Thursday 16 July 2015

Go Private, save the state



"It seems like there is a whole lot more room to grow. I for one would much prefer it if the government outsourced all schooling to private entities, which set themselves really high standards. As Curro points out (just after this table in their 2014 Annual Report), them building schools saves the state 70-120 million Rand initially and then 50 million Rand a month. People pay for private education after they have paid their taxes."




To market to market to buy a fat pig. Agreekment done. At the "money moment", the Greek parliamentarians, for all their noise voted for the money. In fairness however to Syriza, the governing party, much of the members voting against the package were part of the ruling party. Were or are, it is difficult to say. Whilst there were heated debates inside the Greek parliament, there were the 'no to austerity' protestors throwing molotov cocktails at police. Question, if there were to be a cut in Greece's debt that is owed to the Troika, who would ultimately be hurt as their asset is written down? Is it the pensioner of France, Italy and Germany, Spain, Portugal and the Netherlands? Debt to one is an asset to another.

The bigger picture is that the IMF are right, even if there were incredible terms imposed on Greece and they were told that there was a 30 year interest holiday, they were told that there was more debt reduction, it needs to happen sooner rather than later. Investors of Europe need to know. Even if this is not exactly a deal breaker for opening a business elsewhere in the common currency area, it has captured the imagination of the networks for the better part of five years. Greece needs to grow their economy, that is the only way that tax receipts will rise and that the government will easily be able to service the debt more aggressively.

There needs to be political will power and I am afraid as long as there are far left wingers feeling that the only way to do things is more government intervention, and less private sector, I do not see that happening soon. The Golden Dawn (one of their members tore up the agreement in parliament yesterday) are borderline cases to be institutionalised. No, that is rude, as I said to my eldest last night, people get what they vote for. And do not ever question why someone voted X or Y, that is immediately suggesting that their political views are inferior to yours. That is exactly why each and every person has a single vote, it may not be perfect, it is however better than having no choices.

So that is done and dusted, expectations are for a fall out of sorts in the ruling party. Resignations, perhaps even new elections. If Tsipras comes through this wiser and better as a leader then thumbs up to his leadership skills, well done to him. If he firmly believes that what he is doing is the best interest of Greece long term and not scoring political points (even though he suggested that there was a knife held to his throat), then I admire that. It shows some maturity that was possibly lacking beforehand. Read the NYT piece: Greece, Its Back to the Wall, Adopts Austerity Steps.




The other "thing" capturing markets yesterday was Fed chair Janet Yellen delivering testimony in front of the House Financial Service Committee, see the NYT story: Janet Yellen Warns Congress Against Adding to Fed's Oversight. What I find really funny about the story, and perhaps it deserves a copy paste is the following paragraph in that story: "Ms. Yellen provided few new indications about the Fed's plans for the next few months, and she was not pressed on the issue. Lawmakers in Congress evidently do not share Wall Street's obsessive interest in the exact timing of interest rate increases." Ha-ha! A Wall Street obsession is definitely not a worry of the person on the street.

I expect that we will see rate rises different to those in the past, the trajectory will be slow to begin with, I reckon a range adjusting in smaller increments that the street is used to, like 10-15 basis points at a time. i.e. Moving the band slowly higher until you can hike by 25 basis points, why not, the way down was unconventional, why should the way up be anything ordinary? And expect the high end of the next interest rate cycle to be lower, i.e. not 6.5 percent, rather somewhere between 3.5 and 4, that is my best guess. Markets on Wall Street? Not too much action if you look at the scoreboard, the Dow and broader market S&P 500 were a whisker lower. Earnings, those continue to filter in and through, Bank of America was the standout, the stock was up 3.3 percent. It is still down 61 percent over ten years however, the "great recession" saw to that.




In the local market, Jozi, Jozi, stocks rallied across the board, obviously there strong Chinese GDP number buoyed commodity stocks. Both Anglo and BHP have recorded big write downs in the last two days, the Anglo production report from this morning does not look encouraging. Lower prices, lower demand is not a perfect cocktail for shareholder returns.

Less commodity exposure, I still am struck by that comment I read earlier this year that said an investment in commodities was a bet against humanity, I think that it was our old pal Cullen Roche who said it. I think what he is trying to say is that humanity keeps doing more with less of the same resource. That is not too dissimilar to that graph from yesterdays piece with more than double the number of people on earth eating food that is roughly the same price, farming technology has improved significantly over fifty year, without ordinary people noticing. When something changes slowly and constantly, it is called a Mesofact says our old pal Samuel Arbesman. Of course none of these people are really our pals, as a result of the awesomeness of Twitter, we fell we actually know these people. Including folks like Novak Djokovic and Serena Williams who we can (and do) follow on platforms like Instagram.

After all was said and done, the local market closed at 52 and a half thousand points. That looks like the best level in around one month to me. However it has been a tough old year, stocks have not really moved, the JSE all share index is up an uninspiring 5.55 percent. Although, that is around what inflation is, and on an annualised basis you would be double that. That is a decent enough long term return, remembering the rule of 70. i.e. how long does it take to double your asset base. Is it 70, or 72 or 69.3? Read Wiki: Rule of 72. Divide the annualised returns by 70, that is your number. Working the other way around, what return would you have to get in order to double your money in 5 years. Divide 70 by 5, you get to 14 percent. 6 years, that number falls to 11.66 percent, per annum. In other words, the consistent return matters. As Warren Buffett says however, he would rather have "lumpy" (read outsized) returns than solid and consistent ones.




Company corner

Curro and AdvTech confirmed yesterday that they are in talks. Obviously it was Curro who initiated the talks, they want to buy AdvTech. It makes sense that as the bigger competitor by market cap that they use the momentum and big shareholder to buy another business that the market has not taken so kindly too. As Michael pointed out yesterday however, and lean in a little closer to your screen here, Curro has a market cap of 12.1 billion Rand, turnover of just on one billion Rand for the financial year to end February. AdvTech has a market cap of 5.2 billion Rand, turnover of 1.93 billion Rand. Curro's turnover grew at 51 percent last year, AdvTech at less than ten percent.

Even at elevated share price levels, AdvTech trades on a 27 multiple, Curro has recently started making a profit, it trades on a multiple of nearly 200 times. Is the market bonkers? Perhaps not. There may be expectations from the market that the PSG magic could work again here, as it did for Capitec, PSG own 57 percent of the shares. And of course PSG have underwritten all the rights issues along the way, Curro has grown exceptionally fast. I doubt that there will be a massive PE unwind for Curro in a hurry, the goal is to continue to roll out as many affordable private institutions as possible. Where the perception is that paying for education means that the quality offered against the alternative (the government) equals a better outcome for the child, that is all that parents worry about. Curro have recently been in the news for all the wrong reasons, I truly hope that (for the sake of our nation) that this is dealt with swiftly. Racism is narrow minded and plain dumb, we should be all turned inside out, we would all look the same. Not very good "same" though, I love diversity and different.

Not too dissimilar to many success stories, and often what the ordinary person on the street misses, Curro started with a small school, all of 28 pupils in 1998. They started this year with 42 schools and 36 thousand scholars, learners, pupils, whatever you want to call them. So are they going to triple the number of scholars (or are they customers?) in the next three years?



It seems like there is a whole lot more room to grow. I for one would much prefer it if the government outsourced all schooling to private entities, which set themselves really high standards. As Curro points out (just after this table in their 2014 Annual Report), them building schools saves the state 70-120 million Rand initially and then 50 million Rand a month. People pay for private education after they have paid their taxes. I still like to think that the modern schooling system needs a serious shakeup, more responsibility needs to be given to the child. To get real life readiness, you have to be responsible for your actions. Elon Musk is right to start his own school, that is however for super rich kids. Sadly here in South Africa there are limited resources.

Whether or not a formal offer is made, or a merged entity appears at the other end when these talks between the two private education providers appears on the other side (or even if the competitions authority allows it), progress is being made shaping the minds of the youth. And that is something to celebrate, after all, the founder of the nation, Nelson Mandela was quoted as saying: "Education is the most powerful weapon which you can use to change the world." That will always be right, the only problem with that is that the more you know, the more you realise there is to know.




Linkfest, lap it up

I enjoy peanut butter, I buy the sugar and salt free one from Woolies. Not everybody can eat nuts, 1.4 percent of kids have a nut allergy in the US and this is rising. There is always capital looking to solve this problem, Mr. Picketty should take note that it is a French firm raising money in the US to solve the problem of nut allergies: Progress in peanut allergy trials raises hopes. Darn one percenters looking to solve problems of ordinary people.

Yesterday Amazon turned 20 many people didn't think it would get past its first birthday, it has survived start up phase, the dot come bubble and a host of new competitors - At 20, Amazon Continues to Defy Predictions.

Where there is a will there is a way! Many young people that I speak to are struggling to get jobs in the industries that they hope to have long careers in. This CV highlights the possibilities that are out there if you are willing to do what it takes, very inspiring! - Hey, I'm Nina!




Higher cash levels with asset managers may point to people preparing for an interest rate hike? Where funds want to own a couple more bonds but can only purchase them after the rate hike - Fund Managers Holding Highest Cash Percentage Since Lehman. This isn't pointing to a bear market because cash is also flowing into financial stocks which can be seen as a proxy for the economy and one of the sectors that do a bit better with higher interest rates.




Home again, home again, jiggety-jog. Mixed Asian markets this morning, I saw an interesting comment from Blackrock's Larry Fink that suggested that the reason why Chinese markets are so volatile is that capital markets are immature. There was an awesome interaction between Carl Icahn (who is nuts) and Larry Fink, you might see footage during the day. Back to the real grind of earnings today. Google, Ebay, Goldman Sachs, Mattel, Philip Morris, UnitedHealth and of course an interesting one Schlumberger. That is why we invest in markets, for companies, not for Jannet Yellen comments or Greek debt issues.




Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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