Money with a dash of Funny: June 2014

Monday 30 June 2014

Aspen autocorrect

"Aspen took the time and effort to respond to each news article one by one -> Response To Media Reports Following Pre-closed Period Conference Call. The most important line for shareholders however is that Aspen will release a trading update when they are certain of what they are expected to achieve for the full year. The analyst community have pretty lofty expectations for the company, expecting them to earn over 40 percent more than last year."

To market, to market to buy a fat pig. Markets fell here Friday, the all share down just over one quarter of a percent. Aspen was routed and in a turn up for the books, ABIL surged ten percent. Why did Aspen get trounced like that? Well, there was a conference call in which the company told analysts many, many things. South American Merck portfolio products out of stock, but equally the South African anti-retroviral tenders have been weak and margins in this business have been impacted. That has been telegraphed though.

This was not a conference call where the media was invited, it was an analyst call before the full year closes out, that is today. Searching across the Aspen website I came across two things that were more than interesting, both under the front segment of their website. First, the results published are strangely in Latin seemingly and second, below that our very own Paul Theron and Vestact get a mention, thanks to the Hot Stoxx show:

Thanks Aspen for the Latin, I am not sure whether this has to do with the publishing platform on their website, or whether it is intentional. Mostly though, thanks for the video where of course Paul thinks that Aspen is hot. But because Aspen is a rather large holding in many of our client portfolios, the six percent fall on Friday has to hurt! Spare a thought for those folks that would have bought the stock on Friday at 313 ZAR only to see it close at 288 ZAR. And I guess we are about to close out the first half of the year, many money managers would be, how does one say, disappointed. Of course context is needed, the company and share price have done really, really well. Over the last 12 months the stock is up 26.8 percent, that is still a fabulous return.

Right, to listen in to the pre-close period conference call, you can call 011 305 2030 and then plug in the playback access code, which is 31356#. I listened in there. Gus Attridge leads and it is all rather business as usual. Political unrest in the rest of Africa business is weighing in Nigeria and Kenya. Stephen Saad then comes on the conference call to add a little "colour" as Gus Attridge uses analyst speak. Stephen fleshes out the supply problems at a Brazilian plant. He uses the word colour again. Lovely.

Government a problem here as a customer on the ARV's. 100 million Rand a month disappeared for a while (in revenues), the recovery in that far off. That is the part that I think spooked most people, there seems to have also been some confusion from the analyst community around the heparin (the anti coagulant) manufacturing at the PE plant (when only the vials are being manufactured there for the time being), with the thinking that it would be done here. And by here, I mean PE and not abroad. The Boks were excellent in PE, not so? Scotland were never in it, oh dear.

Oh dear to the Aspen shareholders too, a couple of really tough sessions, but the share price is still three and a half percent better on the month after a poor two days. I listened to the whole call, around half an hour and then I read that Stephen Saad was a little surprised about the share price falling on Friday. Me too. Mind you, the price had rocketed forward over the last 30 days, as I mentioned. This morning there is a bounce in the price, up around two and a half percent.

Trigger happy selling perhaps, the results themselves will provide a lot more clarity around the issues raised in the conference call, I am thinking that NEXT time there must be transcript associated with the call, when you are moving at high speed there is no pause and rewind as we have gotten used to on the PVR, that does not exist on any conference call.

This message is written real time and as such Aspen have now issued a SENS message with the related comments from the call. The message is clear, the said analyst was taken out of context: "Unfortunately certain comments made by Aspen management have either been misconstrued or have been quoted out of context and have now appeared in certain sections of the media creating uncertainty in the market."

I think that you need context, you need the original press reports in which the quoted analyst is corrected, a Bloomberg article: Aspen Falls After Managers Tell Analysts Second Half Was Weaker.

Aspen took the time and effort to respond to each news article one by one -> Response To Media Reports Following Pre-closed Period Conference Call. The most important line for shareholders however is that Aspen will release a trading update when they are certain of what they are expected to achieve for the full year. The analyst community have pretty lofty expectations for the company, expecting them to earn over 40 percent more than last year.

This is a great example however after the market shooting first and then asking questions later. The SENS puts the negativity that was associated with the South African business into context: "In the presentation on Aspen's 2014 interim results referred to above, it is disclosed that revenue from ARV tenders in South Africa for the six months ended 31 December 2013 amounted to R525 million. This was 14% of the total South African revenue and 4% of the total Group revenue reported for this period." So a very small part of their business is having a very big problem. And to add to that very small part of their business, it is one of their businesses with the worst margins too.

Seeing as we never have to trade aggressively around any of these events the damage is limited to a drawdown in the P&L column. We continue to accumulate what we think is a fabulous company and anticipate that the businesses that have been added over the last 12 months will become stronger profit contributors in the coming years. I know that sounds a bit vague, and it is, but because we back what is a great management team operating in fast growing developing markets and selling products that continue to grow quickly, the market affords the company a high multiple for a reason.

Home again, home again, jiggety-jog. Markets are flat here. For all those people who are very excitable, note that Friday is non-farm payrolls. Perhaps another chance to react to data. It is of course the most anticipated data point of the month, with much excitement generated across the box and on the Twitter thingie.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Friday 27 June 2014

Nike spikes

"Twenty years ago it was uncommon for people to wear their favourite football team's shirt to go shopping, nowadays that is commonplace. Nike footwear was reserved for those folks who were on their way for a jog or a run, whatever you want to call it, nowadays there is a whole leisure wear segment attached to the brand."

To market, to market to buy a fat pig. I have seen everywhere I read that tomorrow, 100 years ago in the town of Sarajevo on the banks of the Miljacka river at the intersection of the Latin Bridge, the seeds were sown for the "Great War". You may know that in the hours before the shooting of the Archduke Franz Ferdinand and his wife Sophie, a bomb had been thrown at their convoy on the way to deliver a speech at the town hall. Gosh, he delivered the speech and then decided to scrap the rest of the program to visit those in hospital that had been wounded by the bomb thrown at them.

On the way there, to the hospital, the driver took a wrong route, there was a breakdown in communication and the second (of the six) assassins was successful in shooting the Archduke and in his trial he said he was not aiming for Sophie, but rather the Governor, a fellow by the name of Potiorek. Gavrilo Princip was his name, the assassin that is. The rest is history, my word it is darn complicated, for more reading check out Wikipedia: Causes of World War I.

37 million Civilian and Military deaths later, the war was over on the 11th day of the 11th Month in 1918. There are only two good things about wars, one, they end and two technology advances much quicker as there are very definite time constraints. i.e. if you do not get this project finished in the next five weeks we will die. Or some such other thing.

As Eddy Elfenbein said in his weekly newsletter we live in a better world now than then, although you would not say that if you lived in Norther Iraq, Syria or Eastern Ukraine, North West Pakistan, South Sudan or Somalia. Amongst a handful of other places, but nowadays there are better mechanisms to solve conflict. I would prefer if there was no violence what soever, but self preservation is at the core of all of us, which is why it makes it attractive to own companies that operate in the broader medical sector.

Europe is obviously very different now from 100 years ago, the Germans have pushed hard for continued trade across the continent. There is more cooperation across the continent than ever before, there is a shared currency and absolutely no borders. Many different languages, for sure. Apart from a few Baltic states and Switzerland, most of people want entry to the trade zone with over 500 thousand richer than the average global consumer. Europe might have been in turmoil 100 years ago, but they have averted a huge fiscal crisis from three odd years ago through to last year. That is humans making real progress, fewer conflicts leads to increased wealth and superior standards of living.

Nike reported their fourth quarter and full year numbers post the market last evening. Nigh-Key, not Nigh-ck. In Greek mythology Nike was the goddess of victory, her brothers were Kratos, Bia and Zelus. Other companies and organisations that use the same winged goddess include the first FIFA World Cup trophy, also known as the Jules Rimet trophy. That is quite apt, Nike and Adidas have been locked in mortal combat (not quite, but it is fun to think of it that way) around the football on the go currently.

Depending on whether your favourite team or team member is trying to undermine one another or actually eat their way to victory. Enough already, the man is dentally unstable. Anyhow, as per the Nike website: Five of 10 national teams wearing Nike kits will advance to the next round in Brasil. Five in, five out. The ones left are the USA, Brasil themselves, The Netherlands, France and Greece. I would say of those, two have a realistic chance, a third at an outside chance.

And whilst that tournament is on the go, a more upper crust one is taking place at postal code SW19. SW stands for South Western and Battersea, that broader area. The most famous district from a sporting point of view is Wimbledon. The very first person to endorse Nike was actually a tennis player, if you are 40 or older you would remember the great Ilie Nastase. Currently in the top tennis players Nike sponsors Li Na, Maria Sharapova, Serena Williams, Rafael Nadal and Roger Federer. C'mon Djoko, Uniqlo is NOT Nike.

And then of course Nike have a sponsorship for the entire NFL. There are 32 teams there, the average team is worth a whopping 1.17 billion Dollars, according to Forbes. Perhaps more, we have seen high prices for some US franchises lately. The whole league is worth around 37.44 billion Dollars. The entire market capitalisation on Nike is around 68 billion Dollars.

There are some things that are difficult to understand, but to bet against the American consumer (and their economy in general) is a nigh impossible business. And their sport is worth serious money. Which is why of course they struggle with the word football and soccer and cannot use it interchangeably. Perhaps now that their ~~football~~ soccer team has made it through to the next round for the first time, they can separate the two.

Why own Nike? Why would you want to be invested in this company? They have had their fair share of problems with regards to sweat shop allegations and it has not always been plain sailing. The investment thesis however is simple, if you can sell and market your brand with the power that Nike can globally and with your brand being the gold standard for athletic and footwear, your brand will continue to attract new customers.

Twenty years ago it was uncommon for people to wear their favourite football team's shirt to go shopping, nowadays that is commonplace. Nike footwear was reserved for those folks who were on their way for a jog or a run, whatever you want to call it, nowadays there is a whole leisure wear segment attached to the brand.

The clothing, the footwear and broader sporting equipment now carry a brand that is globally recognisable, because sporting teams like Manchester United and FC Barcelona, as well as Manchester City and of course some of the teams at the current World Cup. Association with a brand, or a specific player is key for Nike and their competitors. Association through soft luxury purchases, football shirts are hardly cheap! And neither are the shoes, running or tennis, or be they for casual wear too. Nike should continue to see their brands grow as well as entering into different segments of the sporting market. This investment falls squarely into that aspirational consumer theme that we believe has growth prospects across the globe.

Nike themselves on their investor relations website refer to themselves as a growth company. I am not too sure what the differentiator is, I would want to let the investment community decide. I guess a business of this size, growing global revenues in a tough consumer environment by 10 percent to 27.8 billion Dollars, that qualifies as a growth company. That means that you are on track to double sales roughly every seven years. Diluted earnings per share rose 11 percent to 2.97 Dollars, the stock closed at 76.86 Dollars, 25.91 times earnings. That is hardly cheap. The dividend yield currently is a mere 1.25 percent, but I guess growing at around ten percent per annum means it is still a better investment than short term government debt.

What underscores the point about the brand and awareness is that the company reported that the Young Athletes' (Kids') businesses performed well, alongside the women and mens segments. Buying your kids Nike shoes might seem like a waste of money to some, but the quality cannot be questioned. Whether your beloved is good enough, that is another question entirely! At the same time the company stays relevant, growing their ecommerce sales quickly as well as continuing to be cutting edge from a technology point of view. Their footwear pushes boundaries.

In the forward looking statements Nike said that future orders were 11 percent higher than this period last year, one of the big teams with big populations winning the world cup would be nice, perhaps a Brazil or dare I say it, the US making it far. The buyback program, 8 billion in total under the current mandate given to the board by shareholders has only topped 3.4 billion Dollars by the end of the financial year. That is as much as 11.7 percent of the current market cap, and of course the price was far cheaper than it is now, so many more shares in issue removed should be hugely earnings enhancing. Earnings are expected to grow in the high teens to early twenty percent for the next three years. Earnings revisions are likely should global growth pick up more than anticipated. We continue to buy Nike.

Home again, home again, jiggety-jog. Markets are lower here, US futures are also marginally lower. Not by much. US markets made a spectacular recovery last evening to end only marginally down. The Rand is steady, volatile perhaps is a good word. Even if Vix is not. Good luck to your football team over the weekend, as long as they wear Nike.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Thursday 26 June 2014

MTN makes mobile money manageable

"The product turns your cell phone into a bank and your cell phone number is your account number. The system will allow you to send money from your cell phone to another cell phone (once they have registered). You will also be able to withdraw or deposit cash at Pick 'n Pay stores, or top up your account with EFT."

To market, to market to buy a fat pig. Boom, we got thrashed yesterday. Resource stocks were the ones most hurt, inside of the broader resource complex were the platinum miners getting crushed, down 4 and nearly one quarter of a percent. Yowsers, that is a bit of a drubbing right there. Sometimes, no, let me rephrase, all of the time it is painful to look for a reason why equity markets sell off, or go up for that matter.

I read a Jack Bogle (the founder of the Vanguard group) piece in which he quite clearly made one of the best observations I have ever seen about the market. Corporates create wealth, the stock market does not. Ironically those very companies that the ordinary person finds is try to get one over them is possibly in their pension fund creating value for them. And many public officials who tell you that x or y or z company should do more for society use the tax payers money to support private enterprise. The stock market represents the collective corporate value afforded to them by savings and retirement money.

And then another one that I read, on the Psi-Fy Blog is that you are not in control of the market, and in fact nobody is. I guess that is why, like flying and being a passenger on an airplane, we always want control of our destiny and are scared of the event. Being invested in companies that trade freely on a stock market, with people having a separate agenda, we can never be in control. Relax. Many times I am astonished at how few people there are as shareholders in some businesses. Remembering that institutional shareholders are beholden to their clients, who indirectly own these shares too. Take Famous Brands, that is a good example.

There are only 7381 shareholders of Famous Brands as per their annual report for 2014. Of those, 5877 are individual shareholders. The Public Investment Corporation owns 7.28 percent of the company, Famous Brands. The PIC also manages 1.4 trillion Rand worth of assets on behalf of their clients of which 1.252 trillion (as of March 2013, it mud the higher now) is managed for the Government Employees Pension Fund, or the GEPF for short. As per the GEPF website there are approximately 1,2 million active members from more than 325 government departments and some 300 000 pensioners and other beneficiaries.

All I am saying is that through the PIC and by function the GEPF holding in Famous Brands, there could be as many as 1.5 million people who entrust their savings to the business. Obviously 7.28 percent of Famous Brands is only 726 million Rand (only?) and not the biggest holding of state pensioners, but the point is worth making that there are many shareholders who do not know that they are shareholders. Ironically all these pension holders, any pension holder who is invested in companies should always wish that they are as profitable as possible in order to maximise returns in the long run. If corporate South Africa is in a better place then your retirement savings are going to be a lot higher than if law makers fiddle and mess with private enterprise.

Of course this only applies if you have retirement savings, there are many South Africans without retirement savings and only possible to qualify when they retire for a government old age pension, which is 1350 Rand a month. Once you hit 75, that amounts rises to 1370 Rand, an extra 20 bucks a month for being a year older. 1350 Rand on food per old person does not go really far now, but it is better than NO government pension at all. And that, the old age pension, you and I have the current government to thank for, whether you like that or not.

Google are having a proper go at their competitors, currently there is the Google I/O developers conference on the go at a place called the Moscone Center, a 65 thousand square meter centre in San Francisco. Day 2 of the conference ended yesterday. If you want to watch the Google I/O 2014 - Keynote, of course you can do so on YouTube.

There is a fellow by the name of Sundar Pichai, who is the senior VP for Android, Chrome and Applications, delivering the keynote speech. Pichai was born in India, in Chennai for all you MS Dhoni fans out there, has been at Google for over ten years which is a lifetime at a relatively new company like that, I guess. Google is only 15 years old, turning 16 in September. So if you have been there for this long, you can call yourself there at the beginning.

Enough about the personalities at Google, you know them well. What Google announced in a nutshell is a smart watch, Android TV and Android Auto, taking the existing Android software and expanding it across to other devices that we know well. Cars, watches and TV's. Google through their fragmented hardware market running Android software has the biggest ecosystem, it makes sense that there is a standard for all of the hardware manufacturers to be able to run later versions of the software. And the launch of Android One, a cheaper smartphone (around 100 Dollars) with the first place to be launched in India. Eric Schmidt, the chairman of Google took to Twitter and had this to say:

Particularly excited about Android One, launching first in #India. Affordable smartphone technology for the next billion. #io14
— Eric Schmidt (@ericschmidt) June 26, 2014

There are some interesting notes to emerge from the conference, one being that Android users check their phones around 150 times a day. Or, in a 14 hour day that the handset is with you, around once every 5 minutes and 36 seconds. Wow. For what? Does it matter, you are missing out if you do not check your handset, right? Yes!! Fear of Missing Out, or FOMO is real.

All you need to know about Google is that in time, and perhaps sooner rather than later, they will start to monetise other platforms of theirs, with the initial intention to connect the world. That of course is not too different to Facebook, coincidently, the whole idea of connecting everyone. I suspect that with more connectivity society will get back to self inflection and making sure that we police ourselves, in a similar sort of way that Wikipedia does, the community keeps the outliers in check. The exact opposite of a few bad apples spoiling the crop.

What is going on with Steinhoff? A late announcement on Monday and the headline read Steinhoff announces secondary offering of shares in KAP Industrial Holdings Limited. Steinhoff offering institutions a discount in a book-build for 400 million of their KAP shares, thereby reducing their stake in the company to 45 percent from 61.8 percent. If you recall, Steinhoff quite simply have taken their South African assets and injected them separately into KAP and JD Group.

January 2012 -> Steinhoff looking to take control of JD Group. What happened is that Steinhoff gained control over both JD and KAP:

Steinhoff swapped their PG Bison, Unitrans and Steinhoff raw materials business in return for "1 912.8 million (new) KAP shares at R2.50 per share", that announcement was on the 18th of October. "And .... KAP credit(ed) a loan account in favour of Steinhoff in an amount of approximately R4 139 million"

So they, being Steinhoff used KAP shares to pay for a control premium in JD Group, reduced their stake in KAP from 88 to 61.8 percent (back then) and all the shareholders agreed that was a wonderful idea.

Fast forward to June of 2014. So now Steinhoff International are selling down their KAP stake and taking a full go for the rest of JD Group. After the rights issue, where JD Group shareholder stumped up another 1 billion Rand, Steinhoff now own 86.19 percent of JD. Not quite the 98 percent that they are looking for. For the record, on Tuesday the 400 million shares were sold at 3.85 Rand a share. So, Steinhoff extracted 1.54 billion Rand from this deal. Steinhoff injected their industrial assets into KAP in exchange for 1.9128 billion shares at 2.5 Rand a share. 400 million sold now at 3.85 Rand a share around two and a half years later. Sounds like a decent return in a short period of time.

Inside of the announcement, the KAP announcement of Steinhoff International selling their stake, was a one paragraph that could have huge implications for shareholders. Here goes:

"Steinhoff also announces that it has received formal approval from the Financial Surveillance Department of the South African Reserve Bank within the framework of the Exchange Control Inward Listing Rules, to seek a listing on the prime standard of the Frankfurt Stock Exchange. Steinhoff intends to commence with the listing process as soon as possible, subject to prevailing market conditions, after the release of its 30 June 2014 audited annual results in early September 2014. Once the Frankfurt listing has been implemented, Steinhoff will continue to be listed on the JSE Limited ("JSE") through an inward listing. The Bookbuild will support the preparation for the proposed Frankfurt listing of a focused retail group."

What? First of all, what is an inward listing? Inward listings by foreign entities on South African exchanges is explained via the Reserve Bank piece. The headline however tells you that this applies to foreign entities on South African exchanges. What Steinhoff are looking to do here is almost the exact opposite of what Glencore Xstrata did last year. Or is it? When that announcement was made it was a secondary listing. So that is not an inward listing. So that would not be an inward listing. The Reserve Bank have a segment on Inward listings. It is still as clear as mud to me.

I think for the purposes of trying to understand why Steinhoff have applied to do this is simple. The business as it exists now, post the Conforama purchase in March 2011 and reshuffling of South African assets in 2012 and now again this year, the rump of the business is no longer South African. As per the 2013 Annual report, you can see the evolution of the business from a small company here to a giant company with global operations. At the last results, 55 percent of their revenue was derived from Europe, 6 percent from the United Kingdom, 2 percent from the Pacific Rim and the balance, 37 percent, from Southern Africa.

On an assets basis however they are not a Southern African business. They (Steinhoff) quite possibly picked up Conforama for what was a generational low in asset prices in the developed world. Check the re-rating that the European assets have got over the last 18 months or so:

What has happened is that this business has become a European one. And as such wants their principal listing to be in Frankfurt. Not just any listing, but a prime standard listing, follow the link for more information from the Frankfurt exchange, prime standard. I have no way of knowing what the nitty gritty details, if you can still own them here, then why worry about this? What could happen though next is important for existing shareholders. More German and European investors looking to own another business with a developed market platform and a developing world presence. That might be very attractive for European investors.

It is hard to get to grips with the furniture sector, in the US there are no big listed businesses and equally I cannot find any across Europe, many of them seem to be private businesses, family owned. Businesses like Ikea, which itself has enormous history and is the only furniture business, in the world, that is bigger than Steinhoff International. Ikea has revenues of 28.5 billion Euros, profits of 3.3 billion. There is a VERY long way for Steinhoff to go to get close. But they have laid down their marker and investors may just give this company a higher multiple than they currently are afforded by the market. Sadly this means that the high energy team at Steinhoff has taken the view that their empire belongs in the old world and not here. But hey, you can still buy the shares, and there are extra buyers who will no doubt want the shares.

Michael's musings: Companies joining forces to add value

Yesterday MTN, Pick 'n Pay and Visa announced that they have joined forces to launch a new mobile money product. The product turns your cell phone into a bank and your cell phone number is your account number. The system will allow you to send money from your cell phone to another cell phone (once they have registered). You will also be able to withdraw or deposit cash at Pick 'n Pay stores, or top up your account with EFT.

An optional extra will be to get a Visa card linked to the account, which comes with unlimited swipes and no card fees. Basically this product is the same as a "normal" bank account, except your bank is your cell phone and your account number is your cell number.

I think that this product is a great way to reach many unbanked people in South Africa. According to Google, 67% of South Africans are unbanked, but the large majority of people in South Africa have cell phones. There are more subscribers on the mobile networks than there are citizens in South Africa. The account can be opened from your cell phone, so no need to go into a branch which in rural parts of South Africa could be a fair distance away. This a great way to remove the risks of keeping all your savings in cash, and it makes it easy to transfer cash from one family member to another.

The model is based on Vodacom's M-Pesa, which is thriving in East Africa. Currently 40% of Kenyan GDP goes through M-Pesa! The start of using your phone as a bank came when air time was being used as a proxy for money in the Kenya by people. This is when Vodacom and Safaricom stepped in to have a more formal structured product.

Vodacom has brought M-Pesa to South Africa, but it hasn't had nearly the same success as in Kenya. I think that the MTN and Pick'n Pay system will be more successful because it is being promoted by two large South African brands. Also the new system can work with any cell number even if it not MTN, it just costs more, where as far as I can see you can only have a M-Pesa account if you are on Vodacom.

The move towards a cashless society is one of the main reasons why we own Visa in the US portfolio. The trend towards not using cash for security and convenience reasons will continue. Mastercard estimate that 85% of all retail payments is still done with cash. This deal is great for everyone involved, but only time will tell if it will be taken up by the target market.

Home again, home again, jiggety-jog. Markets have bounced off the lows from yesterday. The Rand has weakened, US GDP, the second take yesterday was awful, markets rallied in the US on the basis that the Fed will continue to be accommodative for as long as the metrics are not inside of their mandate. Companies will continue to innovate or get left behind, allocate capital where it can grow quicker and hopefully that continues to attract greater employment and remuneration of employees over time. Those that cannot innovate and cannot grow capital at the rate desired will not attract any. Capital only takes one side.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Wednesday 25 June 2014

Platinum paradox

"So where to from here? Is everyone going to work exceptionally hard at substitution methods for platinum, at least on the industrial side of the business? Will that make it more attractive as a jewellery metal? Will the companies slim down production plans and the market be much tighter?"

To market, to market to buy a fat pig. Markets were lower across the globe yesterday, there was some very good US related housing data, as well as a sentiment read. As my alerts said though, Iraqi fears weighed on markets. It must be tough living in Northern Iraq, the Syrians sent in their air force and bombed the insurgents. Why? Because the folks heading towards Baghdad are the same folks that Bashar al-Assad is fighting in Syria. Three weeks ago al-Assad was reelected president of Syria. My word. Look in the mirror and thank your lucky stars that you live here, in this part of the world. There are many more places that are far worse.

The official pen meets paper announcements from Angloplats, Implats and Lonmin came at around 14:45 yesterday afternoon. At the Lonmin offices (it still says London Mining) just down the road here. I could walk there in 5 minutes if it was brisk. What is not so brisk is the recovery in the share prices of the aforementioned miners. We pointed out yesterday that the market had up to this point been well supplied, but that the miners had divergent share prices too, Amplats had outperformed Implats, which had outperformed Lonmin, during the strike.

But how have these share prices fared over the last five, or ten years? Seven years is a decent time frame, even if you do not want to live in Tibet for that time. Impala Platinum is down 52 percent over that time frame. Amplats is down 62.8 percent over seven years. Lonmin has also been carried out the back door and left for ummmm...... you know what. I thought that there must have been some share consolidations, but alas it is true, the highs of the 2007 financial year, share price wise was 330 Rand plus, this morning it is 43.88. Wow. And the number of shares in issue have risen significantly at Lonmin as they raised money at a deep discount. 193 million shares in 2009 is 532 million nowadays. Whoa.

So where to from here? Is everyone going to work exceptionally hard at substitution methods for platinum, at least on the industrial side of the business? Will that make it more attractive as a jewellery metal? Will the companies slim down production plans and the market be much tighter? I do not know any of the answers to these questions. What I do know is that these companies are possibly not investable and not reliable and if they need to raise more money, those costs need to rise because the risk factors associated with their business have increased, not decreased.

I am of course removing the social element, that is so tricky and filled with despair and hope at the same time. Higher paid jobs is good for the economy, but if the pie is the same size that means there are fewer eaters of larger slices, get my drift? This is as tricky to understand as the Crimean situation, as tricky and as complex and you would think that we would have a better handle on it living within the borders of this fine land. Whether or not we think these businesses are investable or not, the short answer is no.

Omnia reported numbers yesterday morning for the full year to March. Firstly, what is it that this company does? Well, they have been around for a long time, 61 years and are providers of fertilisers, explosives and chemicals to not only local customers, but to around half of the continent we live on, Africa as well as to Brazil and Australasia. Mostly it is mine related activities in Western Africa, ironically only agriculture in Australia, predictably New Zealand and Brazil. South of the equator on our continent Omnia's three businesses are represented from Angola to Tanzania. Omnia's rest of Africa business has been represented for around one quarter of a century.

Let us look at the record numbers straight away in an analysis of their three businesses, the mining business, which is not only explosives, but chemicals too and then their agriculture business, fertilisers and lastly, the least exciting business, the chemicals one.

So that gives you a pretty good idea of how the business ticks, revenue grew 21 percent to 16.3 billion Rand (a record) thanks to both volume and price increases in their agricultural and mining divisions and partly due to price increases in their chemicals business. Which tells me of course that the chemicals business has been stodgy.

It is a massive business, the chemicals one, it offers 10 thousand products to around 6 thousand customers. But yet it remains a laggard. In the 2013 annual report the following was said: Recent discussions with the dti have highlighted that government realises that the chemical sector in South Africa is not growing in line with global trends. Several reasons have been identified and discussions to try and lift the sector out of its moribund state have been initiated. While these discussions have merit, significant industry growth will require a national gas network to be developed to help contain energy costs, as well as significantly increased mining activity with a much greater degree of mineral beneficiation.

The growth of the chemicals business depends on whether or not shale gas extraction takes place here locally, or whether or not they are to sell significantly more volumes across the continent, through their East African businesses. But, as you can clearly see, this is not the most important business to Omnia right now, but has the potential to be a serious profit contributor to the overall group. A positive for the chemicals division is a massive jump in their operating margins, but still, at 3.8 percent it is low.

For now however, the most profitable part of the Omnia stable is their mining business, which is twice as profitable as their agriculture business. Their mining business provides bulk explosives, mostly for opencast mining. Again when I refer to their annual report from 2013, they have this to say: "South Africa's underground gold and platinum mining sectors are in the doldrums and are proving to be unprofitable markets for explosives, as price pressure and lower volumes reduce their attraction." And as such, in their mining division back home, Omnia are really well placed. And across the rest of the continent?

In West Africa the company is more active than before, I would have to presume that surface mining operations would be mostly confined to non ferrous metals. I am making presumptions here. In other words, read iron ore. Now as you may know, it (iron ore) is one of the worst performing metal prices this year. The more important question is, unlike BHP Billiton whose profits depend on the iron ore price (an example), for Omnia it would depend on the volumes that BHP Billiton were to move. For instance, you would recall the piece that Michael wrote in February titled Earnings up 24% and waste up 26%.

Michael wrote at the time that "The trend of having to remove more waste to get to the ore is expected to continue, with output in 2016 expected to be 19% higher than 2013, but waste is expected to grow by 61% over the same period." So quite simply, who does this actually benefit? Clearly it becomes more costly per produced ton to move more waste, but someone, and in this case the explosives producer would be the winner. One of a few winners of course. The price of iron ore and the profitability of the outfit and more importantly increased steel consumption matters the most. And that trend is set to continue. So you would think that the mining space, explosives at least the kind that Omnia sell (and the associated chemicals) is a good growth business, right now.

And then on to the most exciting part of the business, at least for me, fertiliser. A certain economist Thomas Malthus published a piece which agricultural production would not be able to keep pace with growing populations, in particular because they (the urban populations) were growing too quickly and traditional methods of agricultural production would not have kept pace. Of course what Malthus failed to see was innovation coupled with profit motives. And that of course was around the time that industrialisation was taking place across much of Europe. On the Wikipedia website, under the fertiliser segment, the suggestion is that HALF of the people on earth are fed as a result of synthetic nitrogen fertilizer use.

The Haber-Bosch process, for which Fritz Haber, the German chemist who won a Chemistry Nobel prize (1918) for his development of producing synthetic ammonia (patented in 1908), is responsible for all of this, and is a process that Omnia uses in production of ammonia. Ammonia is then used as one of the inputs into both fertiliser and explosives. So it was very important for Omnia to have built their nitric acid and ammonium nitrate plant (all of 1.4 billion Rand investment) and finished it at a cheaper cost than international norms, back in March of 2012. The company raised money by asking their shareholders to pony up 1 billion Rand, by issuing 20 million new shares at 50 Rand each. And back then, that was 42.3282 shares per 100 existing. Those shareholders have been handsomely rewarded with a fabulous investment from management in their own business.

You do not need to understand the Haber-Bosch process or worry about Malthus' predictions, what you do need to pay careful attention to is that Africa has much of the worlds arable (and fertile) land and there are going to be more mouths to feed by 2050. And as such, better methods and more fertiliser will be used across much of our continent in the coming decades. Also, water pollution and water usage (Omnia has water cleaning technology) will become more important and is definitely not a priority on our continent yet. As an investment, this company is in the right space right now. Mineral demand and agricultural development across the continent continues at a fast pace.

At 223.15 Rand a share, on historic headline earnings (to March) per share of 14.28 Rand, a dividend for the full year of 4.4 Rand means that the company trades on 15.6 times earnings and a yield of 1.9 percent. Before dividends tax. What is also important to note on the dividend front is that the company has serviced much of their debt and remains unguarded, meaning that they could make a chunky acquisition soon. Rod Humphris, the CEO is solid, the management team is steady, the company is a good one. In time their shareholders may be more rewarded with higher dividends, we continue to buy Omnia.

Home again, home again, jiggety-jog. Markets are lower here this morning. Perhaps another heightened angst towards the global economy, the talking heads have been citing a lower VIX and a lack of a pullback as a reason to why the market should go lower. I guess that is not ours to worry about too much, the market levels, rather than the businesses you own. We must have said that 1000 times at least.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Tuesday 24 June 2014

Country Road taking Lew home

"Part of the condition on the offer for Country Road is that the David Jones deal goes through, which means that it is in Lew's interest not to upset the apple cart. The rationale for Woolies was that they had to offer a big enough premium to Lew on the Country Road shares so that he wouldn't turn down the offer."

To market, to market to buy a fat pig. 5 months to the day and we are presented with an agreement, that will be inked today we are told, on the platinum belts of South Africa. We are told that this is a victory for the working class, I for one do not know what to think. All I know is that the workers feel like they deserve so much better and have been through extraordinary hardships to reach this point. There have been many lives lost, at the hands of police and worker on worker. That sort of violence is not forgotten, nor should it be forgotten in a hurry. Money can be made up, the website Platinum Wage Negotiations 2014 has an estimate of what that financial impact was/is on all involved. And because this impacts all South Africans as a result of a weaker or stronger trade balance, it is important that the strike has come to an end.

So, how hard did this impact on the shareholders? We know that companies forfeited 24 billion Rand in revenue, employees forfeited 10.669 billion Rand in wages. But how did the five months turn out for the shareholders of these businesses? Well, it turns out very differently for each of the major three platinum mining companies, if you held Lonmin for instance five months ago, and you still hold them, in Rand terms you are down 20.3 percent. If you held Implats through the strike, then you are down 10.42 percent. However, if you held Amplats, you are up 12.67 percent. Huh?

It turns out that all mines are not exactly the same. Of course not, because each ore body is not exactly the same. And each individual mine worker is not the same either, we are after all individuals. For a little more information on the nearly there deal, read David McKay's piece in Miningmx titled AMCU extracts 3-year platinum wage deal. I think that once this has been signed, once victory is proclaimed by all sides, once everyone is back at work, we will see the real landscape when the proverbial dust has settled. The long lasting impact of the strike on broader society and in particular the people who live around the mines. What decisions will be made by the mining companies when allocating capital to new projects, that will be interesting to see.

It feels hollow, as if there were no real winners really. Although workers will eventually move towards that mark that AMCU drew in the ground, I suspect that many marginal mines will be mothballed. What worries me about the consumers of the metal, specifically on that autocat side is that they may be making different plans, perhaps reengaging with the Russians (on palladium usage), or finding new supply in North America. What was pretty amazing about this strike was that the likes of Johnson Matthey having built in lots of supply prior to the event, and were able to withstand a very rocky time. Rocky time for their customers. I keep asking the question though, with recycling being more and more important for the producers of autocats, what does that mean for the primary supply side?

On the Johnson Matthey conference call of their 2014 results, they said as much, that they are investing money in their refining business:

"We're investing money in this area. It's a very strategically important area for us. We're the biggest pgm refiners of secondary material, and that's a very nice place to be when there's uncertainty in supply from the primary producers."

There is a certain irony in that with every motor vehicle that is scrapped and extra demand comes into the market, the supply of recycled platinum increases. There has to be a point (seeing as the first commercial autocatalytic convertor was only fitted in 1971) where there is enough of the metal above the ground to meet the demand. I am just not sure when and where that is, because whilst I think that jewellery demand will remain strong, there are many richer people in the world now than at any other time in humanity. And rich people like nice things, which is very understandable, most people like nice things. Equally the threats of alternative energy can change the motor vehicle industry, the Tesla opening of their patent books is a good example. Do not always think that your customer is there forever, and their loyalty is only as good as their demand, equally what the price is currently.

So what has the platinum and palladium price done over the last five months? It turns out that the platinum price is flat, whilst the palladium price has been a little more active, up nearly ten percent over the five months, below is a graph courtesy of Johnson Matthey from their website.

The next big question is then, why has the platinum price been flat for the last six months? You can take a two year graph and the price of platinum is DOWN from a high of over 1700 Dollars a fine ounce, the low being around six months ago. Because there is strangely enough supply around, everyone had provisioned for this event.

Michael's musings: 3 to become 1

This morning Woolies announced that they have made an offer for the outstanding 12% of Country Road, which is listed in Australia. The offer is at a premium of 21.4% to yesterday's closing price, will value the offer at A$213 million, which based on today's Aussie Dollar of R9.99 (let's call it R10) is R2.13 billion.

The reason for the offer is due to an Australian business man named Solomon Lew, who has been a thorn in the Woolworths side since they tried to delist Country Road back in 1997. Solomon Lew owns the majority of Country Road shares that Woolies doesn't own and has been blocking a delisting. The other big deal on the table for Woolies is the purchase of David Jones, where they have already had the voting date for the deal pushed back by two weeks due to Lew. Lew owns 10 – 15% of David Jones and threatened to block the purchase.

Part of the condition on the offer for Country Road is that the David Jones deal goes through, which means that it is in Lew's interest not to upset the apple cart. The rationale for Woolies was that they had to offer a big enough premium to Lew on the Country Road shares so that he wouldn't turn down the offer. They would rather "overpay" on a A$200 million deal than have to raise their price on the A$2.2 billion David Jones deal.

All in all, owning 100% of a company is much better than owning 88% and the funds for the purchase will come from Australian banks, which Woolies say will not impact on their dividend. The share price has not done much on the news, unlike when the news of David Jones came out and the share price dropped below R70 a share. Currently the share price is around R78 which will means that Woolies will be able to offer fewer rights to raise the cash to complete the David Jones purchase. So a higher share price does not only look god on your statement but will also mean you as a shareholder gets less diluted with the rights offer down the road.

If all goes according to plan David Jones and Country Road will fall wholly in the Woolies stable, adding 40% to the current market cap and in the process creating the Southern Hemisphere retailer desired.

Home again, home again, jiggety-jog. Markets are lower here this morning, US futures have sold off. I guess the strike being officially over means something, the currency has strengthened somewhat. All good, keeping calm and carrying on in the mantra here.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Monday 23 June 2014

Bob the builder for Naspers

"But the growth in their ecommerce business has been nothing short of astonishing. Whilst Jeff Bezos of Amazon.com might be the genius of ecommerce and the first fellow to get it right, Amazon.com remains an unprofitable business. Why? Because they are investing an enormous amount in the infrastructure, Amazon spent 3.8 billion Dollars in their infrastructure, everything from automated warehouses to bigger depots. And this is where Naspers are spending all their money, in their ecommerce part of their business. Whilst there was a very impressive 64 percent increase in revenues to 20.355 billion Rand (from a mere 3.085 billion Rand in 2010), that segment registered a loss of 5.329 billion Rand in this last financial year."

To market, to market to buy a fat pig. On Friday locally we managed to eke out a marginal gain, not a lot, but with the small gain it meant another closing high for the bourse. We are now also over the hump, the winter and summer solstice has passed depending on which hemisphere you live in. It says on the Wikipedia page about the Southern Hemisphere that between 10 to 12 percent of the global population lives this side of the equator. So....... All of the action happens on that side of the equator, from here. Because of the skewed nature of developed versus developing nations, you will probably find that a larger percentage of the wealth of the world is on that side of the equator.

Being a science geek I was out at midday on Saturday and paid careful attention to the shadows. Yes, the longest midday shadows of the year were on Saturday, at least if you happen to get some sun. At one of the most Southern points in South America, Ushuaia, which is right there at Tierra del Fuego, there is a total of 7 hours and 12 minutes of daylight today. Joburg today? 10 hours and 29 minutes, no complaining about the cold please, we have it relatively easy here.

Having it relatively easy too have been the bulls, the equities market in New York touched another all time high on Friday, the S&P 500 at least. The Down Jones industrial average is within one decent session, just over one-third of a percent higher. If you suffer from market vertigo, just relax, because one of the most reposted bloggers in the financial world tongue in cheek had this tweet on Friday:

OMG, it's a bubble! The S&P 500's P/E has SOARED from 15.5 at the start to the year all the way to 16.6 today. RUN! http://t.co/oZSzIVqzYX
— Eddy Elfenbein (@EddyElfenbein) June 20, 2014

I guess what Eddy is trying to say here is pretty simple, if you are throwing the bubble world around because markets have reached a new all time high that is the wrong way of looking at it. You should rather be focusing on the valuations and whether or not markets are expensive at this moment in time. And in Eddy's mind, and I agree with him, a move from 15.5 to 16.6 represents a 7 percent increase in what the overall market is willing to pay for the next set of annual earnings. Again it is down to multiple expansion driving the equity markets with a less gloomy outlook. Whilst the Grexit from the Euro zone never happened, from the world cup football it is almost a certainty. Bother.

One of the most followed stories and right in the heart of the debate around bubbles and valuations in the local market, Naspers, reported numbers this morning. These results are for the full year to end March 31. And in so much that things stay the same, they certainly move forward with a lot of pace. There are many segments of the market that have been telling everyone else, with a lot of energy, that you should not buy Naspers and that it is completely overvalued.

From an earnings point of view, that is the case, BUT when you have a combination thereof (what the TenCent stake is worth) and what the earnings are worth on their existing businesses, then it becomes clear that South Africans are applying a discount to the Hong Kong price. In other words, South Africans inside of the Naspers share price believe that the valuations for TenCent are too high. I have seen some analyst reports that suggest the opposite, that Naspers is woefully undervalued, yes, woefully undervalued.

One of the reasons for this divergence of views (which you would not find with a normal industrial company established decades ago) is because of their quick progression from one business to another. You will recall in our message about when Koos Bekker announcing that he was retiring: Bekker departs as CEO, steps in as chair, we went through the four technology spurts in 29 years, meaning that there was something new to think about in terms of business evolution roughly every 8 to 10 years. Currently that growth spurt is in the form of ecommerce, which Naspers set their starting point as 2008.

And as we pointed out, Bob van Dijk, the new Naspers CEO (who is only 41, around Victor Matfield's age - ha-ha!) comes from an ecommerce background, having run eBay Germany. eBay Germany are the second biggest market for that company outside of the US. In fact in these recent results there is a graphic that points to ecommerce slash mobile. Check it out:

Ironically, in their minds Pay TV is two transformations behind. Pay TV, let us focus on this for a moment, added 1,3 million to be 8 million strong. That is a massive jump and yet it hardly gets too much of a mention. Of those, the Compact bouquet (43 percent of growth) is the big driver but not as much as before, indicating that people are paying up. In fact the PVR base increased to 1.1 million. And the BoxOffice product attracts 529 thousand rentals a month. 27 Rand a movie, that translates to 171.4 million Rand per annum. This business is a mere three years old. That is all. So let me get this right, from a standing start, with the existing infrastructure they are able to roll out a business of this magnitude? After all the investment in the TV business is around 1.3 billion for the year, but the profits were only 13 percent higher at 8.5 billion Rand. On revenues of 36.3 billion Rand, increasing 20 percent over the last financial year.

What would you pay for a standalone business of that magnitude? 100 billion Rand? 80 billion Rand? Somewhere in-between? Let us settle at 90 billion for the time being, I think that is fair to value a business at around 10 times trading profit. The current market capitalisation of Naspers, as per Friday close? 529 billion Rand, so the Pay TV business, which accounts for more than half of their profits is possibly worth only 17 percent of the current market cap. Give or take a bit here and there. If you had to value the Pay TV business across 50 countries at a say more lofty 15 times trading profits, that business could be worth as much as 127 billion Rand, or nearly one quarter of all of Naspers. What is clearly currently a growth business is seen by Koos Bekker as an old business. Funny how that works. Meanwhile GOtv continues to attract many more content starved folks across our continent.

Their internet segment is a little less easy to value, first let us take the obvious one, the TenCent stake, what is that worth to Naspers? Well, that is pretty easy to work out. Naspers owns 33.85 percent of the Chinese business TenCent that is listed in China. The market capitalisation of TenCent is 1.07 trillion Hong Kong Dollars or at the current exchange rate 1 Hong Kong Dollar to 1.37 Rand, the Naspers stake is 496 billion Rand. No really. Or with the fall today of the TenCent share price, around 488 billion Rand. The difference between the Naspers TenCent stake Friday and the market cap of Naspers Friday was all of 33 billion Rand. Or roughly at the modest valuation of the TV business, around one third of that.

So quite clearly you can see that South Africans apply a discount to the price that people pay in Hong Kong for TenCent. Quite clearly, without a shadow of a doubt, we apply a massive discount to the holding, because obviously we are smarter than the investors in Hong Kong, right? Sounds too arrogant, the TenCent price is what it is, until it changes, it won't. As you saw from analysis that we did in May: TenCent numbers blow the socks off expectations. My simple analysis suggested that TenCent was not that expensive if the growth rates are maintained, herewith an extract from that message, dated 15 May, 2014:

The previous close was 513.5 HKD. Annualise (you shouldn't, if the company is growing that quickly) the quarterly earnings and the stock is suddenly trading on 29.5 times. Which is hardly a bargain, but the earnings expectations are going to have to be ramped up. If earnings grow by 50 percent per annum, then it may be quite acceptable to pay 30 times earnings. The PE unwind is simply astonishing. BUT, in order to maintain these lofty rates, TenCent will continue to have to grow their other businesses aggressively. Both their advertising and e-Commerce businesses were disappointing in the prior quarter, when compared to the previous one. Seasonality, Chinese New Year puts a spanner in the works.

OK, so if you believe like me that business (TenCent) is NOT expensive and commands a premium because of the growth rates, then it is fair to say that the major internet portion of Naspers is OK, provided that the growth rates remain. That is the tricky part you see, if growth rates fall, then it is fair to say that TenCent will take a heavy hit.

Then next onto the part of their business that is currently in growth mode, the ecommerce business. Now you will know all the businesses here locally that Naspers own, OLX (which is global), Kalahari.com and PriceCheck. How many times do you use these? And because you are reading this newsletter that means that you are definitely a little more advanced that many here in South Africa, who do not have access to the internet, you are the future of these ecommerce businesses. It is far easier to sit at your desk at home or at work (do not let the boss see you) and buy something than it is to get into your car, fight for parking, fight the traffic and queues and get that item that you want. Plus you can only do that when you are not working.

But the growth in their ecommerce business has been nothing short of astonishing. Whilst Jeff Bezos of Amazon.com might be the genius of ecommerce and the first fellow to get it right, Amazon.com remains an unprofitable business. Why? Because they are investing an enormous amount in the infrastructure, Amazon spent 3.8 billion Dollars in their infrastructure, everything from automated warehouses to bigger depots. And this is where Naspers are spending all their money, in their ecommerce part of their business. Whilst there was a very impressive 64 percent increase in revenues to 20.355 billion Rand (from a mere 3.085 billion Rand in 2010), that segment registered a loss of 5.329 billion Rand in this last financial year. Yech. That hardly sounds like a good outcome, it sounds awful in fact.

Why? Because Naspers through all their ecommerce businesses spent a whopping 5.6 billion Rands in growing them. Online classifieds, the OLX model. I have tried it and it definitely works, that is my own personal experience. And businesses like PriceCheck are marvellous for consumers, absolutely amazing. The outlook segment tells you all that you need to know, there is going to be more focus on this line of the business, the ecommerce part. And if that entails a larger spend in the coming years, then you have to accept that as a shareholder of Naspers, as a percentage of revenue spent more now, 12.2 percent on development than in any of the last five years.

It is not too different as a shareholder of Amazon. Not different at all. You are going to have to have to be really patient as the new part of the business ramps up, the speed at which this is happening is mind boggling. And as such, it is going to be difficult to value from three months, to three months. As you can see, we tried to value the above businesses. eBay trades on a price to sales of 3.9 times, Amazon.com on two times. If you use the eBay price to sales metrics, you can see that the ecommerce business (which is growing revenue at a rapid rate) is worth close to 80 billion Rand, using the Amazon.com metrics it is closer to 41 billion Rand. Either way, this segment is only valued, by those metrics at less than their Pay TV business, which is not where the future is, according to the management and development spend.

We continue to hold Naspers and acquire on weakness, believing that the sum of the parts (fast growing parts at that) undervalue the business. On a pure earnings basis the stock is expensive, but remember that, like Amazon.com, when the huge spending on their current business transition has taken place, the company will shift a few gears in that regard.

Michael's musings

One of our core holdings in the US, Google has announced that they are buy video monitoring and security company Dropcam Inc for $555 million. The actual buyer of the company is Google's subsidiary Nest, the "smart appliance" division. The long term goal is to have all your house appliances controlled by a cell phone running the Android software.

Dropcam's current product allows you to monitor what is going on in your house through live streaming of video to mobile apps and through alerts that are sent to you. Security is a big component of being able to interact with your house and environment. Looking forward a couple of years, you will be able to see what is going on in your house to know it is safe to enter, turn on the heating and geyser, turn lights on and having music playing when you walk through the front door. All this will be able to be done on your Android phone, using your voice through Google's artificial Intelligence technology called "Google Now".

In other Google news, this week is their I/O conference, which is where they get to show off their new products. Google's Android is now on every 4 of 5 smartphones sold, breaking the 1 billion mark last year. Having that many people already in the Google ecosystem, the idea will be to keep them there through expanding the places where you can find Android. The conference is expected to give more details on "Google Wear", the wearable tech products, Android in cars through partnerships with manufacturers and further development on Google Now.

Currently Google still gets 90% of its revenue from advertising, but as the Android ecosystem expands along with other products like their Driverless car technology we should see a shift in revenue flows. Even though the word "Google" is in the dictionary as a verb and is something that modern society cannot live without, I think that Google will be an even bigger part of our lives going forward, and this is the reason why we own the shares.

Home again, home again, jiggety-jog. There has been the first positive PMI read in China for a while, that is boosting resource businesses across the globe, which is to some extent being dragged lower by industrials. And in particular Naspers, that stock is down over three percent on these results.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Friday 20 June 2014

Larry is actually the Oracle

"Ellison is wildly wealthy and plans to give almost all of what he has made away, to help other folks. And that friends is when people appreciate money, they work hard making it, they are strangely a lot more giving. Encouraging entrepreneurs and allowing capital to grow at a fast rate leads to adding to the national fiscus, creates jobs and opportunities and inspires many. Less state and more private enterprise, thanks very much!"

To market, to market to buy a fat pig. A day after the Spanish got booted, their pride was somewhat restored with a new king. I wonder what is going to happen in England this morning? Oh well, it is not for us to make any snide remarks about football teams that are in attendance at the world cup when our team did not even make it there. Heck, we did not even get close. So, it is left for us to talk about the place we love, the markets and more importantly the associated companies that are listed on the exchange.

Yesterday was a massive day, it was huge for local equity markets, following on from markets overnight which were, I guess boosted by the Federal Reserve's outlook that inflation would not be a problem for a long time. And as such we were in a low rates environment for a while, perhaps another four odd years. In the EU about the same could be said. I remember when the term ZIRP (Zero Interest Rate Policy) was first brought forward, many were convinced that by 2012, the end thereof, we would see rates start to tick up. Well, here we are, nearing the end of the first half of 2014 and the ECB has gone lower, with negative interest deposit rates, albeit small and the Fed indicated that because inflation was pretty benign that they would be in a position to keep rates low.

However in the developing world it has not been that easy, with currency ructions forcing central banks to act against inflation even though the economic outlooks (most of them) are not as favourable as we/they would have liked, domestically that is. Higher commodity prices have meant higher energy prices and higher food prices. But back to the scoreboard for an instant, the local market ended the session off at a record high, up over a percent at 51264. From a volumes point of view it was also huge as it was futures closeout. Was that right, did I see 26.86 billion go through the market, in terms of value of trade. Gosh that is a lot.

Over the seas and far away on Wall Street, stocks ended the day barely unchanged but that masked a half a percent down at one point for the nerds of NASDAQ, Oracle weighing on the tech heavy index. Not the Oracle, the one that bakes Neo the muffins in the Matrix, but rather the business that is run by that fellow Larry Ellison. Larry is 69 years old and still has a lot of energy, he clearly looks after himself. Larry cofounded Oracle Corporation with Ed Oates and Bob Miner. Bob died sadly nearly twenty years ago, he would be marginally older than Larry now, Ed apparently is a budding scale model builder with H0 scale trains. That is 1 to 87 scale, why that number I have no idea.

Equally, why Larry Ellison sees fit to pay himself so much when he owns so much of the business is a little baffling, admittedly most of the compensation is stock based. He did however stick the most money in at the beginning, according to his Wikipedia page, investing 1200 (1977 Dollars - out of a total of 2000 Dollars) to establish Software Development Laboratories, the original Oracle. 1200 Dollars in 1977 would be 4549.82 Dollars today.

Larry Ellison owns 1,112,434,580 Oracle shares, by one measure that I saw -> Ownership. At the closing price that is worth 47.289 billion Dollars. Yowsers. But with the Oracle share price indicated down 5 percent and a bit at 40.38 USD, that stake is worth 44.9 billion Dollars. I hardly think that Larry Ellison is going to lose any sleep over the company that he still runs.

Now we do not have any interest in Oracle Corporation, but what I find very interesting about a whole bunch of technology titans that saw their valuations stretched during the go-go days of 1998-2000 is that many of these businesses were founded in the 1970's. As the hardware improved, the software improved alongside at an absolute rapid rate. And because Moore's Law possibly still applies, we should continue to see this trend continue. Moore himself was the co-founder of Intel alongside Robert Noyce. Intel was founded in 1968, it makes sense that the big hardware manufacturers are older than the software ones.

The other thing that interests me is how an idea and a small investment of 1200 Dollars in 1977 turns into 45 odd billion Dollars in 2014. A company that employs 120 odd thousand people. And no doubt contributes handsomely to the US economy. And Ellison has joined the giving pledge to give 95 percent of his wealth when he dies to the charity founded by Bill Gates (a competitor) and Warren Buffett, whom everyone knows well. It is a moral agreement and nobody is bound by this.

Ellison is wildly wealthy and plans to give almost all of what he has made away, to help other folks. And that friends is when people appreciate money, they work hard making it, they are strangely a lot more giving. Encouraging entrepreneurs and allowing capital to grow at a fast rate leads to adding to the national fiscus, creates jobs and opportunities and inspires many. Less state and more private enterprise, thanks very much! Pity that Oracle missed the streets number last evening in fourth quarter numbers post the bell, in other words the analyst community was a bit heavy in their estimates. The company did not miss, the company reported what they did, the analyst community missed. Fear not, Oracle shares have risen with the rest of the market, up 25 percent over the last 12 months.

Home again, home again, jiggety-jog. The market is trading at another record high. This morning. I see many people talking about bubbles. Perhaps it is market vertigo. Perhaps it is warranted. Biz Stone, the Twitter cofounder reckons that stock valuations in his sector are not in bubble territory. I guess he expects (not like everyone I tell you) earnings to grow at a breakneck speed to justify the current prices. Time will prove him right or wrong!

Sasha Naryshkine, Byron Lotter and Michael Treherne

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