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
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