"Steinhoff released the results of the rights issue in which they raised a whopping 18.2 billion Rand. To give you an idea of how much 18 billion Rand is, that is roughly the market capitalisation of Grindrod. Absolutely astounding that the company could raise that much money, there was clearly the appetite there from the local market at 16.58862 rights per 100 shares, at 52 Rand a share."
To market, to market to buy a fat pig. Friday was so long ago. It was before Khotso Mokoena won a gold medal for the triple jump, world class stuff in the driving rain. I got a touch of sun on Saturday, my word it was warm. Just a reminder, it is summer in Glasgow and winter here in Jozi. It certainly did not feel like it watching the screens and seeing folks in short sleeve shirts here on the weekend!! We cannot and will not complain about the weather.
I am sure that market commentators had loads to complain about last week, we went through the lot on Friday. I always say that the irony is that when you are adding to a portfolio over time, you should be hoping that the prices stay low for as long as possible. Why? Surely that does not make sense. Same company doing better year in and year out at a cheaper price almost always equals a bargain. Whilst it is true that we have seen multiple (or Price to Earnings) expansion, stocks are hardly unreasonable.
I read a research report that shows many internet companies with lofty valuations are set for pretty quick PE unwinds, in other words because revenues and profits are going to grow so quickly in the coming years, in fact the next three, a 50 multiple suddenly turns into a 20. Granted that is at the price today, the price in the future, your guess is as good as mine. If earnings grow and you do not see multiple expansion, stocks go up a little. Of course as an investor you would prefer measured returns rather than volatile returns, the latter would unnerve you to some extent and ironically see you less likely to invest further.
I always thought that there are several words one can use in a headline to attract attention, the word scary always attracts attention. Over a decade of writing these newsletters has seen me grapple with the headline, that is never easy. So when I see this piece: A Scary Valuation Indicator, I am naturally sceptical. It turns out however as a casual observer that this is hardly "scary" and that we are just seeing equity markets adjust from a time that nobody was scared of anything, that turned into a time when everyone was fearful of everything, to a more normalised environment. To be scared is one thing, to be scared witless and numb, well that is another.
Not scary were the non farm payrolls numbers on Friday, the best combined six month streak for years and years means that the US economy is still on track to recover to somewhere near full employment, to read the full report: Employment Situation Summary. Read what you want to into that, the report was more or a less a Goldilocks porridge number, not too hot and definitely not too cold.
Markets slipped in New York, more on geopolitical events rather than earnings, which on balance have been better than anticipated. Whilst the jobs situation is important to establish a trend, everyone forgets the number from six months ago and yet places more importance on this number than any other. Keep calm and carry on!
When owning companies, you are not owning a share price. You are owning the future profitability of that business and paying a price today for that. The collective try and figure out whether or not the price is right, right now. Tesla is a great example of that. What a business! They are trying to revolutionise the way we think about private transport and the combustions engine. However, the business does not make meaningful profits, if any. They are only going to sell 35 thousand vehicles this year, of the Model S that is. The expectations are for a run rate of 100 thousand vehicles next year.
Whilst Tesla are selling all these motor vehicles and growing revenues quickly, they are spending loads of money ramping up production, breaking ground for the gigafactory (an agreement has been signed with Panasonic on battery development and manufacture) and in general attracting lots of attention, the company still makes a loss. So how do you value it? Obviously you are making lots of assumptions on Tesla's ability to meet a growing demand, affordability relative to the combustion engine and running costs, equally conversion to battery operated vehicles by consumers, which is a mindset hurdle.
Once there are more people with electric motor vehicles there will be more people that want a similar vehicle. The only negative that I can see locally with electric vehicles is that the power produced locally is by burning coal. So whilst you might feel like you are doing the environment a favour, you are not really. One more moderate negative, because the car is so quiet, pedestrians will have to be more aware visually i.e. not as dependent on sound for telling where vehicles are. We are on the cusp of some sort of change I think, with regards to consumer mindsets in richer countries. I think Tesla will disrupt hugely and do superbly well, if you buy it you must know that it is going to be a long way out however.
Steinhoff released the results of the rights issue in which they raised a whopping 18.2 billion Rand. To give you an idea of how much 18 billion Rand is, that is roughly the market capitalisation of Grindrod. Absolutely astounding that the company could raise that much money, there was clearly the appetite there from the local market at 16.58862 rights per 100 shares, at 52 Rand a share. There was enough of a discount, the thought of being diluted in what looks like a good investment was too much for the local investment community to pass over.
The number of shares in issue post the capital raising is now 2 459 880 692. At 53.38 Rand a share you can quite easily see that the market cap is sizeable, bigger than Sanlam, just smaller than Aspen and in 16th place on the ranking tables now. Wow. At the bottom of the market in mid 2009 the market capitalisation of Steinhoff was 17.152 billion Rand. The number of shares in issue was around half of what it is now, 1.28 billion back then, generating half the earnings on a per share basis. Revenues have more than doubled in that time, as have earnings.
What is key is that the makeup of the business has completely changed, this is now a European and United Kingdom business with South African assets held through two different entities, a stake in KAP and almost all of JD Group (around 86.2 percent). If the listing in Frankfurt eventually goes ahead, the company will then be in a position to obtain a higher rating relative to their European peers. Inside of the Dax 30, the blue chip index in Frankfurt Germany there are few comparisons to the business that Steinhoff do.
In the consumer space there is Gerry Webber and Adidas, Puma who make clothing, there are automobile and parts manufacturers in the broader consumer space including ElringKlinger, Continental and BMW, Cewe is in digital printing, there seems to be no other furniture manufacturers and retails. Henkel are close, they make glue, shampoo, detergents and the like, Beiersdorf makes and sells skin care products. And all these businesses trade on much higher earnings multiples than Steinhoff, which has traditionally been quite low relative to the rest of the market here locally.
The only point I am trying to make is that Steinhoff are quite possibly going to take some time to be rerated by a different subset of investors, should they be listed in Frankfurt soon, the point about re-rating with PE expansion is that the Rand price would reflect accordingly, although the leader/follower (Frankfurt/Joburg) would take some time to work out.
In my mind all that Steinhoff have to do now is meet the markets expectations when they report numbers for the full year to end June sometime in early September. Remember that earnings will be calculated on the smaller number of shares in issue from the end of June, a trading statement should be anticipated towards the end of the current month. I suspect that market conditions all being equal, most folks should be positively surprised.
Meanwhile, the aforementioned Grindrod and their market capitalisation of 18 billion Rand was under some pressure Friday, although today it (it being the share price) is bouncing off the worst levels. Best I do a copy paste on why earnings expectations and reasons why HEPS are expected to be lower:
Shareholders are advised that Grindrod expects its ... headline earnings per share (HEPS) to decrease by between 30% and 35% (2013: 76,2 cents per share). The decrease in HEPS is due to the continued depressed shipping markets, the impact of the industrial action in South Africa and closure of the commodity trading business.
The thinking was that shipping was supposed to be "stable" now, clearly not yet. Industrial action, that is supposed to be a once off, the labour and business landscape looks spotty at best in South Africa. Interim numbers are expected to be released on the 21st of August, that is in three Thursday's time.
Home again, home again, jiggety-jog. Markets have moved higher here, somewhat, up nearly four tenths of a percent. Retail stocks are stronger on the day, getting a lift here, not enough to lift the whole market to new heights however. Stay tuned as always!
Sasha Naryshkine, Byron Lotter and Michael Treherne
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