Tiger treks taking time

<i>"Turnover which amounted to R14.9bn was up 11%. R11.2bn of that was domestic which increased 8%. The export business grew turnover by 20% to R3.7bn. You have seen the profit details in the table above which all equated to headline earnings per share of 856c, up 7% from the same period last year. This is impressive considering the conditions. I think their strategy to crimp margins and maintain volumes has worked well for them. Internal cost cuts have allowed them to remain very profitable. The dividend has been increased by 6% to a healthy 329c per share."</i>

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<b><u>To market, to market to buy a fat pig.</u></b> The Grand old duke of York marched his troops to the bottom of the hill yesterday. So we were down from our mid afternoon highs, the US market sold off last evening to the tune of two-thirds of a percent for the S&P 500 and over four-fifths for the Dow Jones Industrial Average. Nerds? The NASDAQ from their intraday highs was off in-between those two indices, down 0.7 percent. What gives? Why? Well, searching for a reason why the markets are always down must be a tiring job, the several folks that I have spoken to over the years that were tasked with such jobs don't call us back, because we do not really have an opinion on whether Mr. Market goes up or down, or sideways. 

It matters most (Mr. Stuck Record) what companies you own. And in this case, the brick and mortar stores at strip malls are being travelled to <i>less</i> by ordinary Americans. Staples. Urban Outfitters. Target, which had the sellers exercising much practice, down nearly three percent. But I am just guessing out loud here that this is very good news for Amazon.com, who are essentially a technology business with a large retail element to them. More people buying online means that there will be less room for brick and mortar stores, more affordable work space, or converted into residential space? One wonders. 

Also falling into that category of sold heavily was <b>Dick's Sporting Goods</b>, well, their golfing and hunting divisions sales disappointed the market. The stock sank nearly 18 percent. Interesting business of how the second generation, three brothers, bought the store (one and only) from their dad (Dick Stack) and then transformed the business into 566 stores offering all sorts of sporting equipment. I remember the famous sports stores, Kings Sports in Durban, I remember getting a cricket bat from there. An SS Jumbo if I was not mistaken, my pride and joy. Or was it a GM Maestro? Darn it, my memory.... Back to Dick's Sporting Goods. The company is on many buy lists for many good reasons, they sell everything that you could possibly want from a sporting point of view. At least in the US, I doubt that there are too many cricket bats in their stores. But then I checked their online site and low and behold, there is a <a href="http://www.dickssportinggoods.com/family/index.jsp?categoryId=4414029">cricket</a> offering. 8 items, all Slazenger. No boots, but hey, enough to get you started I guess. 

The sell off in light of weaker than anticipated quarterly numbers and a downgrade to their forecast has meant that the market no longer affords a 20 multiple to this business, but rather a 16. The problem was that two months ago the company guided towards 51 to 53 cents for the quarter, a delivery of 50 was well, not enough training, you are going to be found out. For the full year earnings were guided lower to 2.70-2.85 Dollars, down from a mid March guidance of 3.03-3.08 Dollars. Phew, that guidance lower was enough to send folks packing and only marginally higher than the last full year, in terms of earnings. 8 percent higher at the top end of the range. Whilst this is disappointing, a good sell off in a sector that one likes is always a great opportunity. Whilst golf and hunting may be struggling, youth and woman apparel, footwear and team sports equipment sales are strong. I think that not so silently there is a revolution towards health and fitness, it is taking place as we speak. The company plans to open another 50 odd stores, online sales only represent 7 odd percent of total sales, that is an opportunity itself. Looks cheap (relative) and is trading at levels not seen since the beginning of 2012. 

Locally we saw equity markets end higher, but sag off the best levels. Up just shy of a quarter of a percent on the day. Michael said something about the <b>local market not cracking 50 thousand points</b>, perhaps the head shoulders knees and toes chart is not aligned with the stars. No, I am kidding of course, technical analysis and levels, those are not really for me, because <b>the price of a company and the share graph tells me nothing about that business at all</b>. Absolutely nothing really. But having said all of that, it would be really *nice* if the market were to breach that mark. 

For the time being we are stuck with 49617 points at the close, and judging by the movement overnight in the US equities market, we will probably start lower. And in case you needed another reason why the US markets sold off, the taper of the bond buying program, as a result of an improved economy, might be quicker than anticipated, those comments were attributed to Charles Plosser from the Philly Fed. I remember late last year when this was <b>the number one concern, tapering of the bond buying programs</b> and how that would lead to an aggressive sell off because there would be no support, et cetera. Three weeks ago the Fed cut their bond buying program to 45 billion Dollars, down by 10 billion Dollars. Which means that come the next meeting on the 17-18 June and the Fed will wind in another 10 billion Dollars, lowering the amount to 35 billion Dollars a month. You know what, that is less than half of what they were six months ago. Actually in August last year. Emerging markets, commodity prices, the S&P sold off over 100 points. Since then? <b>Up 300 points.</b> All that anxiety for nothing. Keep calm, be aware of the risks but do not be reactionary in any way.    
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In light of the recent <b>AT&T intention to acquire DirecTV for 49 billion Dollars</b> (the share price of DirecTV is telling you it may not happen), I was suddenly struck by how many people discount the DSTv business inside of Naspers. When people talk about Naspers, you are always saying, oh well, <b>this is a proxy for TenCent</b>, and then South Africans in their infinite wisdom apply a discount to the TenCent valuation in their valuation of Naspers. All rather complicated if you make it "like that", but that is part of trying to determine the value of any business that is in the public domain when investing real money. When you buy shares in a business, you part with your hard earned money (someone banks it on the other side) at a particular price. You, as the shareholder are then entitled to a share of the profits, you know that of course! 

But let me deal with one thing at a time, firstly, the value in Rand of the TenCent stake relative to the Naspers share price. Our trusty calculator is as follows: Take the <b>TenCent market cap</b> in Hong Kong, which right now is 1040 billion Hong Kong Dollars, or 1.04 trillion HKD. Naspers owns 33.85 percent of TenCent, that translates to 358 billion Hong Kong Dollars. Now one Hong Kong Dollar is equal to 1.34 Rand. So, quite simply, multiply 352 billion HKD by 1.34 and that equals 471 billion Rand. That number in Rand terms has not changed much, even though the HKD to the ZAR has not been in Naspers' favour i.e. The Rand has strengthened to the Hong Kong Dollar. At last close, Naspers had a market capitalisation of 498 billion Rand. So, in simple terms the "rest" of the business is worth 27 billion Rand. What is the "rest" of Naspers actually worth? -> <a href="http://www.vestact.com/single.php?p_id=6893">Naspers results, big e-commerce ramp up coming</a> One of the old Naspers links is broken in there, sorry. 

I want to focus on the TV segment for a second. Six month revenues were 17.1 billion Rand, as at the last set of numbers. 7.3 million subscribers. What would you pay for that business? 5.375 billion Rand EBITDA last half. Currently DirecTV (at the lower price) has an enterprise value to EBITDA of 7.7 times. Of course we are not comparing this fruit and that fruit, DirecTV is in the US and DStv is across the African continent mostly, but they are both satellite TV businesses, so that is fair enough, I guess for the purposes of this exercise. Working backwards to determine the enterprise value, and annualising the six month EBITDA to 10.75 billion Rand, you get an enterprise value for DStv (or the TV part of Naspers) of 82.775 billion Rand, or roughly one sixth of the total Naspers market capitalisation. But this I think is a conservative valuation. 

<b>But yet the fellows here, in South Africa, in their infinite wisdom, discount the price of Naspers</b>, because from an earnings perspective it is not quite at historical levels. When of course they, Naspers, used to only sell magazines and newspapers. And not satellite TV subscriptions and more importantly, the future being ecommerce businesses, which are currently LOSS making. We can all add. Even the print business makes profits and must be worth more. Even the loss making ecommerce business will be worth something in due course. As luck would have it, I received (for what it is worth) an analyst report which suggested that Naspers is trading at a 25 percent discount to their NAV. And that there could essentially be 50 percent upside in the share price over the next 12 months. Yowsers. But then again, take those brilliant and well researched reports from where it comes, that could change in the next six months. <b>But the argument can equally be made that a cheaper entry point into TenCent is via Naspers, because surely the rest cannot be for free?</b> We continue to hold the stock and accumulate on weakness.    
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<b><u>Byron beats the streets</u></b>

<b>This morning we received interim results from Tiger Brands for the 6 month period ending 31 March 2014.</b> As Sasha mentioned a few days back they are taking a write down from the 63.35% Dangote Flour Mills (DFM) stake which will have an effect on Earnings. Lets first look at current operations then we can look at the Dangote Mills issue.

As with many of these brands businesses the actual strength of the brands is crucial. <b>Take a look at how Tiger dominates the brand positions in its relevant categories.</b> That is very impressive I must say. 
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Now to get a better idea of where the business makes its money here is a breakdown of their operating income as well as their margins for the period. Grains is still the dominant contributor but the business is very nicely diversified. Exports and international, excluding Nigeria, is becoming more and more significant, especially after growing 26% in the period. That is crucial for the growth of this business. It was of course helped by the weaker Rand but lets be honest, that is a welcome hedge for a company this negatively affected by a weaker consumer thanks to a weaker rand.
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<b>Financials (excluding DFM).</b> 

As you can see from the table above, margins were purposely squeezed to maintain volume growth. Turnover which amounted to R14.9bn was up 11%. R11.2bn of that was domestic which increased 8%. The export business grew turnover by 20% to R3.7bn. You have seen the profit details in the table above which all equated to headline earnings per share of 856c, up 7% from the same period last year. This is impressive considering the conditions. I think their strategy to crimp margins and maintain volumes has worked well for them. Internal cost cuts have allowed them to remain very profitable. The dividend has been increased by 6% to a healthy 329c per share. 

Lets assume they can double operating earnings in the second half. That would assume earrings of R17.12. Trading at R293 (it reached R238 at the end of Feb this year) we get a forward multiple of 17. As the biggest food producer in the fastest growing continent I'd call that fair.

<b>Dangote Flour Mills</b>

Ok that was the good part, but there is an ugly part as well. Sasha did cover it last week Thursday. Basically they are impairing R849 million, the entire value of the goodwill and intangible assets which were calculated when the acquisition was done. In simpler terms goodwill and intangible assets is the premium Tiger paid over and above the book value (assets you can feel and touch). In other words they paid too much and are writing off that entire premium. But lets go back a few steps.

In September of 2012 Sasha wrote this piece titled <a href="http://www.vestact.com/pls/pub/pub_misc.preview?p_id=5238">More insight on the Dangote Flour Mills deal.</a> It is nicely simplified. Tiger paid R1.5bn for the stake but it had a clause which stated that on top of that they would pay 14 times the current years adjusted profits. That current year was 2012. In the first half of 2012 they made a loss of 815 million Naira (R52m in todays currency) according to the Dangote website. In their results last year they confirmed that they paid no more than the R1.5bn but they also assumed R1.5bn in debt from the business. It was certainly a business in decline when they bought it but they knew that already. Continuous over capacity in the Nigerian milling industry has furthered hampered the turn around. 

Yes they may have overpaid in the short run but remember when MTN "overpaid" for their entry into the Nigerian market. I am not saying that this will turn out as well but the numbers are certainly there. I still back management to turn this around in due course, these things take time, especially in Africa.

<b>Conclusion.</b>

All in all I think this is a good set of results and the share price has certainly been rejuvenated. As Shoprite and Co expand into Africa they will naturally take the best Brands with them. We maintain this as a core holding in our portfolio and continue to add.  
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<b><u>Michael's musings: Taste, looking Tasty?</u></b>

Fast food has been in the news this week, with Famous Brands releasing their results on Monday, yesterday Taste saying that there has been a local objection to their agreement with Domino's and then this morning their full year results are out. 

<b>Let's start with the numbers, revenue is up 15% to R582 million, EPS is up 23% to 15.1c and the dividend per share is up 22% to 6.2c.</b> The group is split between their food services business and their jewellery business, from when they bought NWJ in 2008. The revenue split is about 60/40 in favour of food, but the profit share is closer to 50/50 because of the better margins on jewellery. 

Taste only has an operating margin of 8.5%, which compared to Famous Brands' 20% seems very low. Taste do say that their operating margins are not directly comparable to other franchise companies because of the way they treat marketing income and expenditure. 

Their jewellery division is in the right sector and is able to cater for people moving into the middle class, so they should continue to see growth. From my experience there are multiple lower end jewellery stores in malls, which to me says there are low barriers to entry. For high end jewellery brands (which I wouldn't classify NWJ as) this is not a problem because they have decades/ centuries of history, making it very difficult for new comers to take market share. If I had the choice I would rather have a brand name, high margin business in my portfolio. 

<b>The reason that you would buy Taste Holdings is for their fast food division, and more particularly for the impact that Domino's is going to have on the group.</b>  I was watching the CEO on CNBC this morning, Carlo Gonzaga, where he was talking about how much he has learned from Domino's over the last two months. I think that this is the key, the skills that they will gain from Domino's they can use in their other brands. Having the Domino's brand also brings customers that they have not had in the past; when last did you eat from Scooters, for me it has been at least 6 years. In the center up the road from me the Scooters was replaced by a Debonairs, still early days for Debonairs but I think I have made my point. 

Taste say that they expect Domino's to have a material impact on their results in two years' time. The reason for the delay is due to the cost of converting the existing stores. Some headwinds that might come up in the future would be if Yum brings back Pizza Hut, which they indicated they might do.

My money would still be in Famous Brands over Taste but the company (Taste) is growing off a vastly smaller base and as such looks attractive to have a punt on them doubling earnings in a short period of time. The Domino's deal is a catalyst for the company and their results will have to show it in years to come, if it comes off, I think there is good money to be made. 
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<b><u>Home again, home again, jiggety-jog.</b></u> Markets are marginally lower by midday. Not too much to talk about by way of data around.... keep calm. Carry on. 

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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