To market, to market to buy a fat pig. Financials and Industrials led the charge yesterday, results from well known businesses. Some of them like AngloGold Ashanti in recovery mode, getting used to a stabilising gold price. At the same time the World Gold Council reported that gold demand last year was essentially unchanged from the year prior. Seeing as the gold companies are not really core to our portfolios at all, all you need to know is that the metal is still in demand and will for historic reasons remain like that. The positives for AngloGold Ashanti are lower costs and higher production, we have definitely shifted to an era of more profitable ounces rather than chasing production. That is good news for shareholders. This is the strongest quarter operationally in four years.
Another business in recovery mode and reporting results yesterday was Astral, resuming paying an interim dividend after having skipped one last year. Surely that tells you something. The volatility of soft commodity prices and the volatility of the Rand as well as the cheaper imports saw tough times perhaps past. Or the worst of it. Almost anything can however happen when owning a business of this nature, an agricultural business is a tough old neck of the woods, farming itself is for the very brave. Ironically deep inside of all of us there is a farmer, someone who thinks that they could be good at that! Too cyclical for our liking, entire chicken populations can be wiped out. Hey, how do you feel as a consumer paying higher chicken prices as a result of import tariffs being slapped on chicken from Brazil? Whilst the department of so and so stands up and says that x or y number of jobs have been saved, the unintended consequences of higher protein prices, for the protein of choice in South Africa for 52 million people, could be much worse. Short sighted, just like the chickens themselves which have to turn their heads sideways to spot the piece of grain.
Another set of results from Barloworld yesterday, the industrial business far different from the conglomerate that it once was, even 30 years ago. Major Billy Barlow (a WW1 veteran) founded this business over 110 years ago in Durbs, obviously before the Great War (you know your history), his son Punch Barlow became a legend in South African business circles. Heavy machinery has also been at the heart of the business, the Caterpillar licence belonged to Thomas Barlow & Sons as it was known back then. That was in the 1920's. The Hyster licence was also acquired by the family in the roaring 20's. Forklifts and heavy machinery, a great proxy for the economy, not so?
The stock of the business was first traded in 1941, according to the Barloworld website it opened at seven shillings and sixpence per share. Twelve pence in a shilling and twenty shillings (240 pence) in a pound. Yes, that makes sense. Not really. So the share price was 12x7 plus 6 pence. 90 pence, got it. Believe it or not, decimalisation took place in Ye Olde Worlde (the United Kingdom) a day after Valentines Day in 1971. Barlows is not the same business as it used to be. Punch built a massive empire over a 60 year plus career. By the late eighties (Punch had been dead for a decade), whilst tie dyed tees and bleached jeans were all the rage, Barlows had become a top 100 company in the Fortune 500, 79th place in fact on the 1989 list. Wow.
Just over a decade ago however the divesture of noncore businesses started, out went various paints and steel distributions businesses. PPC and Freeworld were unbundled in 2007. Now what is left in Barlows (sorry, Barloworld) is the equipment business which is a CAT licence in 11 Southern African countries, Iberia (which is Spain and Portugal) and selected Russian territories. Post the Caterpillar purchase of Bucyrus (mining equipment), Barloworld hold that licence too. The handling business is a product sales business (agricultural products, you will know Massey Ferguson) in Southern Africa as well as Russia. When Russia keeps coming up, does that ring any alarm bells? Maybe. Lastly their automotive and logistics division is far and wide, rentals logistics (duh) and motor vehicle retailing. You can get the full numbers from the presentation document from yesterday -> Interim results for the six months ended 31 March 2014.
Whilst there is definitely a recovery in Iberia, the Russian sanctions and stand off around The Ukraine remains a problem, from the commentary: "The deteriorating situation in Ukraine continues to take its toll on the Russian economy with the rouble weakening in the period and the outlook for economic growth continuing to decline." Sigh. But the outlook is fairly upbeat, if not mostly cautious. Equipment Southern Africa is stand alone their biggest division, both from a revenue and profits point of view. You could argue that because of their location that Barloworld are well positioned to take advantage of a sustained mining, industrial and agricultural upswing across the region. Twenty Rand cheaper and I would say for a business with limited earnings growth over the next three odd years, then you are talking. But then again, who am I kidding? I am starting to sound like those fellows that suggest the market has got it wrong. Very cyclical, dependent on construction and industrial capex, as well as agricultural spend. It would be great to want to hold such a champion of industrial Southern Africa, but probably best to avoid for the aforementioned reasons. Another important rule of investing is that you cannot own everything.
I wanted to make some sort of point following on from yesterday about comparing two moments in time. Pattern recognition is engrained in all of us. It helps us evolve as a species, the next time we come across a Sabre Tooth Tiger we know that it is not friendly, but rather a foe, because uhhummm, we lost cousin Bob to the big beast. I am not a fan of technical analysis because it is about pattern recognition and saying, oh, X happened and this is forming a Z pattern and now I expect A to happen. A chart of a share price tells you nothing about the business that you are buying. We are in the interest of buying companies, not random prices that are supposed to do X or Y or Z based on what they did last week, or last month. I am not suggesting that it doesn't have a place, it just doesn't have a place in investing in companies. When someone mentions a head and shoulders on a graph, I snarkily ask, where is that knees and toes pattern forming? I should not be so rude, but I cannot help it, for me technical analysis is like Candy Crush, recognising patterns.
Back to that two moments in time comparison. A lot has been made of the valuations of internet stocks now and the dot-com era of 1998-2000. Anything with a dot-com domain, or something to do with technology was immediately snapped up by Mr. Market and retail investors that crazily bought every single tech stock. Substitute tech with internet and do we have the same? It is always very dangerous to say that this time it is different, but where it is different is that at least there is an E in PE. E being earnings. Facebook trades on a historical multiple of 75 times (expensive), current year that is 41 times and next year that shrinks to 32 times. Still expensive for many, but growing at a breakneck speed. From an advertisers perspective, Facebook knows more about their users than any other platform, and because monetisation of this powerful database is in its infancy, the prospects of an ARPU ramp up are real. For many that have stricter guidelines with regards to investment and investability metrics for their mandates. You have heard the argument, great business, wrong price. The same almost always applies, no matter what moment in time we are at. Sometimes a specific company's stock is either cheap for a reason (no growth) or conversely expensive for a reason (faster growth).
Last point. The platforms that investors and money managers have access to, ourselves included, is a powerful platform to put forward your own argument about specific companies. Making noises about absolute market levels is lazy forecasting or simple observing from a distance. "The market is high" tells me nothing about the companies inside of the index. Zero. Beware the market forecaster, that is all that I am trying to say. Own companies, read their prospects and outlook and performance. And of course the list goes on.
Byron beats the streets
This morning we received interim results from PPC for the half year ended 31 March 2014. If you remember we divested from this one about 3 years ago on the premise that slowing demand and increasing competition in South Africa will put big pressure on their already heavy balance sheet considering their big plans to expand in Africa. Lets see how that is panning out.
Cement sales for the period increased by 2% while group revenues increased by 9% to R4.1bn thanks to better exports as well as the inclusion of sales from Safika, a South African cement manufacturer they bought last year. Revenue was also boosted by good growth in the lime and aggregate division. This division is responsible for 7% of profits so not exactly significant. EBITDA for the period was up 5% to R1.18bn which equated to headline earnings coming in at 96c which is up 50% from last year which included once off in Zimbabwe associated with indigenisation costs.
Earnings for the full year are expected to come in at around R2.20 which is just above flat from 2013. The stock currently trades at R32 (down 3% today) putting it at 14.5 times earnings. They have managed to keep the dividend the same as last year at 38c but as expected, they have put their dividend cover under review because of big capex requirements in the future. This is why I expect the share price is taking a hit. PPC has historically been a very strong dividend payer and many dividend orientated funds and indices may be wary of this news.
The South African market is still slow. Demand for cement was down 2% while price increases of 4% matched cost of sales increases. With current electricity and transport costs escalating this is certainly commendable. As you can imagine Zimbabwe has really struggled, the country is a shambles. Botswana has also seen slowing sales as a result of a more competitive landscape.
The company has big plans however, this is what they have to say in their prospects.
"We are pleased to note the accelerated progress in the execution of our rest of Africa expansion strategy. Construction is underway in four countries; Rwanda, the Democratic Republic of the Congo, Zimbabwe and Ethiopia. We are particularly pleased with the fact that at the end of calendar 2014, we will begin commissioning our 600 000 ton per annum plant in Rwanda. A positive outcome of a detailed feasibility study into establishing cement operations in Algeria would result in the construction of yet another cement factory in a different African country."
Conclusion. Net debt went from R3.9bn last year to R5.2bn this year. That is more than a quarter of the market cap and getting tighter. How are they planning to fund all the expansion mentioned above while sales in their main market South Africa remain subdued because of muted demand and increased competition? Don't get me wrong, I still think this is a good company and probably your best entrance into the construction sector. Africa will certainly have big infrastructure demands in the future. But there are too many question marks and still too many risks, there are better opportunities elsewhere.
Michael's musings: Waka waka, eh eh
Yesterday Famous Brands released their full year results, and had a results presentation that I got to attend. I was hoping to have a King Steer Burger as part of the snacks followed by a Tashas/Wakaberry desert, but that was not the case. The company had strong results with some mile stones over the year. The first and most important as an investor is that they achieved an operating margin of over 20% for the first time (from 18.5%), they also have passed the R10 billion market cap number and their debt to equity ratio is negative, meaning that they are debt free.
As an investor you would like to see a bit of debt in a growth business like Famous Brands because you would be backing management to put the borrowed money to work giving returns that are higher than the interest on them. The management hinted at an expansion into what they called the "related leisure" sector, which would include hospitality, beverages, food retail and fast moving consumer goods. The move would make sense because they can leverage off their logistics and manufacturing networks, which currently supply's their franchisers. The move would also add some debt to the books that could be paid down relatively quickly due to the strong cash flow of the company.
At the moment they have 2378 stores of which 1935 are in South Africa, 347 in the Rest of Africa, 94 in the UK and 2 in India. An interesting stat is the operating margins for the different regions, South Africa is just shy of 20%, but the "Rest of Africa" category has a margins of 46.1% and the UK has only 14%. As markets become more developed there is more competition and margins drop, it is interesting to see where South Africa's fast food market fits in compared to others. As far as growth is concerned the rest of Africa still has vast amount of opportunity and as you can see, if they get into the right regions there is high margin business up for grabs.
Onto the numbers revenue was up 12% to R2.83 billion, headline earnings up 20% to 406c and the dividend is up 20% to 300c, the numbers are all moving in the right direction. Like on like sales were up 6.7%, with South Africa only up 5.8% which is in line with inflation. The company said that they found that the number of consumers purchasing were up, but the frequency of purchases were down. Which points to a growing middle class but people who have less disposable income to spend. The "recession proof" brand Tashas had like-on-like growth of 20%, as the company says "Those who have money continue to spend it"
This is still one of my favourite companies not only because of our growing middle class but also due to societies shift towards easy and fast on the go food. The prospects for the company look good and with them looking to expand into the leisure sector, we should see further strong growth from them.
Home again, home again, jiggety-jog. Much the same stocks from yesterday are the leaders today. Not quite at all time highs but pretty close. Iron ore prices continue to fall (below 100 Dollars), futures markets across the sea and far away are flat essentially.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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