"The important part in there is that the Australian Securities and Investments Commission believe that in Australian Law, Woolworths have breached "equality of opportunity", obviously in favour of Lew. That is another 213 million Aussie, or 2.15 billion Rand for Lew, but that is presuming that the court hearings this Thursday are in Woolworths favour. The Australian Securities and Investments Commission, according to the SMH article may raise all sorts of objections."
To market, to market to buy a fat pig. Err..... Crisis, what crisis? I get alerts from certain applications on my phone, they give you updates, push ones. In addition to Twitter, which if you have never used it, I like to describe as the most customisable of news apps, these push notifications are pretty cool. The one I got this morning however was pretty funny, it went something along the lines of: "Asia shares higher as Portuguese bank fears dissipate". That is the nature of the beast, the collective tends to panic from time to time.
I was hearing people on the screens talking about a Euro-crisis 2.0 and that the structural problems in Europe had not been addressed. Tell that to the people of Greece. The graphics might tell us that the shortfall in the Eurozone relative to GDP matched that last seen in 2008 and at lower rates to boot. Meaning that the spending had been reigned in. The reason why I say tell it to the Greeks is because they still grapple with high unemployment rates, the good news is that the market welcomed them back, four years on, with 3 billion Euros raised at under five percent cost to the country. But yet the Greeks still have borrowings of 175 percent to their annual economic output. The other news is that the Greeks in 2013 matched their 2006 GDP.
So perhaps it was a case of not collecting enough nuts for the winter and austerity is a grim reminder that too many benefits for your people, too many people working for the government, not enough controls from the same bigger government is not sustainable. In the short run everyone feels like the proverbial winner, but eventually the chickens come home to roost. Whatever that means, personally I remember collecting the eggs from a chicken run when I was around 4 or 5, it was not a pleasant experience. Those chickens lived inside a run, so they were always home to roost.
I think the points worth making are that confidence in Europe is still fragile and that I think both austerity and stimulus will work for their respective economies. Debt of one country is the asset of another, there may be many state liabilities that are there to meet their obligations, but equally there are many state assets that can be carved up and ultimately better run. For the record Greek GDP is five times the size of what it was 35 years ago, perhaps like the mythical Icarus, who tried to escape from Crete with his wax and feathers, only to fly too close to the sun, Greece was not ready to enjoy the same benefits of their Northern Europeans brothers without the same productivity.
The US markets eeked out small gains Friday as it was apparent that this must be an isolated case, Portugal is relatively small as far as economies go, even though they once ruled the seas and the world. That was a long, long time ago. We had seen financials and banks bounce back hard here, steering the local index to a third of a percent gain on the day, above 51 thousand points again for the Jozi all share. Resources dragged again, the swirling data from China is a concern for many. China is not a democracy, the data is mistrusted, that is the perception and therefore = reality in the minds of the folks allocating capital. It does get frustrating sometimes, we have to live with the fact that Chinese data is not going to be accepted in the same way as German data.
Germans are efficient and clinical (perception), even if they eventually laboured to a fourth world cup title, well done, they were worth it. The Brazilians might have felt aggrieved at only achieving fourth place, the truth is that they beat 205 other associates. Better luck next time in Russia. Yekaterinburg (named after Peter the Great's wife) is four hours behind us here, which makes for tricky times for the European (and worse luck for the Americas) television audiences. The difference between here and Moscow at this time of the year is a mere two hours. Ah well, pencil in 8 June 2018 as the next greatest world cup, they certainly are special. About having representation there....... that would be *nice*.
Woolies news, David Jones' shareholders have voted overwhelmingly for the South African company to buy them out, check out the release from down under: David Jones Shareholders Vote in Favour of Scheme of Arrangement. 96.81% percent of the shares in issue voted in favour of the deal, but only 89.64% percent of the holders voted in favour. Meaning that whilst the people that had most of the shares voted in favour, many private individuals probably thought this was a bad idea.
OK, so what next for Woolworths? What are they waiting for? Well it looks like the money flows on the 1st of August, out of Woolies and into the hands of the David Jones shareholders. At 4 Dollars a share that amounts to 2.149 billion Aussie Dollars, at the current exchange rate that amounts to 21.67 billion Rand. That represents 31.95 percent of the closing market capitalisation of Woolworths on Friday. I get the sense that the market is warming to the deal, believing that the execution of the current management team is stronger than most businesses down under. Most businesses have not owned what is a successful Australian retile operation for nearly two decades, in the form of Country Road.
Remember that in order to shunt through this deal, Woolies had to buy out Solomon Lew, who had bought Country Road (and held it for 17 odd years) at 2 Aussie Dollars, he exited now at 17 Dollars a share, a good return in a developed market for a retail stock. Good for Lew, he got what he wanted in the end, good for Woolworths too, they get all of Country Road.
That part is not done and dusted. The Sydney Morning Herald reports David Jones' fate hangs in the balance as Lew mulls takeover deal. The important part in there is that the Australian Securities and Investments Commission believe that in Australian Law, Woolworths have breached "equality of opportunity", obviously in favour of Lew. That is another 213 million Aussie, or 2.15 billion Rand for Lew, but that is presuming that the court hearings this Thursday are in Woolworths favour. The Australian Securities and Investments Commission, according to the SMH article may raise all sorts of objections.
One step at a time then, Thursday will be key and we will know by the early morning, as a result of the time zones.
I was reading the Eskom results on Friday afternoon - 2014 results, trying to get a sense of who to compare the parastatal to, if it were a listed business. That is the tricky part, a business that is accountable to all parties at all times and without any government guarantees has to be more efficient, there is an element of failure attached. Without a doubt the company is less efficient in the absence of real competition.
First of all, I do not get upset if the company makes a profit. I would want them to be more profitable in order to service their debt obligations. You can download their Integrated Report 2014 and see that they currently have debt of around 255 billion Rand, or 6.2 percent of GDP. One parastatal has that much debt, most of it is to grow the grid. As the report points out: "Between 1994 and 2014, our generating fleet capacity has been expanded from 37 636MW to 41 995MW", an increase of 11.6 percent over 20 years. As per the same report however, "When the build programme is completed in 2019/20, Eskom will have increased its capacity by 17 384MW". Obviously since 1994, many measures in South Africa are benchmarked against the democracy time line.
Obviously the company fell behind, demand has spiked significantly since then, 5 232 915 customers now compared to 872 509 cutovers back in 1994, mostly as a result of households access to electricity having risen from 44 percent in 1994 to 85 percent currently. You think about that for a second, 2 out of every 13 households in South Africa do not have what you take for granted. Hot water for one, power for cooking, entertainment and warmth. The ability to be able to learn, to read and write, to improve your knowledge goes hand in hand with having power. We cannot work without it.
You do of course have to pay for the service. If you thought that the commercial banks had a problem, check this out: "Electricity debtors (before impairment provision) increased from R16.7 billion at 31 March 2013 to R20.2 billion at 31 March 2014. The allowance for impairment for trade and other receivables increased by R1.4 billion, from R4.3 billion in 2012/13 to R5.7 billion in 2013/14."
My interest in Eskom is only as a shareholder of Sasol. You will recall that we wrote a message last year titled Much cheaper than Eskom, in which we compared the cost of building a gas fired power station (Sasol) versus the Eskom one, Medupi. Cost per MW? Medupi at that stage was 122 percent per MW more expensive. Obviously my knowledge about gas and coal, the running costs and whether coal is cheaper at that scale over ten years is limited. It really is. So whilst it is quicker and cheaper to build gas turbines, we do have an enormous amount of coal in the ground. Eskom burnt around 122.4 million tons of coal last year. Clearly they will continue to be a massive customer of coal mines here locally.
I suspect that business and individuals will continue to adapt to rising prices and uncertainty around supply, which quite clearly comes from one point only. I would love to be a customer of someone else, I believe that private enterprise will fill any sort of gap. Eskom have property, plant and equipment, as well as intangible assets valued on their balance sheet at a whopping 404 billion Rand. Their staff costs are 546 thousand Rand per employee, that is pretty good for their 46915 employees. And by extension, these employees consume, so that is good too for the broader economy. The way the South African government view the state and their participation in the economy, I would doubt that Eskom would ever be sold, parts and or otherwise, unless there was a huge crunch, a cash crunch. The good news is that we just need to get through this winter.
Talking Sasol, some good news on the fines front. You will recall that Sasol bought a European chemicals business years ago, one of those divisions was involved in a paraffin wax cartel and fined 318.2 million Euros. They paid by January 2009, but applied to the European courts in Luxembourg for a reduction. Which was subsequently granted, the fine was reduced all of five and some more years later to 149.98 million Euros, meaning that the European Commission owes (according to the ruling) Sasol 168.22 million Euros. Which is 2.459 billion Rand at current levels.
At the time of the fine, the amount was closer to 3.7 billion Rand, which means that the ruling is more than just 168.22 million Euros, you do the math. So what they paid, in full, and the subsequent weakness of the Rand (and strength of the Euro) means that the fine amount could only have been 1.241 billion Rand. I say only, because it would have been worse for them if the currency moves went the other way. The European Commission has the right to appeal, perhaps they will.
The net benefit to you as shareholders is an accounting event of 168 million Euros, just in time for the pending results, remembering that Sasol is a June year end. Relative to their market cap this is around 0.6 percent, not a big number, but relative to their profits this is more significant. Results are expected to be released on the 8th of September.
We are being teed up for the Anglo American results with numbers coming through from their subsidiaries, at least trading updates released from both Kumba Iron Ore and Anglo American Platinum, Amplats in the last two days. The last two trading days that is. For Kumba Iron Ore results are expected 22 July, which is next Tuesday, HEPS and EPS are expected to be between 19.50 to 21.50 for the first half. This is against the 24.13 to 24.16 cps from the first half last year.
Iron ore prices have had a rough time this year, but the Kumba Iron Ore price has adjusted accordingly, year to date the share price is down 22 percent. If the company maintains a very aggressive payout ratio, then the yield should be excellent from here. The weakening Rand should have at least buffered the price, watching volumes is going to be key. Results shortly, so let us not speculate about anything just yet.
The other Anglo American company, Amplats, of which parent Anglo owns nearly 80 percent had a trading update this morning. Headline earnings per share are expected to be between 20 to 80 cents, the first half last year saw the same number at 514 cents. Phew, of course you know why there has been a precipitous fall, the crippling strike around the Rustenburg mines has been the biggest problem. From what I understand there is no doubt going to be loads of restructuring announced this time next week, that is when the results hit the screens. As such one should also wait for a detailed review this time next week.
Michael's musings: The everything store
Over the last week Amazon has been in the news for a couple of things. The first is a dispute that is going on with a publishing house called Hachette Book Group over the pricing model of e-books. The basis of the dispute is over who controls the price and how the profits are split. The current model is where the publishing house gives wholesalers like Amazon a 50% discount on the retail price and then it is up to Amazon to set the price. The model that Hachette is fighting for is to have the publishing house determine the price and the profit margin of the retailer.
The problem lies in that an e-book is cheaper than a print book by about 30%, which to me seems fair given that there is no paper involved and no transportation costs. I think the fight is more a power play and a fight for survival. With Amazon and e-books, independent authors are now able to get their books to market, all they need is a computer and their idea of a good book. From there they put it onto Amazon and if the book is any good, it should be noticed and start to sell. Under this model there is no need for the publishing house. This is the power of the internet!
The other reason Amazon are in the news is they are applying to the FAA to allow them to do drone testing in the Seattle air space. Under current law drones are not allowed to fly for commercial use, unless special permission is obtained. The special permission was there to allow drones for inspection of buildings or tracking of things like fires, not for many drone to be flying around delivery things. If they do not get approval to fly in the US they will continue testing in countries that allow drones in their airspace.
The current ninth-generation drone can fly up to 50 miles an hour and carry a 5-pound (about 2.3kg) package. The goal is to have some packagers delivered within 30 minutes of ordering. If that becomes the case it could be quicker to do shopping online as opposed to getting in your car and driving to the store, searching for what you are looking for and then driving home again.
This is a stock that forms part of our US portfolios because of them ticking the retail box and the internet box. The vast amounts of money that they are spending to setup their distribution centres around the world will make it hard for other companies to compete. Amazons earnings will be coming out next week Thursday, where we will be able to see the spend on infrastructure and if their high PE of 540 will drop.
Home again, home again, jiggety-jog. Markets are up comfortably here today, it must be amazing to be German today, you are no doubt going to welcome the national team home in due course with all sorts of ticker tape parades. To be Argentinean? Well, there is the small matter of a pending default ->
Sasha Naryshkine, Byron Lotter and Michael Treherne
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