Money with a dash of Funny: February 2014

Tuesday 25 February 2014

Mount Gone-zo

To market, to market to buy a fat pig. Financials and banks were on a tear, but the strengthening Rand had a negative impact on resource stocks and single commodity miners in particular, namely the platinum miners. OK, enough of that market report mumbo-jumbo! After the Koos Bekker news, Naspers short tremors had something to chew on, the stock eventually ended the session higher. Up 1.5 percent on the day, well, 1.46 percent to be exact. The stock nearly crossed 1300 Rand for the first time and is up nearly 19 percent year to date. TenCent, listed in Hong Kong, how has that done? Well, it should come as no surprise whatsoever that TenCent is up 18.2 percent year to date and is trading near their all time highs. So, follow TenCent and that will = Naspers. For now.

If you needed a gentle reminder, take the TenCent market cap in Hong Kong, which right now is 1.09 trillion Hong Kong Dollars. Naspers owns 34.5 percent of TenCent, that translates to 376.05 billion Hong Kong Dollars. Now one Hong Kong Dollar is equal to 1.39 Rands. So, quite simply, multiply 376.05 billion HKD by 1.39 and that equals 522.7 billion Rand. Naspers closed at 1290 Rand last evening, which translates to 536.5 billion Rand. The rest of Naspers is worth less that 14 billion Rand, according to the market participants. Businesses like their pay TV business, which generated 4.5 billion Rand in trading profits, for the half year to end September basically as valued at zero. I suppose that their ecommerce business registered a trading loss of 1.8 billion Rand, that counts for something! Mail.ru, their other significant investment made Naspers 601 million Rand for their first half.

So why is TenCent then given a discount by the South African investor crowds? Do we (South Africans) feel that somehow the Hong Kong investors stretch the valuation of TenCent too far and we should really show them how it is done? Discount a valuation that another market already values. It does not really make sense that Mr. Market here discounts what I think is a pretty efficient market there in Hong Kong. I think it does smack a little of conservative arrogance or perhaps it is a misunderstanding of TenCent growth, either one or the other. Whatever it is, I still think that Naspers is a buy, but will from time to time go through periods of extreme volatility, because the TenCent multiple is so aggressive. Which ever way we do not have to wait too long until we find out a whole lot more about TenCent and their full year numbers for their 2013 financial year, pen into your diaries the 19th of March.

I still think that a lot of investors struggle to understand what TenCent is exactly. Well, they are a chat service, they are a gaming service, they are a music service, they offer other online services that includes film, fashion, there is a search engine (soso.com - recently merged with sogou.com), the biggest of the lot of course is the QQ.com portal. Tenpay and Paipai are both online web portals, one is ecommerce and the other offers payment systems. Perhaps if all the platforms were in English, the English speaking investor community would understand these businesses better.

If you want to understand how TenCent actually monetises their platforms, search no further than here, a fabulous breakdown: Tencent Service Offerings. so whilst you have seen a slowdown on some fronts with regards to paid for services, the potential base could grown tenfold (on the paid side). We continue to hold the company and we are really thrilled to see what Koos Bekker comes back with once his head and mind are cleared of the day to day fog of running a business.

OK, it is terrible to laugh at the demise of Mt. Gox, the crowd that was supposed to enable you to trade your BitCoins, but really, ....

All withdrawals from Mt. Gox Bitcoin exchange were halted on the 7th of February and just this morning we heard that the website had been turned off. For good seemingly, over, gone for good. If you try and browse there, you are met with a blank page. Money laundering allegations, security concerns, withdrawal irregularities, concerns about the exchanges solvency and the list goes on leaves Bitcoin "investors" feeling probably a little battered and bruised right now. The other major exchanges released a joint statement saying that there was a tragic violation of the trust of users of Mt. Gox. Yes, yes, thanks for that guys.

If you want to have alternative ideas of the world of "investing", I think that the world of digital currencies is the Siberia for explorers. It makes whatever leverage used in currency trading seem like fishing in a goldfish bowl. I will rather stick to buying real companies that offer real services or make real goods that real people want and use. And the fact that they make real money, that helps too.

Do I think that digital currencies will disappear? No ways. Do I think that authorities will force the users to comply with real world rules to prevent money laundering? Yes. It has happened already. And whilst the users may think that the regulators can never interfere, I think that they are wrong. The only question I am left with is where has the money gone and does this mean that more Bitcoins can be mined? Nearly half of the Bitcoins ever mined have been made. Sigh ... you really cannot understand everything, or NEED to understand everything, let alone something as way out as this.

Michael's musings: Paid for your economic contribution

I read two articles this morning about inequality, not intentionally it just happened that way. The first was about the inequality that is rising in San Francisco. The summary version is that long time residences are complaining about the rising cost of living in San Francisco due to all the tech companies growing and bringing many new, highly qualified people to the area. The result is that the "middle class" there now earn more than $110000 a year, which translates into more consumption (demand) and then higher prices. One of the main areas that people are feeling the increased prices is in property prices. The biggest problem is the divided that is growing between skilled and unskilled people and that is why people are complaining.

A bus driver in the city makes $50000 a year, yes in rand terms he is better off than 99% of South Africans, but his purchasing power is a lot less than it is for South Africans with the same amount of money. This is compared to the average "techie" who is earning twice that straight out of university. Is that fair? Yes. Who contributes more to moving the human race forward? Who contributes more to the economy?

At the end of the article it was mentioned that the bus drivers two children where at university, one was studying medical engineering and the other had a job at one of the tech companies. This is the key to the future, unskilled people are going to have to bite the bullet now so that the next generation is skilled. In China for example their unskilled are taking the pain now but the life that the next generation will live is going to be far better than the current generation.

The biggest problem (in my opinion) for South Africa is the number of unskilled workers. One of our strengths should be our cheap labour but stats show that we are moving toward mechanising. If the current generation bites the bullet and essentially work for pitifully low wages, but that results in economics growth, higher number of people employed and a skilled generation to follow, is that not better than slow economic growth and large unemployment for generations to come.

There are 16.5 million people on government grants, compared to 15.2 million people employed and being funded by about 4.3 million tax payers. Those 16.5 million people are essentially getting a pitifully low wage from the government, isn't it better if they were employed and earning the same amount? If that were the case we have a higher GDP, higher corporate tax income, lower government grants but more government expenditure on education. If the unions view formal employment remuneration as "slave" wages, I am not too sure how this would be palatable however, these extremely low social grants.

Imagine if 20 years ago government went to the people and said that we are going to create an investor friendly environment and lower labour regulations. The result will be that you will have a job, your current circumstances will not improve much for now but in a generation your children will be out of the poverty trap. What would South Africa look like today? There is no easy solution to the problem and if you are unskilled the future does not look bright.

I want to add to Michael's piece, but at the same time leave it alone. Those are his thoughts entirely and because this is an opinion piece, we are entitled to our opinions. His background is economics and therefore he would be looking for the absolute best from a resource utilisation point of view. Michael is younger than myself and therefore does not have the same reference points with regards to the history of South Africa, he only knows what he is told and reads, on the other hand I can say that I was lucky enough to vote in the first free and democratic elections in South Africa.

The piece is no doubt going to touch on elements in society that make people angry, a lack of resources usually leads to a vicious cycle. The answer is simple, solve education and you solve everything in my opinion. You can't take away someones thoughts and intelligence, that will enable skilled individuals to create employment opportunities for others. We need more education, more learning centres, more celebrating of excellence, more private sector, less government.

Home again, home again, jiggety-jog. Poor Byron is man down in hospital for over a week, which means unfortunately he is not well. I have interacted with him, he seems all good, but of course nobody wants to spend that amount of time in hospital. For starters in the local market we are lower, not by a lot.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Monday 24 February 2014

Bekker back on the trail

"But do not fear, Bekker will return after travelling the world again for a year, gathering information, visiting both the developed world as well as "oddball spots". And as the release puts it, Bekker will again be searching for the next "big thing": "Koos intends to travel widely and research where the group's next spurt of growth may come from, once ecommerce has reached maturity." Amazing, he and the company are already looking beyond the current businesses that they have. No wonder the man is so highly regarded."

To market, to market to buy a fat pig. The situation in the Ukraine moved so quickly that is was pretty difficult to keep up. I should care, after all my family lineage is from around there, a little further east into Russia, and who knows what Putin's next steps are likely to be. For the Europeans and the North Americans, this is a good outcome, because the Russians might well lose their stranglehold over the Ukrainians. But the size of a possible bailout, being prepared as we speak by the Europeans is not likely to be huge, but very likely to be unpalatable for many Europeans. It could in reality translate to higher gas prices for both Ukrainians and northern Europeans, and that is not good for a population that has had to downscale for the better half of 6-7 years now.

Make no mistake, this muscling by both the "West" and Russia might be small monetary wise, but it is big geopolitically. And the reason why I say small, the Ukraine may only need somewhere in the region of 4-6 billion Dollars (think how small that is in comparison to the Facebook acquisition of WhatsApp, thanks for that comparison Michael), but if the country fails to get the necessary funding they will default. Standard & Poors have basically downgraded the rating of Ukraine sovereign debt to CCC. And it was downgraded one notch, from CCC+. The difference is sublet, from substantial risks to extremely speculative.

To even be considered investment grade, the Ukraine debt rating would have to move up 8 notches and even that would be "lower medium grade". We watch, for the time being the ex-president is gone, perhaps he is in Russia. His life was full of, well, opulence. For what it is worth, people of the Ukraine, had little idea of the living quarters of the ex-president. If you draw any parallels here in South Africa, the media bats for the tax payer. And politicians might not be as accountable as we may want (the chattering classes), but at least there is major exposure of irregularities, to word it mildly.

Friday locally we reached record highs, a weakening Rand had something to do with of course. Again, the inflationary concerns no doubt will manifest themselves into reality in the coming months and for the rest of the year. The best case scenario for the SARB is that globally there is less concern about emerging markets and we start to attract the flows again. For the time being, even though they are marginal at best as investment destinations, the Ukraine and Venezuela (watch carefully) are no doubt likely to attract negative headlines and as such deter the inflows. Hopefully not though.

Oh dear, Koos Bekker is stepping down at Naspers, that was announced on Saturday. The official .pdf is available for download: NASPERS ANNOUNCES CEO AND CHAIRMAN'S SUCCESSORS. Bekker is only 61, but I guess after an interrupted 17 years at the helm of Naspers, the timing is probably right. The appointment of Bob van Dijk, who is currently head of ecommerce tells you the direction that Naspers are heading in. You will recall that Koos Bekker made remarks about satellite TV being a business in decline (notwithstanding the additional subscribers across the continent time after time), and saying that ecommerce was going to be the next big thing. There are of course many working examples today, Amazon.com of course the one that strikes you as the leader in ecommerce.

But do not fear, Bekker will return after travelling the world again for a year, gathering information, visiting both the developed world as well as "oddball spots". And as the release puts it, Bekker will again be searching for the next "big thing": "Koos intends to travel widely and research where the group's next spurt of growth may come from, once ecommerce has reached maturity." Amazing, he and the company are already looking beyond the current businesses that they have. No wonder the man is so highly regarded. The release also identifies four technology spurts that Naspers has undertaken with Koos Bekker at the helm, digital satellite TV in 1985 (M-Net leading to DSTv), MTN and mobile communication in 1991, the internet businesses in 1997 and most recently ecommerce in 2008. And now, in search of something new for himself as a shareholder of Naspers, Bekker once again travels the world.

When Bekker returns (his last day as CEO is the last day of March this year) in a years time, he assumes the role of chairman. Current chairman, Ton Vosloo, who has been at the business since they were in this "spurt" phase, steps down 1 April 2015. But who is Bob van Dijk? Well, van Dijk is from the Netherlands, is ~~six foot three and a long suffering football fan~~ "only" 41 years old, and as per the release is married to Tina (a finance exec) with whom he has two daughters. More importantly for the shareholders (it is nice of course that he has a stable family life) is that van Dijk is formally the head of eBay Germany, the second biggest market for that company outside of the US. He also speaks five languages, English, Dutch and German no doubt, the other two, not so sure, but as a guess I would think French would be another one. The last one, well, we can only speculate.

Bekker is not going away. He is also human and recognises the time to pass the baton on to someone young, who looks more than capable of running what is now a global business. In our eyes the company still remains cheap, there are several concerns about the valuations of TenCent, but that business continues to grow really quickly and we are not worried. Chinese consumers are still on the cusp of something special, in terms of a change of patterns and behaviour. I expect that there will be sympathy selling, but once the shareholders realise that this is the right thing to do, and their "wealth creator" is going hunting (in the business sense) and will return fresh and invigorated, full of fresh ideas for the company, they will be happy. We continue to add to the stock on the basis that it is cheap in a sum of the parts valuation.

Home again, home again, jiggety-jog. We are mixed to begin with here, resources are lower here. The Rand had firmed up, that had a lot to do with it! Good results from Nedbank are giving the stock a lift, up three percent plus!

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Friday 21 February 2014

Fine tuned Tesla

"Make no mistake that the stock is very expensive because investors are expecting big things from the company, but I would still have a small part of my portfolio in the stock. Tesla are a pioneering company whose battery technology can be adapted to other industries. Also in the transportation industry Tesla are talking about their driverless car technology being only a couple of years away, and talk of potentially coming up with electric aeroplanes."

To market, to market to buy a fat pig. It was not a day for the bulls yesterday, the bears stood front and centre. In part as we said yesterday to do with the Chinese PMI number, the HSBC preliminary one that showed that the countries manufacturing was contracting and also the Fed indicating that the glide path into an era where they are NOT participating in the markets. As far I thought, the second one is what everybody wants, less stimulus and letting the economy stand on their own two feet by itself. That could probably take place right now, but the assurances are sometimes what Mr. Market, at least the participants need.

It is astonishing that the longer I do this, the more that you see quality individuals saying the same thing over and over again, whatever the flavour topic is right now in the market. Yeah, it is absolutely terrible that the Greeks were allowed to get away with fudging their public accounts and gave their civil service benefits that were ultimately unrealistic without growth rates equal to that of China. But it happened. At the time, and cast your mind back, how many individuals and institutions predicted that Greece was out of the Eurozone by a specific date? Many. Citi predicted that Greece would exit on the 1st of January 2013, well they did say that there was a 90 percent chance. The very term Grexit was coined up by two analysts, Willem Buiter and Ebrahim Rahbari, who published a paper just over two years ago.

Now, I have not been to Greece since 1986 when they used Drachmas, I am pretty confident that they are still in the Eurozone. In fact, the same Citi crowd changed their mind in late May 2013, saying that the chances had fallen to basically nothing. But day after day, over two years ago, there was a crisis meeting between the Germans and the French over what to do with the Greeks. Yields in the other periphery countries in the Eurozone began to rise, Italy and Spain were the elephants in the room. Portugal and Ireland were manageable.

The PIIGS, remember? Portugal, Italy, Ireland, Greece and Spain. And what happened? Humans intervened and squashed the chattering classes. In fact it took the ECB president to quite simply wave a giant stick at the nay sayers and say that they (the ECB) would do everything possible to "save the Euro". And all along, it was the Europeans that eventually solved European problems, not outsiders. For the outsiders had not experienced hardships associated with wars that had been fought in Europe for centuries.

The only listed conflict in Europe at the moment (on Wiki) is the Euromaidan conflict in Ukraine. That is the official name. But the last official conflict in Western Europe was in 1993 where the British Royal Navy and French fishermen had a scrap around fishing rights. Yes. And that was serious. For the time being Eastern Europe still has places where tensions run high, Georgia/Russia and now Ukraine. But they want and need unity. It is better for Europe, they are the ones who remember the great wars more than anybody else, because it actually impacted on their families lives.

What exactly am I trying to say though? A crisis can come and go. A crisis is normally always an opportunity. There are many. Most of them, the vast majority however, do not impact on asset prices in the long run. If you have held a stock for longer than ten years, get the graph and try and identify all the moments that made the financial markets anxious along the way. Go back further and you can of course see the Dot Com crisis, the Asian debt crisis, the collapse (or near) of Mexican debt, the Japanese asset bubble explosion, Black Monday and so on. But that is less fresh in our minds as the Financial Crisis of 2008/2009. The 2010 European Sovereign Debt crisis. Less fresh. And that is why as human investors we are somehow looking for repeats, so that we can see a drawdown in prices to get stocks cheaper than they are now. Just stay invested in the quality, capitalism will do the rest for you.

Company corner

I suddenly wondered to myself when I heard the Cell C advert saying that a certain network provider was taking the regulator to court for not liking the regulations. That perhaps more time is needed to be focused on getting their network better, rather than advertising like crazy. Everywhere I look, I see Cell C adverts and their new building is nothing short of very swanky over at the Buccleuch Interchange. Very, very nice guys. But in fairness to the company, they HAVE actually been spending heavily on their infrastructure, and have attacked the market from the point of view of pricing on voice calls. They are by numbers the third biggest network in the country and have wrestled market share away from MTN recently. Check the legal battle, courtesy TechCentral, from yesterday: Why we really sued Icasa: MTN

Yes. It goes to the heart again to that point that I made earlier in the week. Vodacom and MTN have been hugely successful where the alternative, the government has failed terribly in connecting people. If the service was so prohibitively expensive, nobody would use it. The market has adapted accordingly where ICASA, the regulator was protecting the states interests in Telkom, and now that dominance has gone. Although, remember that governments stake in Vodacom is more valuable than their stake in Telkom. Ironically, the very best thing that the regulator could have done for the countries consumers was to leave business to their own devices. That would have benefitted the consumer the most.

That one paragraph written by MTN South Africa CEO Zunaid Bulbulia that I want to share with you is telling:

"There are documented economic, social and employment benefits in ensuring broadband for all. Every government understands this and all are proposing targets and policies to deliver these benefits to their citizens. South Africa is no exception, and our government has set very ambitious targets in terms of broadband for all. Such ambitious targets will require significant further investment."

But Cell C have done more than that, jostling and taking MTN on in the public domain. How can you tell though that MTN are under a little pressure? Well in the last set of Blue Label Telecoms results, in the pre paid market, Vodacom market share was flat (51 to 50 percent), Telkom Mobile was ~~nowhere~~ flat too (1 percent), whilst Cell C (12 to 17 percent) gained from MTN (36 to 32 percent). My only question is, in the quest to attract people to the Cell C networks, what quality have they managed to pick up? And lastly, if Cell C are going to tell you that MTN is taking the regulator to court, perhaps they can throw in that MTN has invested 26 billion Rand over the last five financial years. Tell it as it is.

Byron's beats: Interims

Yesterday we received interim results from Discovery for the 6 months ending December 2013. Here are the financial highlights.

"The period saw normalised profit from operations up 21% to R2 383 million; normalised headline earnings up 22% to R1 650 million; growth in new business annualised premium income up 19% to R5 883 million; excellent performance in the key drivers of new business, loss ratios and lapses across all of Discovery’s businesses; growth in embedded value of 19%; and cash generated from operations over the period of R1.3 billion."

The company is still growing at a strong rate off what is becoming a very high base. But as you will see below, the opportunities and potential are huge. Before we look at the business per division, here is a graphic which lays out the different businesses by profits.

Health. As you can see from the table, Health is the second biggest contributor to profits (R860mn). New business increased 15%. As a member myself I can see why new business is growing so strongly in a fairly mature market, the product is great. What else was impressive was that loss ratios continue to decline as the Vitality product succeeds in making customers healthier. Because believe it or not, it is a general rule for insurers to pay out more than the premiums they receive.

Life. Life is the biggest part of the business (R1246mn) which grew earnings 21%. There are huge synergies here between the Health division and Vitality. Firstly Vitality users who are healthier live for longer and therefore pay premiums for longer. Secondly it makes perfect sense that if you have Discovery Health, you will do your Life insurance through Discovery and visa versa. Of course the company makes that decision a lot easier with all sorts of incentives. It is also nice to have all these products under one umbrella.

Invest. Again people who are not in the know (otherwise they would all come to Vestact) and want to keep all their products under one umbrella will just use Discovery Invest to manage their money. Assets under management grew by 35% to R36bn. It is still small and has plenty room to grow.

Insure. Sasha recently insured his car with Discovery. He loves it because he drives like a granny and gets plenty benefits. Remember they install a tracker and monitor your driving. It is a very innovative product. New business grew 40% to R257mn.

The UK. Business is starting to take off in this region. Profits grew by 27% (now the third biggest contributor) and new business grew 35%. The national health system in the UK has a bad reputation and people who can afford it are insuring their health and going private. We already know that the Discovery product is quality, especially with the addition of Vitality. Those Brits need to exercise!

Ping An.The Chinese market has huge potential. 37% of healthcare spend comes from out of pocket. Discovery own 25% of Ping An health which is a subsidiary of the biggest insurer in China, Ping An Insure. The business is still small but new business doubled for the period so expect this to become more influential in the future. 3-5 years according to Adrian Gore.

Vitality. Now this the exciting part. Both in the US and in Asia, Discovery are leasing out their Vitality intellectual property, mostly to corporates for their employee wellness solutions. A healthy body is a healthy mind which means more productivity from employees. I am a strong believer of that, plus it is win win because the employee gets healthier at the same time. This is taking place in Singapore, Australia and the US. I suspect that we will be seeing plenty more of this adoption going forward.

Valuations. Embedded value sits at R39.8bn. The current market cap sits at R45.8bn, a 15% premium. And rightfully so. The growth rates and potential are huge. Earnings came in at 307c. Very simply, if you annualise that we get R6. Trading at R77.50 the stock seems cheap at 13 times earnings. I remain conviction buy.

Michael's musings: Tesla powering ahead.

Yesterday Tesla finished up over 8%, significantly breaking the $200 mark for the stock. If you bought the stock today a year ago, you would have paid ... (wait for it) ... $35 a share. Yes a year ago you could have bought Tesla for $35 and today they are worth $210, so you would have made a cool 500% in a year.

If you haven't heard of Tesla, they are an electric car company selling the first cool and stylish electric car, and are run by one of South Africa's greatest exports, Elon Musk. So why is the stock up 8% yesterday and up 500% for the last year? Tesla are the disrupter in an established industry and are run by one of the greatest innovators of our generation, so people are paying for the companies potential (I also think for bragging rights, nothing like an ego boost to say around the braai that you own Tesla).

The results yesterday beat the already high analyst expectations, their revenue is up 43% compared to the previous quarter with margin growth to 25% from 23% in Q3 (Q1 margins were 14%). So this company is growing at breakneck speed and they are growing margins while doing it. Both those metrics are expected to continue growing, with Europe and Asia market expected to grow and as production numbers increase, economies of scale will improve their margins further.

In terms of their growth, Tesla are a North American based company and in their words, "Towards the end of the year, we expect sales in those regions (Europe and Asia) combined to be almost twice that of North America. To give you an idea of how far ahead Tesla are of the rest of the industry in terms of margins, Fords current gross margin is only 15.5%.

Would I own the stock? Yes. Make no mistake that the stock is very expensive because investors are expecting big things from the company, but I would still have a small part of my portfolio in the stock. Tesla are a pioneering company whose battery technology can be adapted to other industries. Also in the transportation industry Tesla are talking about their driverless car technology being only a couple of years away, and talk of potentially coming up with electric aeroplanes. Elon Musk was one of the founders of Pay Pal and one of his other companies SpaceX is developing rockets and have the goal of enabling people to live in space. Tesla is in the position to not only revolutionise the car, but many other industries and they are led by an innovator who already has a proven track record.

Home again, home again, jiggety-jog. We are better to start with. The volatility is testing in the short term. Year to date, the S&P 500 is down half a percent. We are up over two and a half percent.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Thursday 20 February 2014

WhatsUpp with Zuck?

"You could argue that it was not quite Samsung or the iPhone that blew Blackberry to smithereens, but rather WhatsApp, that took the dominance of BBM away, and the niche functionality that it had in order to offer any handset on any platform the ability to interact with all their friends, no matter what their handset preference or affordability. Yes. WhatsApp killed the BBM star."

To market, to market to buy a fat pig. Markets settled in Jozi at a closing high for the all share index, 47438 points was both the intraday and all time high for the overall market. Today of course we will start lower, the reasons are in part the Chinese PMI read, the worst in seven months and below 50. And then of course the commentary from the Federal Reserve which of course said that rates were going higher. And that they would continue to wind down the bond buying program. Of course. Provided of course that the economic data looks OK. I can tell you that some of the recent data is not all that great, perhaps the terrible weather has got a lot to do with it. In fact, that weather is still iffy.

US markets turned after the Fed statement: Minutes of the Federal Open Market Committee, which I read, and was not too sure where everyone was spooked. Talking central banks and being spooked, at first glance it seems that political interference has led to the suspension of Central Bank Governor in Nigeria. Sanusi Lamido Sanusi has been suspended by Goodluck Jonathan, the president of Nigeria. Phew, seems crazy. For the time being the FX markets and bond markets remain closed after the Naira was slammed.

It comes just moments after MTN indicated that they expect earnings, HEPS, to be between 25 to 30 percent higher for the full year to end December 2013. There was a positive impact (1.1 billion Rand positive versus 2.7 billion Rand negative) from the weaker currency through the course of the year. Remember that FX losses of 178.5 cents were incurred in Iran, Syria and Sudan. Now the way I see it, Syria is worse, Sudan is worse, perhaps Iran is a lot better than before and that is probably where the positive impact was. HEPS last year was only 1089 cents, flat on the prior year because of those currency headwinds. So by my simple calculations HEPS should be in the 1361 to 1415 range. The stock initially popped, but the Sanusi news is negative and indicates that although Nigeria has come a long, long way in cleaning their banking sector, much is still to do.

Wow, this is absolutely huge. No, it is one of the biggest tech deals done in a while, a 19 billion Dollar transaction in which Facebook will acquire WhatsApp. The deal will be structured as follows: 183,865,778 A class Facebook shares worth 12 billion Dollars (at 65.2650 Dollars a share), 4 billion Dollars in cash and the balance, 3 billion Dollars in restricted stock (45,966,444 units) to WhatsApp employees, that will vest over the next four years. The shareholders and employees of WhatsApp will now own 7.9 percent of Facebook, you will of course be diluted as a Facebook shareholder, but will get WhatsApp, of course.

Why? I mean, why would Facebook acquire this business for that sum of money? And anyhow, some of us readers (OK, perhaps just a few) might not know what the WhatsApp service is. As per the WhatsApp website, it is simple:

WhatsApp Messenger is a cross-platform mobile messaging app which allows you to exchange messages without having to pay for SMS. WhatsApp Messenger is available for iPhone, BlackBerry, Android, Windows Phone and Nokia and yes, those phones can all message each other! Because WhatsApp Messenger uses the same internet data plan that you use for email and web browsing, there is no cost to message and stay in touch with your friends.

And then as per the Facebook presentation, Facebook + WhatsApp, these are the key metrics of WhatsApp:

You could argue that it was not quite Samsung or the iPhone that blew Blackberry to smithereens, but rather WhatsApp, that took the dominance of BBM away, and the niche functionality that it had in order to offer any handset on any platform the ability to interact with all their friends, no matter what their handset preference or affordability. Yes. WhatsApp killed the BBM star.

For Facebook this means that whilst the Facebook messenger might be a valuable tool, this acquisition goes a long, long way to being able to offer a more complete service. What changes for the users of both platforms is nothing, not much at all. Facebook, like when they bought Instagram, allow the business to operate as they were. It does make founders Jan Koum (a Ukrainian by birth, moved to the US in 1992) and Brian Acton fabulously wealthy, as well as funder Jim Goetz from Sequoia Capital.

The story of the people involved, in particular Koum, should see you say, gosh, these guys deserve every single cent they made. They had nothing, didn't draw a salary, used blankets to keep warm, working on really cheap furniture. Some very useful insight into Koum and Acton here in a Forbes article: The Rags-To-Riches Tale Of How Jan Koum Built WhatsApp Into Facebook's New $19 Billion Baby.

Some choice swearwords in that article, in fact even on the WhatsApp website. You can read the blog from Jan himself on the WhatsApp website, simply titled: Facebook. The company has 450 million active monthly users, 320 million daily users and is grown at around 1 million users per day. It is free, the initial service, but then you pay 99 US cents per year thereafter. But this is how valuable it is, the company handled 54 billion messages on the 31st of December, there could/must be a way in future to mine this database, or do advertising across the platform. For now, however, as per the WhatsApp website: What are WhatsApp's subscription fees? 450 million users at 1 Dollar a year equals 450 million Dollars.

What are the costs of the business to operate? Other than to pay their employees and their server network must be high tech in the extreme? My simple calculation tells me that they (Facebook) bought this business on a 40 multiple forward, in order to kill the opposition quickly and to welcome them to your side of the fence. With a big, big cheque. Everyone has a price, Koum and Acton as per the Forbes article applied for a job at Facebook (but were rejected) before they decided to start WhatsApp. But like many have said, they may have paid way too much here.

But what happens in two or three years time, if they have 1.2 billion, or 1 billion users and decide to charge them 2 Dollars a year? And then 3 Dollars in another two/three years time. If the app has all sorts of added functionality, people would be prepared to pay more for the functionality. And quite quickly, Facebook could have paid less than 10 times forward. Think about it, groups inside of your broader "friend base" on Facebook using the WhatsApp functionality.

Or perhaps Facebook paid too much, I remember the same folks bleating when they bought Instagram. People laughed. Mostly people with no vested interest that must be said. I think that the Zuck is smart and exceptionally quick. This is a big transaction, obviously well thought out. Lastly, let us leave this piece with a chart from that same Facebook + WhatsApp presentation, remembering that WhatsApp is a paid for service, after one year. Astonishing growth off a very small base:

Home again, home again, jiggety-jog. OK, we are lower here today, SA inc has sold off again. The Ukrainian protests are starting to get folks spooked about the broader emerging markets. And not helping of course are the lower PMI reads in Europe this morning, with only the German services PMI beating. Ah well, volatility must be good for some people, not us of course.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Wednesday 19 February 2014

Less at Adcock

"The Adcock board might say that this is regrettable, the manner in which the chairman was forced to resign, but equally the shareholders (the new and old ones) might think that shareholder returns could and should have been higher and that is actually more regrettable. This is the way that it works in real life, the board will meet in the coming days and no doubt there could be more high profile resignations at this business, that is one thing that I guess we could bank on."

To market, to market to buy a fat pig. Markets locally were mixed, the German ZEW number was pretty rubbish and spooked a few here and there, a New York manufacturing read that was lower than anticipated, but I guess the disappointment was because January had been a 20 month high. Our market this morning, if it were to close now would be at a new high. So much for that gripping emerging market crisis that somehow seems to have been shelved.

For now, no doubt, these things come back. Like Greece and their public finances, those still rear their ugly head in the same way that the Lernaean Hydra, you know, every time you chop the head off three new ones would appear. Although, perhaps that is the wrong analogy, that is kind of gone in a way. No more Greek tragedies, although the real tragedy have been the huge deficits and government debt levels. Plus tax evasion and corruption. So whilst you might feel sorry for the Greeks in the aftermath of the bailout, nobody stopped the benefits and government spend earlier. Sigh. Sounds familiar. All you need is economic growth and that solves absolutely everything.

Company corner shorts

I wanted to add something to what Byron wrote yesterday in his piece on Curro - Making a profit, growing like crazy, but it only struck me whilst I was out having a jog/run (slow, sadly) this morning. Firstly, on the priority lists for parents, education of their kids ranks very, very high up the priority lists. If not at the top, very near to the top. Secondly and the main point was, watch the main shareholder of Curro, who is PSG. PSG Financial Services owns 101 729 366 shares, according to the 2012 annual report, but after the rights issues, there are now 294 794 391 shares in issue and the PSG holding is still 63.1 percent.

I don't think that the shareholding percentage there has changed much, so their (PSG) stake in Curro is worth 5.245 billion Rand. But PSG also own 28.48 percent in Capitec (shares in issue, around 115 297 995, PSG holding = 32.8 million shares). PSG's Capitec dividend (interim and final before that) after dividend tax was 5.168 ZAR or 169.7 million Rand. If Curro are issuing one for every ten (at 20 ZAR a share), then they (PSG) are going to have to pony up 372 million Rand of their own to not be diluted. Which can be covered by 4 dividends from their holding in Capitec.

And the most amazing thing out of all of this is that neither Curro, nor Capitec existed 16 years ago. Enterprise value of the two combined is an amazing 30.5 billion Rand. And to think that PSG "only" has a market cap of 18 billion Rand. The biggest shareholder BTW in PSG is Steinhoff, who own 19.6 percent. Many fingers in many pies, those fellows from Steinhoff. Make no mistake, both Marcus Jooste (Steinhoff) and Jannie Mouton (PSG) are champions of capital, and have been rewarded for their risk taking and company building and wealth creation. Nice. And lastly, need I remind you that SADTU members are voting soon about whether or not to embark on industrial action. Good for Curro, bad for poor people.

Shareholders flexing their muscles today/yesterday, the chairman of Adcock Ingram has been asked by the PIC and BB Investments (subsidiary of Bidvest) to resign. And almost immediately (this morning in the release), Dr Khotso Mokhele announced his resignation as chairman. Dr. Mokhele has a very impressive CV. I guess many at that sort of level do seem stretched, sitting on multiple boards, I wonder what the optimum number is? No disrespect meant to any person who sits on multiple company boards, their expertise and opinion matter enough for shareholders to approve their board remuneration levels, but spreading yourself too thin could be to the detriment of shareholders in the end.

At the same time, the identical letters from the PIC and Bidvest have requested that Mr Brian Joffe, Mr Lindsay Peter Ralphs, Dr Anna Mokgokong and Mr Roshan Morar are appointed to the board of Adcock. You know who Brian Joffe is, Ralphs is the CEO of Bivest subsidiary, Bidserv, Dr. Mokgokong is the cofounder and chair of CIH (representing her stake) and Roshan Morar is principal at accounting firm Morar Incorporated. According to the Morar website, the company offers services to Public entities and Provincial Departments, so no guessing that Morar will represent the PIC.

The Adcock board might say that this is regrettable, the manner in which the chairman was forced to resign, but equally the shareholders (the new and old ones) might think that shareholder returns could and should have been higher and that is actually more regrettable. This is the way that it works in real life, the board will meet in the coming days and no doubt there could be more high profile resignations at this business, that is one thing that I guess we could bank on. This time next week we will no doubt know.

This makes me mad. This whole idea that MTN and Vodacom have made super profits and profiteered at the expense of the consumer. I beg your pardon. If the service was too expensive for everyone, nobody would have owned a mobile phone and if they did, they certainly would have used it a whole lot more sparingly than they currently do. Famously Alan Knott-Craig said something along the lines that the expectations of Vodacom were to have 250 thousand customers in ten years. Inside of two years (according to this old academic paper) the company had 300 thousand subscribers.

In this whole argument of finding a glide path for lower interconnect rates (which I agree with, BTW), I think one thing escapes many people is what the alternative to your mobile phone is. Let me take your mobile phone away for a second. No, a minute. Stuff it, I am taking it away for the day. What are you going to do? Use your phone at home/work in order to phone whomever you need to? I am not too sure about you, but I do not have a home phone. It would be no different then to being Chuck Noland. Noland of course is the fictional character who is stranded on an island with nothing other than a volleyball for company. OK, not quite that bad, of course.

But that is my point, Telkom says that South Africa has 7.2 percent fixed-line penetration. Telkom have 3.713 fixed lines and 898 thousand ADSL lines. MTN have 25 million subscribers and Vodacom have 30.9 million in South Africa alone. Add those up quickly and you have many subscribers using both companies, depending on their signal, company offering and ease of use. Let me give you a practical example, according to the regulations, these mobile companies have to offer coverage in all sorts of little towns in this country. My parents who live in rural Western Cape have had their Telkom line rendered useless for a couple of weeks, someone called them yesterday and simply said, its working hey, and that was that. Imagine if that was your mobile phone company? Quite simply the not so good fixed line operator and very efficient mobile companies have set a different bunch of expectations, and ICASA seem to wave their stick in that direction accordingly.

Vodacom and MTN have invested billions of Rand in infrastructure since they were granted licences, they have served their customers well. Sure the interconnect fees have juiced up profits and have enabled the companies to offer what are essentially world class services. Those opposed to the mobile companies fighting the lower interconnect rates must also go and bark up the tree that tells ICASA to set the rules all the same. Unbundle the last mile, let MTN and Vodacom offer me a fixed line service where the bandwidth and service will no doubt (in my mind) be better. Bark harder up that tree if you are looking for discounts as a consumer, inefficiencies of the state (Telkom) have led to business having positioned itself accordingly. And yes, I talk from the position of shareholders, those are the people who actually stuck their money in at the beginning (and along the way) in order to build the business that is today.

Michael's musings: Obama wage

The Congress Budget Office (CBO, in the US) released a report yesterday showing their predictions for the effects of raising the minimum wage. The Obama administration is proposing either raising the minimum wage to $9.00 or $10.10 per hour, from the current $7.25. The South African minimum wage is currently R9.63 an hour for a domestic worker; how someone can survive on that is scary but something is better than nothing?

Okay, back to the US. According to the study if the minimum is raised to $10.10 per hour about 500 000 people are expected to lose their jobs, but on the upside, 16.5 million people would get an increase in pay. There are two positives that should come out of the raising of the minimum wage, the first is that about 900 000 people will be raised over the poverty line. The poverty line is the income someone would need to "adequately" live in a particular country. To determine the poverty line, the total essential resources needed for the average person. The international poverty line is $1.25 a day, but most people now consider $2 a day a better measure. The American poverty line sits at $ 11 490 per year for an individual and for a family of four it sits at $ 23 550 per year. In summary their "poor" have it a lot better than our poor.

The second positive is the net increased consumption (increased wages minus the lost wages) which should come in at about $2 billion dollars, so extra consumption should be better for the economy.

Is the benefits of raising the minimum wage worth the costs? Of the people who will benefit from the increased wage only 19% of them fall below the poverty line, compared to 29% of people who fall in families earning more than three times the poverty line, so for example students working while they study. Those 29% are people who don't really need the extra money.

My opinion is that governments should keep their hands off of the economy as much as possible. In this case, time and money has been spent for what will be a small net gain in the grand scheme of things, and it will cost half a million people their jobs.

Home again, home again, jiggety-jog. Mixed here, but overall stocks are higher. US futures are pointing marginally lower, there is the first look at US inflation and more importantly during the course of the evening we have the HSBC Chinese Manufacturing PMI. I am pretty sure that this time tomorrow it will be the main talking point.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Tuesday 18 February 2014

BHP is a monster

"Today the business has a combined (limited and plc) market capitalisation of 175 billion Dollars, has half year sales (these results) of 33.948 billion Dollars, attributable profits of 8.107 billion Dollars. Basic earnings per share increased by nearly 83 percent to 152.4 US cents, with the dividend modestly higher at 59 US cents per share. If you translate that back to Rands at the current exchange rate (10.806), that translates to 1646.83 ZA cents of basic earnings per share and 637.55 ZA cents of dividends, payable on the 26th of March."

To market, to market to buy a fat pig. Our market closed within sniffing distance (human, not bloodhound) of the all time closing high and above 47 thousand points on the Jozi all share. The top 40 shares by market cap, the ALSI 40, did manage to close at an all time high, boosted by resource stocks that have been on a tear. BHP Billiton results this morning will underscore why this is justified, there have been some thoughts that retail slash banks and all interest rate sensitive stocks are on the sell list from a valuations point of view, whilst the opposite is true for commodity stocks. But I think that many of the retailers are offering value at these depressed (historically) levels. When the foreign investors decide to come back to our markets (and realise that the downfall of emerging markets has been grossly overdone), they will no doubt be buying cheaper retailers at better levels.

Our markets have turned a little this morning, from starting positive, around one third of a percent better to now being in the red. I guess that could change a little later this morning when German ZEW numbers are released, those always have an impact one way or another. European motor vehicle sales were positive again for the fifth month in a row, that is good news for the platinum industry no doubt -> Europe Car Sales Rise a Fifth Month on Volkswagen Models.

Japanese GDP failed to impress yesterday, whilst Chinese credit numbers yesterday certainly raised a few eyebrows, but I guess it was business as usual. I suspect that some time in the next decade we will see more than just a few eyebrows raised on the Chinese credit numbers, I hope that I am very wrong. Markets across the seas and far away in New York were closed for presidents day, the action returns today with futures pointing to a very modest gain.

BHP Billiton have released their first half numbers this morning in Melbourne. I guess the results were released all over the inter webs, so in essence it is a global release, but the company is still headquartered in Melbourne, Australia. The sporting capital of the world we are led to believe, I suppose that they host many events of global importance, including the Aussie Open tennis and the F1 Grand prix. Add to that the annual AFL final (Aussie rules) and the MCG test match and I guess you are spoilt for choices. It is strange then to think that the city had to wait so long to have their own super 15 rugby team.

It is according to the Economist Intelligence Unit the fourth most expensive city in the world to live. Wow. Tied with Oslo, Norway. The three cities ahead are Sydney (3rd) and then Osaka (2nd) and Tokyo the most expensive. Bizarrely in the top ten is Caracas, the capital of Venezuela, the only city in the top ten that I would not live in.

The company traces it roots back to Dutch investors in the year 1851, a tin mine in Indonesia on the island of Belitung. See, Billiton/Belitung! The BHP (Broken Hill Petroleum) part was also initially connected to tin mining in Western New South Wales. In 1891, according to the BHP Billiton website the Australians were selling lead to the Chinese, exporting it across the seas. The merger of the two became official in June of 2001, the 28th of June to be exact. At the time the SENS release said that the enterprise value was around 38 billion Dollars, run by Paul Anderson. Brian Gilbertson was appointed as deputy CEO.

Today the business has a combined (limited and plc) market capitalisation of 175 billion Dollars, has half year sales (these results) of 33.948 billion Dollars, attributable profits of 8.107 billion Dollars. Basic earnings per share increased by nearly 83 percent to 152.4 US cents, with the dividend modestly higher at 59 US cents per share. If you translate that back to Rands at the current exchange rate (10.806), that translates to 1646.83 ZA cents of basic earnings per share and 637.55 ZA cents of dividends, payable on the 26th of March. When the weather unfortunately starts getting cooler round these parts, sad but true.

Reminder, the stock closed at a record high of 346.32 ZAR. In ZAR it is a record, in Australia that record was set back in May of 2008, when the stock nearly crested 49 Aussie Dollars. This morning the Australian BHP Billiton Limited share price is 38.89 Aussie Dollars. Up 2.3 percent. In London the all time high price was December the 24th 2010, 26 Pounds and ten pence. The close yesterday was 19.12. See how the Rand has juiced up the stock here locally! I am guessing that with these results that the share price could crest 350 ZAR for the first time today.

Operationally the company registered record production performances at ten of their thirteen key commodities, ironically the one they have invested a lot of money in, Natural Gas, was the worst performer from a production point of view. In fact, across their portfolio there was a ten percent increase in production. And cost savings too, as a result of increased productivity on bigger volumes. As much as nine percent increase in EBIT. Astonishing. Whilst many of their peers are struggling with rising costs, the quality of the asset base that BHP Billiton possesses has enabled the company to continue to scale up and contain costs.

So what are the key assets here that BHP Billiton have? Well, there are the onshore and offshore (in the Gulf of Mexico) US oil and gas assets, the huge earner in the form of Western Australia Iron Ore (WAIO) and their copper assets, with the major one being Escondida in Chile, one of the largest mines anywhere in the world. See the major contributors from a table in their results release -> Half year ended 31 December 2013.

OK, so quite quickly you can see where is the very profitable part of their business, the Iron Ore division is 32 percent of revenue, but 52.5 percent of EBIT. Copper on the other hand is nearly 21 percent of group revenue and 23.3 percent of EBIT, whilst the petroleum business contributed nearly 21 percent to the group with EBIT of just over 20 percent. Add these three key groups together and they represent nearly three quarters of revenues, but 96 percent of profits. Phew. All the other businesses, including the coal businesses work exceptionally hard, but are barely profitable. In fact, in that same presentation if you look at the EBIT margins of their key commodities, you can see that the petroleum business is still a fabulous one to be in, even though margins have been sliding. BUT. The margins in Iron Ore blow everything else away nearly one third better than their group margins. Slide 34, here it is slimmed down for our needs.

I guess that it is no surprise then that the company continues to invest in the commodities that they think have the best outlook. Spending on their Copper assets in Chile (modest), major capex on their WAIO operations, whilst in the short term most of the spend will be in their petroleum projects. A lot in Australia, a big ramp up in natural gas, these projects are key to energy demand ramp up in China. It is cleaner, and in a country which is starting to take pollution really seriously, gas and solar is the obvious next choice.

So what next for BHP Billiton? CEO, Andrew McKenzie suggested that the global economy is skewed to the upside, suggesting that the early green shoots seen in Europe, coupled with stronger than anticipated US growth and of course China which continues to grow their economy at a rate that is the envy of the world. Do not get pulled into the line of thinking around Chinese growth slowing. Yes, in percentage terms, but not absolute terms. Would you rather have 15 percent growth on a 257 billion Dollar economy or 7.8 percent on 8.227 trillion Dollars? That was 1984 versus 2012 in China. The difference in growth is nearly 17 times more added to the economy in 2012 when compared to 1984. Or, a better way to look at it, the value added in 2012 is roughly 2.5 times times the absolute Chinese economy in 1984. It takes a LONG time to build up a base of size and scale.

Will China continue to show signs of strong demand for their products that they produce? Slide 27 answers some of the concerns that people have with regards to copper and iron ore. Expectations are for the iron ore price to moderate and flatten out over the coming years. Copper, well, that market is much tighter with a deficit expected in 2017, which is not that far away. There are signs that the Chinese economy is changing, becoming more services and consumer based and less heavy industry and manufacturing. Not that consumers do not require raw materials, in fact the more industrialised and advanced societies become, the more steel they need. See this old graph, from a BHP Billiton steel outlook in September 2011:

The range for China (the orange shaded area) is so different. Would China become the new South Korea, or is it more likely to level off like the other major economies of the world, Japan, Germany and the US. China continues to urbanise at a rapid rate, that should attract a big demand for durable goods. There is a fairly detailed commodity and economic outlook (for what it is worth) in the BHP Billiton Results for the half year ended 31 December 2013 release, that is always worth a read.

Here goes the economic outlook, the important line I think: "China's growing share of services within economic output and the United States declining trade deficit are further indications of more balanced and sustainable global growth. We view this as a positive development and expect this trend to continue into the long term." And then in the commodities outlook, this is of course longer term: "In summary, the global economy is expected to strengthen over the balance of the 2014 financial year, providing continued support for commodities demand, albeit at more moderate rates of growth. In the longer term, the fundamentals of wealth creation and urbanisation should benefit general commodities demand, although the transition to consumption led growth in the emerging economies should provide particular support for industrial metals, energy and fertilisers."

We continue to stay long BHP Billiton on the basis that there will be continued demand for their core products. Their portfolio remains the best of the diversified miners, both in terms of quality and positioning, as well as geographical presence. They mine quality scale assets in what are mostly investor friendly territories where importantly the rules do not change all of the time.

Byron's beats, Curro results

This morning we received results for the year ending 31 December 2013 from South Africa's biggest private school operator, Curro. Wow this business is flying. Learners increased by 69%, Revenue increased 80% and HEPS increased 87%. Of course there is a reason for this growth. Last year the company spent R1bn on acquisitions, development and expansion. That is big when you consider that the company's market cap sits at around R8bn. But throughout last year that number was closer to R5bn. Yes the share price has done that well.

The funding for this R1bn came from that rights issue they did last year (R600mn), that R397mn funding programme arranged by Old Mutual and the PIC (I wrote about this a while back: Curro announces big school push) and various debt programmes.

The company compromises of 31 schools with 26 463 learners as we speak. For the year of 2013 for which the numbers are attributed to, the company had 26 schools. Within these schools there are 2 brands namely Curro and Meridian. The Curro brand is more focused on higher LSM groups with an average class size of 20-25 learners and monthly fees of R3700. Meridian has larger classes of 30-50 and lower fees of R1400 per month. This gives poorer people the opportunity to give their children a private school education. Below I have added a table of the brand structure within Curro.

Another interesting table they put in their presentation looks at the % capacity of their current schools and the kind of margins they make.

Clearly it is imperative to fill up these schools as soon as possible to get that EBITA margin as high as possible. That is where the demand for their services come in. If you have read my writing on this stock before you will know that I am a firm believer that there will be huge demand for this product because there is such a big gap in the market left by an inefficient government.

But the company is not stopping there. They are going to carry on acquiring and developing. As I suspected last year they have announced yet another rights issue. They are planning to raise R589mn by issuing 1 right to every 10 shares held at R20. A fat discount to today's R28.

Diluted Headline earnings per share came in at 13c. Trading at R28 the stock trades at 215 times earnings. But this is the first year of profits, I wouldn't worry about valuations at this stage, especially when they are raising money on a yearly basis, seemingly. I still like the company and I like the sector. I would advise all shareholders to follow their rights.

Home again, home again, jiggety-jog. Markets are mixed here to start with, resources and retailers higher, industrials and precious metals lower. Wow, that is exceptionally boring writing for the closing line. Apologies. I will try be better tomorrow!

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Monday 17 February 2014

Tourists, we be having them

"I pay a lot of attention to this industry because I believe it has an extremely important role to play in the South African economy. First and for most we have the natural resources to have a thriving tourism industry. That is very fortunate and we need to take advantage of it. Secondly it offers good sustainable employment. Being a tour guide is a lot more fulfilling than sitting in a factory or 3km underground digging for gold. These are long term, quality jobs."

To market, to market to buy a fat pig. I am starting to read headlines that are asking whether or not emerging markets are a strong buy at all, but then again I am also seeing headlines like this, with evidence that there are still many sellers in our markets: Investors Are Spilling Out Of The Emerging Markets At A Record-Setting Rate. See the graph from that BusinessInsider story, this is the worst bout of selling in all emerging markets since August of 2011, and February of that same year.

But then again, that could be the point to act with the most conviction, when those folks reading the headlines are sellers, Barclays via FT Alphaville have said that on a price to book basis that Emerging Markets are as cheap as they were back in the crisis of 2008/2009. Check it out, via Cullen Roche at Prag Cap: Charts O' the Day: Emerging Markets on Sale?

But then again I am reminded that Turkey is not Brazil is not South Africa is definitely not Russia. In Russia they are hosting the Olympics and it is sort of cold. It is warmer here. But the point that I am trying to make is that all these economies are different from one another. They are not the same, the structure of their economies are different, the companies are unique to the territories.

But global investors taking a large macro view are likely to view all these markets exactly the same. Emerging markets are the same as far as many are concerned, I am keeping it a little simple, but for all intents and purposes the same liquidity concerns in China are supposedly impacting us, and Turkey and so on. So whilst it is not fun to be caught in the same waterfall as the other liquid markets around the world, it does provide opportunities from time to time, the flows will no doubt determine the levels. The stories about oversold EM is starting to appear on my screens and that could mean that toes start to dip back into the water.

As Paul said sarcastically this morning, I thought Turkey and the anxiety around emerging markets was supposed to see the markets halve? And whilst this "crisis" is by no means past us, it is fading from memory. And perhaps now for a while the anxious too and fros can get their knickers in a knot about the lack of growth in Japan. As I write this, our market is basically at the best closing level for the ALSI. Which is bizarre. Having said that, resources have led the charge, up over 12 percent year to date, whilst retailers and banks are down 14 and 7 percent year to date. And the Rand has strengthened over the last week, with the print now at 10.80 to the US dollar. It might be too early to jump the gun now, but it seems that we are heading back into the risk on mode again.

I found this post fascinating. I should not say that, my colleagues are going to laugh, but it was. This is a post from the Calafia Beach Pundit, titled Savings deposit growth slows as confidence returns. That first graph was the one that I was most interested in, the US Savings deposits, which grew from around 1 trillion Dollars in 1995 to above 7 trillion Dollars now. That is a massive number. Bank savings ironically surged in 2008/2009 as folks were pulling in the horns.

It makes sense, it really does. The more risk averse you are, the less you spend, the more you save and repair your own personal balance sheets. But 12 percent annualised growth in savings over the last five years, that is simply astonishing!!! But if you read further in the post, you can see how the savings rate is slowing, and whilst the purists might say this is a bad thing, this is good for growth. It means that people are starting to save less, and spend more.

But that was not what I got interested in. Whilst I was surprised by the surge in savings and that the level was 7.1 trillion Dollars, I wondered what the ratio would be between gross savings and GDP, and of course debt more importantly. Because it suddenly struck me that perhaps whilst everyone would be focused on the household debt and then government debt run-up (government acting as backstop for the US economy in the financial crisis), there was a neglect of real household repairs of their monetary affairs. Stop spending on the unnecessary and paying down of debt mode. But now, this means that the consumer is spending more, and that is good for the global economy.

Now, about those Chinese consumers saving less and spending more. Chinese people save as much as 30 percent of their disposable income. Wow. Much higher than the 20 percent of disposable income norm, for savings rates globally. Locally, we are bad savers. Very bad. We prefer to consume. But I guess when many are living under tough conditions, and living standards and salaries are pretty low, it is very tough to expect people to save more. Courtesy of TradingEconomics, this is household savings locally:

AMCU are going to have their leadership tested this week. And their finances. Let us say that government, nor business has the most friendly relationship with AMCU. Of course AMCU are not part of the tripartite alliance, it is COSATU, even if all the unions in COSATU are NOT that comfortable with their members voting for the ruling party. It is politics, complicated at the best of times. The announcement that I have heard from yesterday is that Anglo American Platinum intend to sue AMCU for 600 million Rand, turning to the courts of South Africa for protection as damages (loss of revenue) and increased security during the protected strike weigh on the company's finances.

I hear you say, what the hell, this is a protected strike? Yes, but in the wake of the death of an AMCU shop steward last week: Anglo American Platinum regrets the death of one of its employees, the company has decided that enough is enough. With intimidation, the right to work has been breached. And as far as we understand it here in this office, the company would have the support of Government here. Why? Simple, AMCU are in many peoples eyes a militant union that is not good for economic growth, and are offering unrealistic wage promises to their members. So what now? I guess that this is good for business, very good for business, because it means that shareholders are taking matters into their own hands. I like it.

You can download the Mark Cutifani/Anglo American interview on 702, download the podcast here. Plus the best part is that you can listen to Paul's weekly business blunders. If you have never heard those, then you had better tune in to 702 on Friday evenings. Come on! Listen around 6 odd minutes into the podcast, for the strong words from Cutifani, saying that the platinum industry is standing their ground, because this is in the best interests of all South Africans. OK. So we will wait and see what happens from now, but it is certainly a very, very big week for platinum miners, both labour and business.

Byron's beats, tourism is cooking

There is one sector in South Africa that seems to be thriving despite tough economic conditions. That sector is tourism. This morning Stats SA released accommodation statistics for December 2013. Total income in the accommodation industry increased 11.1% in December 2013 compared to December of 2012. Actual nights sold were up 5.9% while the rest was due to price increases.

I pay a lot of attention to this industry because I believe it has an extremely important role to play in the South African economy. First and for most we have the natural resources to have a thriving tourism industry. That is very fortunate and we need to take advantage of it. Secondly it offers good sustainable employment. Being a tour guide is a lot more fulfilling than sitting in a factory or 3km underground digging for gold. These are long term, quality jobs.

It is one industry which certainly benefits from a weaker Rand. Not much explaining needed there. But it is not just because of more foreigners visiting our shores, but locals exploring their own country as opposed to going overseas because a weaker Rand just makes it too expensive. As the South African middle class gets bigger, internal travel is going to go from strength to strength

As investors how do we benefit from such a strong growing industry? We hold City Lodge, Michael covered their results on Friday. I really like the business, they are like the Mr Price of hotels. Quality at a decent price. We also hold Famous Brands which indirectly benefits from more travellers and tourists in the country. Within the stats they state that camping and caravanning was up a whopping 51.1% for the month. Holdsport should benefit from that kind of growth. Lets hope this growth carries on at these strong levels, I suspect it will.

Michael's musings: Sasol's two extremes

On Friday just before the market closed Sasol released a trading statement for their 6 months ending 31 December. In the office we agree that the statement is "balanced", with the following statement highlighting the extremes of the results "Excluding the impact of the impairment of our Canadian shale gas assets, EPS is expected to increase by between 44% and 50%." Actual EPS is expected to be between 0 and 6% higher than the previous comparable period.

A background to their purchase of their Canadian shale gas assets, their effective purchase price was R 7.1 billion effective from the start of 2011. The reason for buying the assets was to give greater supply to their upstream Gas to Liquid (GTL) offering. As there is a divergence in the price of oil and the price of gas, so the demand for GLT products will increase. Their long term strategic plan is solid because the price of oil has been going up and the price of gas has been going mostly sideways since 2010. What I don't think Sasol expected though was the increase in the supply of Canadian natural gas. Since they bought the Canadian assets the amount of Natural Gas produced on a daily basis has doubled, which means they would not have had a problem in obtaining supply for their downstream GTL plants. Only 20% of Canada's natural gas reserves with current technology can be extracted so there should be ample supply going forward to keep prices down.

Due to the Talisman's (the guys who own the other 50% of the Canadian asset) announcement that they are selling their stake in the asset, Sasol did an evaluation of the assets value and decided to impair the assets value by R5.3 billion. Meaning that the impairment cost is 75% of what they paid for the asset 3 years ago, the high Rand value is partly due to the weaker local currency (against the Canadian Dollar), but it still means that they greatly over paid for the asset.

On the bright side, due to the weak rand, Sasol have been printing cash and the excesses generated from that has compensated for the asset impairment. Also going forward, there are two things that are in Sasol's favour. The first is that they still have the asset which will supply their Canadian GLT plant in the future when they build it, owning the supply of the gas means that they will be hedged against the price fluctuations of gas.

Another impairment cost that hasn't come through yet is from the sale of their Sasol Solvents Germany GmbH assets, which will be an impairment cost of R 466 million, but compared to the R5.3 billion written off this period it is fairly small. I don't see the rand strengthening too much over the next six months which would mean the increased earnings generated from the weaker Rand will continue and Sasol could increase their EPS in the next half by the 44 to 50% that could have been in this half.

Sasol is still one of our favourite stocks and as oil prices rise and people become more concerned about the environment (GTL is cleaner than oil based fuels), their GTL products will become more valuable.

Home again, home again, jiggety-jog. Today is a holiday in the US, it is one of nine federal holidays in that part of the world, they work on Easter Monday as well as working on December the 26th. I guess that they are entitled to their holidays!

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Friday 14 February 2014

Anglo beat, but ...

"The risks still remain however that the company gets the bulk of their earnings from South Africa, where labour relations and government and mines are hardly friendly. I am sure that all stakeholders will work harder during the current year to ensure stability. Although Michael tells me that he saw an interview this morning with AMCU leader Joseph Mathunjwa in which he said that they are pressing on with their demands. So whilst it may have been quiet, the risks of violence remains."

To market, to market to buy a fat pig. Last night there was the state of the union address (SONA) in parliament where your money paid for politicians to tell you what they have done with your money, and what they plan to do with your money. I have never been in the situation where I am spending someone else's money, so perhaps I am speaking out of turn here. But I know I speak to rich people all the time, not the downtrodden and most vulnerable in society. Of course people who are privileged enough to be in a position to invest money, money that they no doubt have worked very hard to make. But the true meaning of a safety net and a social security net is to protect those that are vulnerable. But the only way to earn the funds in order to pay for greater social benefits in society is for more taxes to be collected. More taxes collected equals more for social spend.

So how do you "get" more tax revenue? Create a better infrastructure, educate your people and make sure that they are healthy, being vaccinated and therefore able to avoid past infectious diseases. Think about it for a second, smallpox, virtually unknown in the modern world (the WHO said it was eradicated in 1979), killed 2 million people in 1967, of the 15 million that contracted the disease. Astonishing. 12 years later the disease had been eradicated. These are the advancements that humankind can make as a result of the pharma industry investing heavily in research and development. 100 billion Dollars, over one trillion Rand is spent in searching for the next life saving therapy, be it a cure for cancer or an HIV vaccine and everything in-between.

I have no problem with a company spending tens of billions and then having a 20 year patent, really, and profiting from this. But I can understand that it is a highly emotive issue, healthcare and costs associated with that. Rich people can afford the expensive therapies, but ironically need to buy more therapies in order for them to become cheaper. The more people that use it, the cheaper it gets. And the company can then continue to be profitable in order to sink more money into curing us of infectious diseases and crippling ailments. If you think that is too simplistic and crude (whilst championing business at the same time) then name me a single government in the modern era that has invented a medicine. I cannot think of one.

But we are getting off the topic here to some extent. The SONA did not put forward the ruling party policies, saying that will come after the elections. That tells me two things, one of course that the ruling party is confident that they are going to win the elections (and they will) and secondly, more importantly, the ruling party will see which direction the swing votes go. In other words, a jump to the left or right from the folks not voting for the ruling party, will prompt a policy change to get back those votes. That is our simple view, we may be wrong, but if you lose in one direction or another, you take notice. On that score however, the Free Market Foundation have an interesting post from a Zimbabwean member of parliament, which compares the economic paths of Zambia and Zimbabwe: Zimbabwe's loss Zambia's gain- destruction vs. protection of property rights. Interesting, again, letting the free market decide what is good for the citizens is good for everybody. But I would say that, of course.

Markets globally continue to get a lift, the move northwards at the start has put the all share index back in the green for the year. The gold stocks have rerated significantly this year, up over 43 percent in about as many days this year. Wow. Against all the talking heads expectations, mine included. I can't say that I have seen the results suggest that the businesses are in take off mode, but possibly there was a bout of selling of the one major, AngloGold Ashanti, that was maybe overdone. Year to date the stock has actually lagged the sector, which is up 44 percent. Over the last year however, GLD, the Rand price of gold is flat, whilst AngloGold Ashanti is down 28 percent. YTD has been an entirely different kettle of fish. The question will always remain, are these investable companies? If there is something that you cannot understand and has an enormous amount of emotion (as the gold market does, for historical reasons) be prepared to not be in a specific bunch of stocks. And sometimes when that index comfortably crushes the market (like it has) the chattering classes will ask, why are you not in the stock/sector?

Today is Valentine's Day. In case you had not noticed. The Americans apparently buy 150 million cards today. Not the e version, but real physical cards. Wiki has some answers of how the day became connected to love and romance, but the money spent is around 14 billion Dollars, roughly 150 billion Rand for one day. I saw another article that said that Russia had over one billion carats of diamond reserves. Does that sound romantic or what, the Russians have five times the reserves that the next placed Zimbabwe has. And to think that Zimbabwe needs 27 billion Dollars in order to kick start their economy. I wonder who will show them that sort of love, I doubt that it will be ourselves, we need every cent that we collect. There were some other amazing statistics that I managed to find online, 196 million roses are bought for the day. But 14 percent of the woman who received roses bought them for themselves. That sounds sad, but self indulgence, that is not I guess. Around 2 in 3 Americans celebrate the day. I wonder what happens here in South Africa? What are you going to do with your partner, if anything?

Anglo American have delivered results for the full year to end December this morning. Talk about a stock on the tear, this is definitely one of them that has blown them all away this year. Anglo is up nearly 25 percent this year alone!!! But over three years, Anglo is down 29 percent. Over a decade the stock is, in Rand terms, not that spectacular. The ten year performance of Anglo American in London is a less impressive 11 percent return. Yes. True. Versus BHP Billiton in London the divergence comes in 2008, after the purchase by Anglo of a very expensive iron ore asset in Brazil and just before Anglo had to recapitalise Anglo Platinum. Or swap debt, I guess. BHP Billiton is up nearly 300 percent in London over the last decade. Wow. Astonishing.

But you sometimes have been dealt a set of cards that you have to squirm around. It is true to say that Mark Cutifani was passed something not associated with the Anglo American of yesteryear. He, Cutifani, is a tough Australian mining engineer, with real on the ground experience. He is different from all of the Anglo American CEO's before him. It has not been an easy ride for him anywhere in his career, not at AngloGold Ashanti, and definitely not at Anglo American. Time will tell whether or not he has both the skill set (everyone seems to think so, so do I) and more importantly, whether the operating conditions and the commodity prices move in the right direction for him. Clearly Cynthia Carroll, who earned around 1.37 million Pounds when she was at Anglo overpaid for some assets and dumped some high profile management out of the companies subsidiaries.

Preliminary results for Anglo American year ended 31 December 2013 are available to download from their website. Kumba Iron Ore contributed 47 percent of all operating profits, their copper assets contributed 26 percent of operating profits. Diamonds were around 15 percent of operating profits. Add all of those things up, Kumba, copper assets and diamonds (De Beers stake) and you are at nearly 90 percent.

The company haves written off 1.9 billion Dollars worth of assets, Barro Alto furnace write off and impairment of the asset of 0.7 billion Dollars. Barro Alto is a teeny town in the middle of Brazil, but home to a major nickel mine. Nickel of course is used in steel manufacturing, because of its properties of being electrically conductive and corrosion resistance. In 1999 the nickel price was 4600 Dollars a ton. By 2004 it had risen to 15 thousand Dollars a ton, a three fold increase and some more. A massive surge in the price from 2006 through to the middle of 2007 saw the price shoot up to an incredible 51 thousand Dollars a ton, and some more. By the lows of the equities market in early 2009, the nickel price had fallen to 9000 dollars a ton. Wow. Back to 28 thousand in February 2011, and now around 14 thousand Dollars a ton. Now I ask you with onion tears in my eyes, how do you plan in a scenario like that? It is nigh impossible to be able to report back on cost containment. I can understand how Anglo are not going to be giving this a full tilt.

Talking about expensive assets, Minas Rio is set to be at 26 million tons per annum production from 2016. the expensive project is 84 percent complete, with the first ore expected to be loaded before the year is out. Platinum guidance has been raised at Amplats to 2.3 to 2.4 million ounces per annum. Diamonds, around 32 million carats per annum. That is pleasing, production guided higher.

The results were a comfortable beat on pretty low expectations, 209 US cents (basic earnings) for the year with a basic loss of 75 cents per share. The full year dividend was 85 US cents for the year, the final dividend unchanged at 53 cents. The risks still remain however that the company gets the bulk of their earnings from South Africa, where labour relations and government and mines are hardly friendly. I am sure that all stakeholders will work harder during the current year to ensure stability. Although Michael tells me that he saw an interview this morning with AMCU leader Joseph Mathunjwa in which he said that they are pressing on with their demands. So whilst it may have been quiet, the risks of violence remains.

Anglo does not look cheap. Not at all. I would suggest that after this recent rally that there remains an opportunity to exit the stock. There are better mining assets in better geographies with fewer problems, namely BHP Billiton, which remains our top and only pick in the diversified mining space.

Michael's musings: City Lodge ticking over

Yesterday City Lodge released their 6 month results and earlier in the month they announced that they bought the remaining share of their Kenyan operations.

Let's first start with their 6 month results and then move onto the Kenyan hotels. An overview of the company is that they have four hotel brands, ranging from Country Yard; which they describe as having its own distinct character to give guests an excellent experience in an elegant environment; to Road lodge with is a bare minimum hotel. The number of hotels is 55 with and another two in the pipeline, and 2 hotels in Kenya and 1 in Botswana.

Their revenue is up 9% compared to the previous period, and Headline earnings are up 14%. The impressive part of the business is their cost controls with, costs increasing 5.7% which is in line with inflation, but what shows to me their quality management is that despite electricity prices going up, their electricity cost has come down. A disappointment though was their occupancy rates, which ticked up slightly to 64% from 63% in the previous corresponding period. Going forward the management team expects this figure to improve with their forecast of improved demand towards the second half of the year. If that is the case, then City Lodge looks very attractive, because as occupancy rates increase, their profit per room increases. Their EBITDA currently sits at 42.1% which is not too shabby, and it will go higher with occupancy rates.

City Lodge are also looking at expending into the rest of Africa, where currently they have 3 hotels. The two in Kenya, they owned 50% of through a joint venture where they have now bought out their partners. A calculation that Byron did 6 months ago, using the full year results put the profit made in the rest of Africa per room at four times that of South Africa. The group say that they are looking at expanding further in East Africa and move onto West Africa, using the lessons learnt and the platform set in Kenya.

The potential to expand into the rest of Africa is exciting and as the economy picks up so should their occupancy rates. The main worry for me is the low growth that is expected for South Africa this year, which will make it very difficult for them to fill more rooms.

Home again, home again, jiggety-jog. We are up for the day, better European GDP numbers are pleasing!!! Better in the place that people hated to invest in a couple of years ago. And guess what, it is all still together.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Thursday 13 February 2014

Chambers forward, always defensively

"Wow, the man is bullet proof and said something very similar during the last presentation. We are patient investors but this has been his tone for the last 3 years. I still really like the thesis behind this stock as an investment. They provide the routers and the servers that connect big businesses to the internet. They also service this hardware. It is a great margin business but it is becoming very competitive and these margins are getting squeezed. Especially in developing markets."

To market, to market to buy a fat pig. I read yesterday that you are not supposed to trust Chinese data from the official sources, I guess because there were some invoicing scandals at some point. And that goes to the very core of our industry, trust is everything, it takes years and years to build and can be eroded in seconds. Think of somebody like Jon Corzine, who was the CEO of Goldman Sachs from 1994 to 1999, and the governor of New Jersey for four years. But he was then the CEO of MF Global, where the company used clients money to cover the firms liquidity shortfall.

Phew. That is disgraceful, really. All of that goodwill and energy built into gaining trust of the investment community and broader society evaporated. And whilst it became apparent that by August 2012 that there would be no criminal charges brought against the management, it is tainted, their reputations. So if the numbers from the Chinese authorities are incorrect, does any authority take any heat? Or are the Chinese, hey, we made a mistake once, at least we uncovered the mistake.

Woolworths, one of our preferred retailers, reported numbers for the 26 weeks to end 29 December 2013. This is the first half of their financial year. Byron said that I stole his thunder because he wanted to write up about these numbers, so I had better make sure that I do a fine job, or else...

Firstly, and as strange as it sounds, what does Woolworths actually do? The simple answer is that the company sells clothing, food and general merchandise and it is fair to say that they are a premium brand in South Africa, in a sense soft luxury in the food department and they posses upmarket internal brands that certainly have been winning market share. Woolworths strive for quality over quantity, as a consumer I have never had a problem with any of their products, but just the other day I fielded a call from a Cape Town based client who said that the Woolies quality down the road from her (food) was poor. Michael tells me that often the Woolies in his home town has bare shelves on a Saturday by lunch and the poor staff have to shrug their shoulders. In Gauteng and in particular around where I work and live, I never have that problem and I am very spoilt with high quality (dare I say world class) products from Woolies.

The only point that I am making is that you must be careful to translate your own experience (good or bad) into whether or not the company is a good investment. Although that of course does define whether or not you, as a consumer, are going to use their services or buy their products? Of course it does and Woolworths have always prided themselves on being able to deliver the best quality product at the most reasonable price.

Numbers time, because at the end of the day the company could sell manure and be profitable, what matters to their shareholders is whether or not they manage to maximise profits. Sales for the half registered 19.4 billion Rand, a 16 percent change on the comparable period. Profits for the period registered 1.567 billion Rand, an increase of 22.1 percent. The company paid nearly 600 million Rand in taxes, thanks Woolies for contributing to the national fiscus, or rather thanks to the customers, who directly make sure that the company exists. The famous exchange between Henry Ford (the second) and union leader Walter Reuther, in which Ford pointed to automated machinery on the factory floor and asked Reuther how he was going to get the robots to pay union dues. Reuther snapped back with a fabulous answer, in the form of a question, Henry, how are you going to get them to buy your cars? Quite.

Headline earnings per share increased by 17.2 percent to 192.4 cents, the dividend declared for the half was 101 cents, generous payer Woolies. After tax that amounts to a little more than 85 cents (85.85), payable on the 10th of March.

On a segmented basis, Woolworths foods turned over 15.3 percent more than the prior period, just shy of 9.5 billion Rand, with profits before tax adjusted increasing 16 percent to 586 million Rand. So let me get this right, the company paid more in taxes than they earned in their foods business? But the food division as you know is not very profitable, so whilst the clothing and general merchandise division grew profits by 7.4 percent, Country Road with a 51.9 percent increase in profits are breathing down the Food divisions neck in terms of absolute profits. But yet is only 41 percent of sales. So that just goes to show you how much more profitable clothing is.

We did however speak about the inclusion of the Witchery business inside of this reporting period, Country Road, which reports as the Australian business. In Australia this is a premium business, as you well know, the clothes at Trenery and Country Road are not cheap. There are of course huge currency implications here, the Rand has weakened significantly over the last year to all the major currencies. Not that the Australian Dollar has had a good time of it lately, this morning there was an Australian unemployment read that was weak, their worst level in ten years, which topped six percent. The horror of it all, but I guess that these are rich people problems. Over the last year the Aussie has gained 8.4 percent to the Rand. Over the last five years, it is much more dire for the Rand, the Aussie is 53 percent stronger. Phew.

In the commentary: "In Australia, where consumer confidence remains cautious, there are signs of an improved retail market and we expect sales to be ahead of the market." so whilst we have to pay careful attention to the consumer here in South Africa, with Woolworths business in Australia we will have to do the same. In South Africa, the commentary is that the lower and middle income groups are under pressure and consumer associated debt in those LSM classes remain elevated. But about their core customer base: "the upper income segment in which we operate continues to show resilience. Trading for the first six weeks of the second half of the financial year has been positive, and we expect sales growth to be broadly in line with the first half."

So what now as an investor in Woolworths? I guess the cycles are unavoidable as consumers, they come and go as interest rates rise and fall. Consumers repair their personal balance sheets when their financial situations look dire. The reaction to what look like decent results is that the stock is down over three percent, and trading at the same multiple as the rest of the sector (forward), I think that it offers good value at these levels. It is a growth company operating in a tricky environment, but they have the right mix and great management. Strangely Ian Moir is listed as Australian, he has a deep Scottish accent, perhaps some United fans would want David Moyes to naturalise as an Australian. Give the man a break, a couple of years at least! Ian Moir on the other hand has another tough challenge on his hands, but I think that he is definitely up for the challenge.

Byron beats the streets: Cisco quarterly numbers

Last night we received quarterly results from Cisco which again looked fairly muted but above analyst expectations. Revenues were down 7.8% to $11.8bn. Net income for the period was down 54.5% but that was because there were a few once off charges. From continuing operations Non-GAAP net income came in at $2.5bn which was down 7.4% from this quarter last year. This equated to 47c per share. The image below pretty much summarises where and how this business makes money.

Yet again the market was disappointed and the share price declined 4% after the market closed. John Chambers just seems to drone on and on about the same thing.

"We delivered the results we expected this quarter. I'm pleased with the progress we've made managing through the technology transitions of cloud, mobile, security and video. Our financials are strong and our strategy is solid. The major market transitions are networking centric and as the Internet of Everything becomes more important to business, cities and countries, Cisco is uniquely positioned to help our customers solve their biggest business problems."

Wow, the man is bullet proof and said something very similar during the last presentation. We are patient investors but this has been his tone for the last 3 years. I still really like the thesis behind this stock as an investment. They provide the routers and the servers that connect big businesses to the internet. They also service this hardware. It is a great margin business but it is becoming very competitive and these margins are getting squeezed. Especially in developing markets.

The company needs new management and fresh ideas in my opinion and the fact that Chambers is both chairman and CEO does not sit well with me.

Having said all this, the stock is cheap. Earnings expectations are for $1.86. Trading at 21.90 we are sitting on forward earnings of 11.8 times. Plus they are sitting on $47bn of cash which is nearly 40% of their market cap. The fundamentals are strong and I'd expect demand for their product will grow, especially as people expect faster and more efficient internet services. I would hold this one but I wouldn't be adding until we see some shifts in management.

Michael's musings: Growth is around

The Bank of England has revised their forecast for the growth in the UK economy from 2.8% to 3.4%. That is a pretty sizeable jump and is very good news considering that the EU as a whole is expected to only grow by 1.1% in 2014.

Adding to the great news for investors and general population is their forecast of reaching the 7% unemployment mark at the start of this year, two years ahead of last year's forecasts. Good growth and lowering unemployment also reduces the risk of European economies slipping into deflation.

The Germans also increased their growth forecasts for 2014, this time not as impressive but you will always take an increased revision over a lower revision. The German government increased their forecast from 1.7% to 1.8% for 2014. Their economy is expected to increase exports by 4.1% (a positive sign for global growth) and increase their imports by 5%.

Driving around Sandton there are many exciting new buildings, which is exciting for me because when building starts it is a good indication that people have confidence in the future. You don't spend billions of Rands on a new building if you are worried about the future. Below are two pictures of new building sights. The first is of an old Standard Bank building being torn down and the second is an old Holiday Inn.

Yesterday the WSJ had an article on trader's looking at using lasers to increase their trading speeds by nanoseconds. The recent history for traders looking for speed has evolved from fibre optic cable, then to another fibre optic cable which was slightly shorter than the first, then to microwave and later millimeter-wave transmissions. For traders who are paying millions in order to gain nanoseconds, the time period between monthly data releases must feel like an eternity. Highlighting the short term nature of some of the big players in the market.

Home again, home again, jiggety-jog. Lower here to begin with. The state of the nation tonight, are you going to watch? You should, you know, because whilst it may not appeal to you, you have to care.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440