"When allocating your capital to a business you can choose whether or not you want to fall into a category of responsible investing or not. Again, most investors just have one objective and that is to obtain superior returns from their investment manager. I suspect that this is personal to each individual."
To market, to market to buy a fat pig. It was a down day for Mr. Market yesterday, the Rand weakened during the course of the day, the unemployment numbers have looked awful. There was also locally a credit report released with the health of the consumer in South Africa continuing to look more than a little average. Not great, many of the big banks looking average on the day, in fairness many of them are trading near their all time highs along with the rest of the market participants.
There were also numbers from Barclays Africa, the stock of the company that is 62.3 percent owned by Barclays Plc. is trading nearing all time highs. An interim dividend of 400 cents per share (14 percent increase) was declared on EPS of 727.6 cents (10 percent increase), the stock trades on a forward multiple of 11.3 times and a dividend yield before tax of 5.1 percent.
With earnings growth rates expected to be muted for the time being I suspect that the stock is about fair value at these levels. It was an interesting set of numbers to trawl through, the mortgages business might be a massive part of their loan book, it is not anywhere near the most profitable. Banks make big money from add on products and initiation fees associated with advances of all sorts, obviously the more risk the bank takes the greater the charge and interest rates.
I do not have a problem with the bank making any money of any sorts, they offer a great service to broader society, not quite Gods work as Lloyd Blankfein, the CEO of Goldman Sachs once said, without finance you are struggling. If you think that your bank charges you too much for your borrowings, then save up the money and buy that house or motor vehicle cash.
Business could not or would not be able to operate without access to credit, the bank takes on enormous risks. Don’t get me wrong, much of the financial crisis is due to excesses of both humans and financial institutions, governments were only too happy to have higher home ownerships and rising receipts as a result of juiced up company revenues. It is only when it all goes pear shaped that law makers start pointing fingers, something that they are good at, blaming someone else all of the time.
Back to Barclays Africa quickly, I think that structurally the company is obviously best placed to cement their footprint as the leading bank on the continent, the brand is nothing short of superb. It is important to note that the continent possesses many frontier markets, ones that you can enter where many fear to tread. South Africa is not Somalia and Nigeria is not Niger, Kenya is not the DRC.
When many talk about the prospects for the African continent as an investment destination, I believe them. There are many opportunities, equally there are many hurdles. On balance we are not likely to be investing in banks and financials, a fine a week at a global level points to great regulatory overreach, greater public scrutiny and higher shareholder anxiety around executive pay, all in all leading to lower profits as a result of lower risk taking. More utility like in the end.
There were also numbers from British America Tobacco, currency headwinds denting earnings when compared to the prior comparable reporting period. You know that we do not like tobacco as an investment, their product is likely to attract more scrutiny from public healthcare and also be seen as a soft target for national treasuries under pressure.
Make no mistake, their product kills people, not to be too precious about it, too many Nestle chocolates will no doubt do that to you too. It is the preventable deaths that the authorities are looking to cut down on. There are many places where the costs of cigarettes are being pushed higher (as a result of higher excise duties) that is leading to lost revenues for governments as a result of illicit cigarettes. The balance for the tax authorities is key here, almost a golden goose type scenario.
I believe in freedom of choice, obviously not at the expense of others however. There are some products that are far worse in broader civil society however, the abuse of liquor over cigarettes has worse consequences for communities. South Africa is a not so great example of that, the impact on poorer societies in terms of abuse of all sorts of substances leaves those most vulnerable worse off.
When allocating your capital to a business you can choose whether or not you want to fall into a category of responsible investing or not. Again, most investors just have one objective and that is to obtain superior returns from their investment manager. I suspect that this is personal to each individual, with a business like ours we can tailor make portfolios to fit each and every need.
Back to the business of the cigarettes producer, for me lower volumes are the biggest problem. I do not care whether you sell chocolates or watches, if you keep selling fewer every single year this has an impact eventually. In their case volumes were marginally lower, 0.4 percent from this time last year. Western Europe trending lower and lower, each and every year, Asia-Pacific making good gains, not enough to offset the lower European volumes however. The margins at this business are fabulous, operating margins were 39.2 percent. There are plenty of costs to cut which should see that high margin remain there.
Earnings and subsequently the superior dividend should be maintained in the very short term. Consumption trends seem in the wrong direction, that worries me the most about this business, how can a company with lower volumes over the years trade on a 17 times earnings multiple? It is because the yield in Pound terms is 4.13 percent, I think therein lies the answer. I would say avoid, I would again go a step further and reckon that in the next three to four years you should start to see the tipping point of whether or not it is a longer term hold. Methinks not. Not for us.
Home again, home again, jiggety-jog. The Fed boosted the economic outlook and hinted that rates could rise sooner rather than later, nothing wrong with that. I am always bemused when people want the Fed to do X or Y and shout that they are behind the curve, if that is the basis of your investment thesis best you give the money back to the clients. Markets are lower today. Remember the big number tomorrow! Non farm payrolls. It will help take our minds off the absolute retirement of South Africa’s favourite cricketing son. The two best players in one, a third if you include the catches. We will miss Jacques Kallis, thanks for the amazing memories. Sad.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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