"Exchange rates and price received had a material impact, as much as 5.9 billion Rand for the half. That makes a big difference. However, the costs that the company could and did control over the half amounted to savings of 2.7 billion Dollars"
To market, to market to buy a fat pig. Markets yesterday closed comfortably higher, over half a percent better by the end of the day. Resources lagged, perhaps the sell off of gold as a result of a Greek deal (of sorts) meant that there was selling across the board. Oil sold off again, the storage issues are starting to come to light. People are storing oil on the basis that the price has to go higher, as a result of less supply. At the same time everyone is pushing the volumes even with the lower prices, trying to make up the difference with the price plunge. Expect the majors, and by that I mean Saudi as well, to continue to pump the volumes. Sadly for the higher cost producers and that means Venezuela included, the higher volumes by those that have invested the money in their infrastructure will continue to produce profitably. Sadly for Venezuela, once they had seized the assets created by private companies, the infrastructure has weakened significantly leading to lower production at the higher prices.
Staying with Greece for a second, Cullen Roche echoed my sentiments: The Media's Overdramatization of the "Grexit" & its Impact on Your Portfolio. If you had listened to the doomsday predictors, as ever, you would have been doing the wrong thing. Too much is made of the flavour de jour at any one given time and almost always blown out of proportion. That is the sense that I always get, normally we tell you to keep calm and carry on. It turns out today that the list of proposals that the Greeks have submitted are inline with the bailout program. So. Greece Submits Reform Proposals.
Forget the source of this, Mises Daily, I subscribe and read lots of "stuff". You do not always need to agree with the material that you read, sometimes reading material you do not agree with can crystallise your own theories and analysis. The only reason why today I thought that this should be highlighted, is the speed of all the building. Take a look at the first paragraph of the piece: Where is the Skyscraper Curse Today? : Super tall buildings, or skyscrapers, are being built at an astonishing rate. Ninety-seven buildings that exceed 200 meters (656 feet) high were constructed in 2014, setting a new record. The previous record was eighty-one buildings completed in 2011. The total number of skyscrapers in existence now is 935, a whopping 350 percent increase since the year 2000. Whilst some may draw parallels with eras gone by and view this as a bad thing, I certainly see this as progress.
The monetary purists, as they like to call themselves, see this progress as a problem. Me, as an optimist, suspect that urbanisation will continue until many of us live in urban areas. Agriculture as an employer used to be massive. Whilst agriculture as a percentage relative to overall GDP has kept the same pace, ensuring people are fed as productivity increases on the same amount of land, the number of workers on the land has fallen dramatically. People move to urban areas and enjoy all the comforts that go with it. The United Nations predicts that nearly 86 percent of all people in the developed world will live in urban areas by 2050, the number in developing countries at that same date is expected to be 64 percent. I guess that means more skyscrapers accommodating people in urban areas, whether or not these folks think it is a curse or not.
Company corner snippets
Just one thing to add to the Bidvest offer to everyone else at Adcock Ingram at 52 Rand a share, if you take your stake (in this case Bidvest) over 35 percent, you are obliged to offer everyone else the same price, being 52 Rand. I do not expect the major shareholders to take this, the PIC being the other big one who rebuffed the Chileans, CFR, at and around 72 Rand a share now are hardly going to accept 52 Rand. It is just a formality really. Read nothing more into it that Bidvest have managed to get two of the major shareholders to accept their advances. With this acquisition they are edging closer to owning more than half the shares, removing uncertainty as to their intentions. They eventually want all of it, Bidvest that is, they want all of Adcock eventually. I guess if the price is right for the PIC, they will take it.
Apple have announced that they will be building two facilities in Ireland and Denmark, the first of their kind outside of the US. They are to be data centres, the support all of the applications that you iOS users will know so well. iTunes, Siri and iMessage, those types of applications being closer to all of the users in the region and have the speeds a whole lot quicker. Check it out on the Apple website: Apple to Invest 1.7 Billion Euros in New European Data Centres. And most fabulous of all? The facilities as you see will be leaving the world a better place after than before, they will take out the exotic tree forest and replant with indigenous ones. Amazing. The company's shares closed last evening at 133 USD, a market capitalisation of 755 billion Dollars.
BHP Billiton amongst many other companies released results this morning, long before most of us were at work. Reason being of course is that they like to give the Australian shareholders the ability to be able to see these results and act accordingly, if that is ever something, "act accordingly". These are results for the half year to end December, the company has been hurt hard by falling prices, some of their key commodities Iron Ore and Petroleum have seen precipitous falls in their respective prices. CEO Andrew MacKenzie put on a brave face when delivering results that are ahead of market consensus, the biggest surprise to the market (although we have intimated that this might be the case) is that the dividend has been hiked. In a falling commodity market the company has managed to deliver strong cash flows and pay down debt. The interim dividend has been hiked by five percent to 63 cents, at the current Rand/Dollar exchange rate of 11.64 that translates to 733 ZA cents before tax. I guess that may (probably not) change with the budget speech tomorrow. Probably not.
Underlying attributable profit was down 31 percent to 5.4 billion Dollars. There is a pretty interesting graph in the associated presentation, slide 8, which shows the factors that they control. Exchange rates and price received had a material impact, as much as 5.9 billion Rand for the half. That makes a big difference. However, the costs that the company could and did control over the half amounted to savings of 2.7 billion Dollars. I know it is the easiest thing to do, to sit here in my comfortable little corner and critique businesses (far easier when you have cool air-conditioning blowing on you), I always wonder why when things get tough that businesses cut costs aggressively. Surely costs should be controlled all of the time?
In fairness to BHP Billiton, they did not push the envelope and have always been conservative with their cash. Such is the aggressive nature at which they have cut costs at their iron ore business, those have decreased 29 percent to be at a mere 20.35 Dollars a tonne now. Just a reminder, the iron ore price is around 61 Dollars a ton. Expectations from various financial houses see a price between 75 to 87 Dollars a ton a little later in the year. It is impressive at how quickly the company managed to reduce costs, comfortably ahead of their internal targets. Not just in their iron ore business, across the board in all businesses.
On to the other major area that has been feeling the heat, the Petroleum division. The company says in the long term forecast that Higher prices will be required to induce the new supply needed to offset natural field decline and meet growing demand. I guess that is true. Once you have burned gas to heat your house, cook your food and driven your motor vehicle to and from work, or to school or wherever it is that you travel, that product has been used. It is gone. Unlike many of the other bulk commodities, you cannot recycle petroleum products. Their cash costs however, and this should be noted, for onshore US (shale) is just a little over 16 Dollars per barrel equivalent. It is still low, and must mean with better technology and savings that it could go lower. That is a risk to many of the businesses out there that produce at this size and scale.
Last up, the proposed demerger of the South32 assets will be clearer when a) we see the documentation associated with it in less than three weeks and b) shareholders more importantly put this to a vote in early May this year, a little over two months from now. The days will be shorter and it will be getting colder no doubt. The BHP Billiton business ex the South32 assets will be of much higher quality, and a lot more focussed which is both good and bad. Bad when your key commodities have taken a hit, ironically the South32 commodity prices have not been under as much pressure. We continue to evaluate the company on a client by client basis, acting accordingly. The stock is up over three percent, reacting positively to the results.
Things we are reading
This could be called a big social experiment and you have to be gutsy to participate - The Rich Man's Dropout Club: Whatever happened to the teenage entrepreneurs whom Peter Thiel paid to forgo college?. The questions brought up are valid.
Each of us have our own bias when looking at the market and when we add all our views together we get the bias of the market as a whole - How Our Memories Shape Market Cycles. The interesting point made in the blog is that pain hurts more and lasts longer than the happiness from winning. It might explain why we are nervous about investing in a rising market and why people with negative views on the market get so much air time.
A very well written piece from Barry Ritholtz on what is forecasting and what is not - You're Smart, But You Can't Forecast
Home again, home again, jiggety-jog. Greek banks are solvent again, the share prices have rallied sharply! That is good news I guess, even though realistically it is a small part of the European market capitalisation, I understand the importance in keeping the area together. There are a whole slew of results that we will cover tomorrow, including Discovery that have also announced that they are raising more money at 90 Rand a share, RMI (who own 25 percent) have indicated that they are following their rights, the management team (which owns over 12 percent) will do so too, I did a back of the matchbox calculation and worked out that CEO Adrian Gore (with 7.77 percent) would have to stick in between 310 to 388 million Rand. Wow, that is a lot. Markets are marginally higher here in Joburg.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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