To market, to market to buy a fat pig. A marginal gain here for the markets, the Jozi all share marched back through the 49 thousand point mark with a modest 0.17 percent gain on the day! Banks caught a bid, by my reckoning that is a record high as a collective. Over the last year the banks as a collective have returned 22.1 percent. Standard Bank has done better than that, up 25 percent plus over the last year, Barclays Africa the laggard (by a long way) up only 1.6 percent over the last 12 months. Nedbank is up 30.1 percent, astonishing! FirstRand has just outperformed the index, the share price is up 23.4 percent for the last 12 months. Wow, what is up at Barclays Africa, formally known as ABSA, before the integration of all the separate businesses across the continent. The business is now 62.3 percent owned by Barclays Bank Plc, the only other major shareholder is the PIC, which owns 7.3 percent of Barclays Africa.
The outlook for all the banks is decent enough, there no doubt will be growth, but it is possibly muted with earnings expected to be in the high single digits/low double digits for the next three years. That means I guess that you won't force these valuations too much over low double digits. Barclays Africa again are the lowest rated bank, from a valuations point of view, relative to the rest of their peer grouping. The high dividend payout ratio sees the yield of Barclays Africa MUCH higher than Standard Bank, FirstRand and Nedbank. Their expected yield for this year is (before tax) 5.6 percent, relative to the other three, which are forecast to be 4.4 percent for Standard, 4.3 percent for Nedbank and 4.1 percent for FirstRand. Why is Barclays Africa discounted relative to their peer grouping? Well, for starters the other banks are expected to grow earnings at a faster rate, in the mid teens and as such catch up quicker, grow into their multiple that the market currently affords them. Perhaps the management team is not as well regarded, I have heard that argument before too.
Meanwhile parent company of the Barclays Africa Group, Barclays Bank plc announced yesterday that they were to cut 7000 jobs in their investment bank division by 2016. That is around one in four current jobs at the division, I can't imagine that this is the best news for those folks employed there. No, let me rephrase that, any job lost is always disheartening to hear about. 19 thousand jobs across the whole bank, obviously including these 7000 jobs. What is happening here is that the new CEO, Antony Jenkins, has decided that the new path must steer away from the riskier trading businesses, commodities, currencies and fixed income, which are volatile in nature and steer more towards his background, retail banking.
So what does that mean? Because Barclays are not the only bank to move in this direction of more stable and less risky earnings mix. Jenkins suggested that this was a generational change, a move away from risk towards reliability. Again that has repercussions for investors across the sector, if there is going to be less risk taking, that is a good thing for the financial system as a whole, but that also means that earnings are likely to be muted. And if Jenkins is right, and this is a generational change, that means that there must be a rerating of banks to a lower level that is more predictable but less profitable. We have been drumming on about this for a while, suggesting that as a result of heightened regulation coupled with lower risk taking, that could possibly mean that bank earnings would be more utility like, less blow out.
The question then is a simple one, in the investment banking and securities industry, which company would you want to own? Goldman Sachs looks cheap on a 10 odd multiple historical and forward it is around 9.23 times. Yet the stock trades closer to the 52 week low than their 52 week high. I am not too sure that either the shareholders, the management, the regulators and the political powers that be want a return to the higher risk activities of the last decade. Interestingly I plotted the S&P 500 against the Bank of America Merrill Lynch, JP Morgan Chase, Citigroup, Goldman Sachs and Wells Fargo over the last ten years and only Wells Fargo was a better investment than an index tracker. But all the others were not, Goldman Sachs was about the same as the broader market. Citi and Bank of America were disastrous investments over the last decade, the blow up in 2009 was not kind to either institution.
So that then begs the question, for the amount of risk that you assume as a shareholder of financial institutions, do you get just rewards? Possibly not. And with increased capital requirements, more compliance, more probing eyes from regulators and politicians alike, it is unlikely to get easier for these institutions. As such I suspect that they will all (and it is a poor show to generalise) be less profitable than before. As a rule we generally avoid the big banks, because it is very difficult to make heads or tails of what is going on under the hood, what is really oiling the profits machinery. Their best assets go up and down the lifts each and every morning and evening, perhaps more true of investment banks than normal good old fashioned banking. It does however attract some of the finest and smartest people I know, the broader financial services industry.
Most people I know fancy themselves as music aficionados and more specifically their music choices are superior to other folks. They just don't get it, right? And you can mock them and suggest that they are listening to X or Y (Justin Bieber or Taylor Swift) but the truth is that X or Y have sold many albums, so they might be seen as commercial/mainstream/bubblegum, but that is what the people want. People love music, the rhythm is in our core, perhaps to those days that we all danced around the fire each and every evening.
I am one of those, I love my music, but not quite enough to wear headphones whilst I walk around. Headphones, earphones and speakers, that is what Apple inc. are being rumoured to be buying, a business called Beats electronics. For as much as 3.2 billion Dollars. None other than Dr. Dre is involved, in fact if you visit the website, you are met by the BeatsbyDre branding. Dr Dre is Andre Romelle Young, a 49 year old entrepreneur, producer and of course himself a recording artist, he has six Grammy's, three for producing (he is known as a perfectionist) and three for his talents in the singing department. The initial stake was a lot, I am not entirely sure what Dr. Dre could stand to net if the deal happens.
So why would Apple want to own a 6 year old business that makes fine (expensive, 300 odd Dollars apiece) headphones and speakers? Well, there is also a streaming music service, that could be worth a lot more in the coming years. Perhaps the fine speakers in both their handsets, notebooks and even motor vehicles (a Chrysler deal) means that the options could be many. But if this deal was to go ahead and as I understand it from this FT article -> Apple in talks for $3.2bn Beats deal, this would be the biggest deal that Apple would ever have done to date. Amazing. Astonishing. The next biggest transaction from that table in the FT article is a 400 million Dollar transaction in 1997 (roughly 580 million Dollars on an inflation adjusted basis), when Apple bought NeXT computer systems. Steve Jobs and Ross Perot were corporate directors at NeXT.
Music streaming seems to be the reason why Apple are interested in this business, but all the other hardware must be interesting too. Selling high end Apple branded headphones might be very attractive for many. We wait, and most likely will have news on this next Tuesday. Or so we read. Who are these people who are always familiar with the negotiations? I will tell you, non secret keepers and people that could be in trouble soon!
Michael's musings: Alibaba, the all in one company files for IPO
So on Tuesday, Alibaba filed for their IPO, the most anticipated IPO for this year. Alibaba are an internet e-commerce China based company. The IPO is relevant to us because they thrown into the same group as Tencent (Naspers biggest asset). Also being an internet based company, it affects other internet stocks like Facebook and Twitter, with talk going around that we are in another internet bubble like in 2000.
The IPO is expected to raise between $15 - $20 billion dollars and will put the market cap in the range of $150 - $200 billion, with some market commentators predicting a quick rise to the $250 billion mark. For comparative purposes Facebook has a market cap of $147 billion.
To give you an idea of what they do, see the below table comparing Alibaba entities to Western Companies from this Quartz article -> All the Western companies you'd have to combine to get something like Alibaba. The article gives a better breakdown of each entity, but the table is self explanatory.
The shareholders of Alibaba are Softbank with 34.4%, Yahoo with 22.6% and Jack Ma (the founder and Chairman) with 8.9%. Softbank are a Japanese internet company founded by a man called Masayoshi Son who has the distinction as "the person who has lost the most amount of money in history!", when he lost $70 billion dollars in the dot.com crash. Ouch! He is now worth around $9 billion, so not all bad for him.
Now onto the numbers, their revenue for the last nine months was $5.6 billion with their last quarter being $3.01 billion up 62%, huge growth! On the earnings side they were $2.85 billion with the last quarter earnings of $1.33 billion up 104% compared to the previous corresponding quarter. All these earnings have translated into them having $7.8 billion in cash. This is where the big difference comes between now and the dot.com bubble. This company and others in the category have real customers and real profits, most importantly they have CASH!
There are around 600 million internet users in China, which means internet density is not yet at the 50 percent mark. I don't think that the human mind can compute those numbers and by extension the spending power of hundreds of millions of online users. In 2012 total online spend for China was $210 billion compared to the USA $226, this would make sense due to the US having a higher GDP per capita. A thing to remember though is that China is growing at 7.5% a year meaning that two things are happening. The first is that the people who are already online have more money to spend, the second is that more people now have the means of accessing the internet; so the customer base is growing as well as getting richer. The great thing with internet companies in China is that you are exposed to the rapid GDP growth of the country and you are also exposed to the internet (computer) revolution that is sweeping the world.
The impact of Alibaba and the internet on China can be highlighted in an article that I read about a farmer in rural China who made just enough to survive. Alibaba then came along and connected the farmer's products to other parts of China and the world. He now drives a Jag and his wife shops in Paris. This isn't the case for everyone, but it highlights what can be done. There are now 14 areas called "Taobao Village" which Alibaba defines as a village in which over 10 percent of households run online stores and village e-commerce revenues exceed 10 million yuan per year.
A big advantage to Alibaba and Tencent is that the Chinese online space is closed to their Western equivalents, meaning that these two companies can to take advantage of all the growth happening in this space. As much as this is a big advantage, it is also a big risk. If the government decides to deregulate, these companies are going to have to share their "backyard" which will mean a drop in profits. Most political analysts do not see this happening anytime soon though.
Alibaba is a very exciting company in a space that is changing the world. I don't think that investors quite know how to value this type of company, so expect a wild ride in the share price when it lists.
Home again, home again, jiggety-jog. Stocks are lower to begin with, the Russians celebrated Victory Day today (Europe yesterday) in which they were flexing their muscles. Not good for anyone. The ECB yesterday signalled their intent to stimulate the European economy, that saw a Rand go firmer. Hey, to the USD we are near the best levels of the year. So much for the finished emerging markets!!
Sasha Naryshkine, Byron Lotter and Michael TreherneEmail usFollow Sasha, Byron and Michael on Twitter 011 022 5440
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