Money with a dash of Funny: December 2017

Thursday 7 December 2017

No Mercy for The Hoff

To market to market to buy a fat pig. Yesterday was one of those days that you will always remember. I remember when African Bank went to zero, it probably spent more time that day in volatility auctions than trading freely. Other days that come to mind would be the day after Brexit and then the day after QE was announced (that was a good day).

It was carnage for Dr Christo Wiese in particular, where over and above the Steinhoff train wreck, all his other companies also sold off heavily too. Shoprite was down 5.9%, Brait was down 5.2%, Invicta was down 3.1%, Tradehold was down 3.2% and Pallinghurst was down 2%.

I suspect that over the coming days we will get SENS announcements from some or all those companies saying that Wiese has sold some of his shares. What the above graph doesn't capture is that Wiese owned some of his shares using debt, or the use of leverage to boast his returns with an appreciating share price. The problem with leverage is that it bites hard when a share drops, more so because as soon as the share drops the bank lending you money tells you to sell your shares to pay their debt.

In September 2016, Steinhoff issued a whole bunch of shares to help them pay for the US purchase of Mattress Firm. Wiese bought 314 million more shares at a price of EUR 5.055 per share, for a total value of EUR 1.587 billion. Wiese may be one of the richest men in the world but to come up with EUR 1.6 billion im cash is not easy. To raise the money for the new shares he had to borrow it. To do that he had to use existing shares as collateral.

"have pledged to Citigroup, Goldman Sachs, HSBC and Nomura International Plc (together the "Financing Banks"), 628 million ordinary shares. . . Rand Merchant Bank, a division of FirstRand Bank Limited, provided additional facilities to companies controlled by Dr Christo Wiese."

He bought his shares at EUR 5.055, last night the stock closed at EUR 1.14; his collateral went from being worth EUR 3.14 billion to now only being worth EUR 715 million. I don't know how much he borrowed from the investment banks but if it is more than those shares are worth, he might be a forced seller. Selling now means that he is locking in his losses. Ouch!

To add insult to injury, less than a month ago Wiese bought 2 000 000 more shares at R61.46. He bought them through a single stock future, meaning more leverage. I have seen a number of people saying after the fact, that it was clear Steinhoff was going to implode. Wiese, a seasoned business man and Steinhoff insider wouldn't have bought R 123 000 000 worth of stock (using debt), if he thought the company was on the brink of implosion. Having a dispute with a business partner is not uncommon. Going to court over tax structuring is not ideal but again not uncommon for a multinational company. When operating in just one country, tax codes are pretty black and white. When you start operating across the globe, things get very grey and loop holes appear.

It currently looks like the reason for Jooste's resignation relates to Steinhoff overstating the strength of their balance sheet, allowing them to get better financing rates.

Market Scorecard. US markets fluctuated between green and red the whole day. The Dow was down 0.16%, the S&P 500 was down 0.01%, the Nasdaq was up 0.21% and the All-share was down 1.64%.

Linkfest, lap it up

Byron's Beats

What did Steinhoff do wrong? Or more specifically (at this stage) Markus Jooste. It is still up in the air at the moment because nothing official has come out but there are many theories doing the rounds.

From what I can gather, one of the main dodgy tactics was to create off balance sheet entities to house non preforming assets or to purchase intangible assets from Steinhoff. This is a simple explanation, it is far more complicated than just that.

Another allegation suggested that the reporting on Conforama was incorrect. Throughout the period they owned that asset, they actually had a JV partner who was sharing all the profits yet they indicated to the market that they owned that asset outright.

We will have to wait for the external investigation to find out exactly what happened.

When you make investment decisions there is an element of trust you place in the management team. Christo Wiese, one of South Africa's smartest businessmen had put the majority of his wealth into this company. As Chairman you would expect (and trust) he knew exactly what was going on behind the scenes. Clearly this was not the case

Michael's Musings

It is amazing how quickly things have changed in the retail space. As a consumer, being able to order online and have it delivered to my desk is a huge win - There are 170,000 fewer retail jobs in 2017 - and 75,000 more Amazon robots.

Bright's Banter

Volkswagen executive Oliver Schmidt has been sentenced to seven years in prison after admitting guilt under a plea agreement in August. He's the eighth executive to be charged in the VW emissions scandal.

It get's worse, the German authorities are also launching their own fresh investigations on other VW vehicles potentially breaking environmental laws - VW Executives Gets Seven Years For US Emissions Fraud

Wal-mart or Wal-mart Stores has finally changed its name to Walmart. The company's name change is inspired by its move to push online shopping so it can compete with the likes of Amazon. Walmart's push online is so aggressive not even a hyphen can stand in its way - Wal-mart Changes Its Name To Walmart In Push Online

Home again, home again, jiggety-jog. Steinhoff is down again this morning, along with other Wiese companies. On the local data front we have mining production and gold production reads. Then internationally the EU publishes their GDP for the 3Q, growth of 2.5% is expected.

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Wednesday 6 December 2017

Hamba Kahle Markus

To market to market to buy a fat pig. Yesterday we received abetter than expected GDP read for the 3Q. The seasonally adjusted, annualised 3Q number showed growth of 2%. I prefer the simpler and less processed number of a simple year on year growth, which came in 0.8% higher than last year this time.

The biggest contributors to the growth came from sectors that are big employers of unskilled labour, much needed in South Africa. Unfortunately 0.8% growth is well below the number that we need to help our debt levels and employment situation. We are in desperate need of an uptick in business confidence to help our economy get back to its potential of growing at 5% a year. The South African Chamber of Commerce & Industry is publishing the number at 11:30 today, which will give us a better idea where confidence is lacking.

Market Scorecard US markets have been in the red for three days in a row. I can't remember the last time that happened? The Dow was down 0.45%, the S&P 500 was down 0.37%, the Nasdaq was down 0.19% and the All-share was down 1.06%.

Company corner

Michael's Musings

Whoa! Last night Steinhoff announced that Markus Jooste has stepped down as CEO (Steinhoff announces investigation into accounting irregularities and resignation of CEO), with Dr Christo Wiese taking up the role of Executive Chairman on an interim basis.

The bigger problem though is the new accounting irregularities that have come to light and the possibility that they may need to restate prior years' financial statements. The result is that the audited financials have now been delayed indefinitely.

Jooste joined Steinhoff in 1988 and became the group's CEO in 2000. He is a Steinhoff lifer, and only 56 years old. So for him to be asked to step down, the new irregularities found are not around the subjective interpretation of tax laws, it will be something far more significant.

The saving grace for the company is that they have Wiese to take the reigns and the old Pepkor CEO, Pieter Erasmus will be assisting.

As the Buffett saying goes:

"In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives"

One of the reasons we owned Steinhoff was because of the management's ability in sweating their assets. That has now changed, management has turned out to be a liability. The stink of the current scandal will probably hang around the company for years to come. You need to ask yourself, what will the company look like when this finally blows over? Will their huge store base still be relevant in an age of online shopping? We have been wrong in owning Steinhoff, expect more details on the matter later today.

Linkfest, lap it up

One thing, from Paul

Vestact leads clients towards direct equity portfolios. We don't hold bonds, cash, property or other asset classes in your account, either here in South Africa or in the US.

Equities are partial ownership claims against the assets and future profits of living, breathing companies run by human beings who take decisions that sometimes work out well and sometime work out badly.

Owning shares is better than having cash in the bank or owning government bonds, as over time we earn higher returns, because we assume equity risk. In economics, the equity risk premium is defined as the "excess return that an individual stock or the overall stock market provides over a risk-free rate". This excess compensates investors for taking on the relatively higher risk of the equity market.

This works both ways. When companies thrive, their share prices go up. In 2017 we have enjoyed great gains in Naspers, Discovery and Richemont. However, we have had also had a number of disappointments, companies which have had setbacks related to poor acquisitions, soft demand for their products or investor fatigue. The stocks have gone backwards this year: Steinhoff, Mediclinic, Brait and Famous Brands. We have to take the rough with the smooth. Over time, we should come out on top.

Home again, home again, jiggety-jog. Anything Wiese related is being clobbered this morning, Brait is down 4%, Shoprite is down 4%, Star is down 15%, KAP is down 15%, PSG is down 2% and Steinhoff was down over 50% on the open. International data out today, we have non-farm payroll numbers from the US and then the US crude oil reserves.

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Tuesday 5 December 2017

Shuffling the Cards

To market to market to buy a fat pig. When asked for advice on which stocks to buy by non-clients, my first piece of advice is to not follow blindly what you watch and read in the media. The first problem with following the media is that you have no idea around the time frame of the commentator. There have been times when I have been on TV with a short-term trader. Unless you know that my views are from someone with a time frame of longer than five years and the person sitting across the table from me only has a time frame of around a month, you are going to get very conflicting advice.

The second problem, and particularly with written media, is that the journalist is not always familiar with the company they are writing about. A perfect example of that can be seen in an article written this morning about Steinhoff Africa Retail, aka Star's results. The headline reads 'Dark days for Steinhoff Africa after 10% drop', the only problem is that the journalist has confused Steinhoff International Holdings with Steinhoff Africa. For your man on the street, this is an understandable mistake, it is not a mistake you want a person 'in the know' making though.

The key is to make your own mind up about any particular stock and investment strategy. There are many successful strategies out there and many companies that are worth investing in, just don't flip-flop based on what the media says.

Market Scorecard. After a closer reading of the 500 page Senate tax legislation, it looks like someone forgot to lower the alternative minimum tax rate. This means companies with a high R&D spend, like Tech firms, won't be getting much of a tax break based on the current proposal. This Bloomberg article gives a good breakdown of its implications, Senate's 'Unpleasant Surprise'Hurts Tax Breaks for Tech, Others. The Dow was up 0.24%, the S&P 500 was down 0.11%, the Nasdaq was down 1.05% and the All-share was up 0.27%.

Company corner

Michael's Musings

It was another bad day for Steinhoff. After their SENS announcement yesterday saying that tomorrows release won't be audited numbers, the share price proceeded to fall 10%. With the pending court case decision around Steinhoff's tax situation, it would seem that the auditors are reluctant to sign off on numbers that may need to be changed in the next couple of weeks.

Management says that there is no 'fire' behind the current 'smoke' surrounding the stock. With yesterdays announcement, some investors have decided to bail out, not waiting to see if there is in fact fire.

In tomorrow's unaudited numbers, one of the key things we will be looking at is how their Mattress Firm turnaround is going. During the last set of numbers, Mattress Firm was in the middle of their turnaround, having a negative impact on their profits.

Linkfest, lap it up

One thing, from Paul

According to Bloomberg, total global equity market capitalisation is closing in on $100 trillion. Here is how that looks in a graph:

The interesting thing to note is how significant the moves have been in the last decade. We've gone from the early boom on the back of the commodities "supercycle" in October 2007 ($62 trillion), to the very dark days of the global financial crisis in February 2009 ($27 trillion) and then the rally to the present highs. Of course, I remember all of those days well. The euphoria and the dismay. I've had a front row seat!

Byron's Beats

Starbucks has earmarked China as a massive growth driver for the business. You can see from the image below how big they are already versus other franchised competitors.

Former CEO and now chairman Howard Schultz has brought it upon himself to open up flagship stores around the world. This Bloomberg article talks about the world's biggest Starbucks which is set to open in Shanghai. The store is a whopping 30 000 square feet (half the size of a soccer pitch).

Starbucks is not just about the coffee, it is about the experience. I am very excited about this concept store initiative.

World's Biggest Starbucks to Open in Shanghai.

Bright's Banter

The series "House of Cards" season finale will continue without Kevin Spacey.

The final season of House of Cards will only have eight episodes as opposed to the usual 13 episodes in a normal season. A fellow by the name of Robin Wright will take Kevin Spacey's role, playing the husband of Claire Underwood.

The shooting was suspended in October after a number of sexual assault allegations surfaced against Spacey. Roughly 15 men have accused Spacey of wrongdoing, of whom five were teenagers when the incidents allegedly occurred.

I can't wait to see how they assassinate this character TF outta the show! The world is a better place without sex offenders!

'House of Cards' Sixth and Final Season Shooting to Resume in Early 2018, Without Kevin Spacey

Home again, home again, jiggety-jog. At 11:30 this morning Stats SA releases our 3Q GDP read, the forecast is for growth of 0.8%. The Rand is looking strong this morning breaking below the phycological $/R13.50 level.

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Monday 4 December 2017

Takealot of Cash

To market to market to buy a fat pig. American politics is driving markets at the moment. Another Trump advisor, Michael Flynn, has been linked to Russia. He pleaded guilty to lying to the FBI, while they investigate Russia's involvement in the 2016 US elections. Markets tanked on the news.

More significant though is that the Senate passed their version of the tax bill. They managed to get the bill through without needing to increase corporate tax from the initially proposed 20%. Considering that tax legislation is arguably the most far-reaching and important legislation a government will pass, you would think it is something you would take your time deciding on. Well, at least enough time to read the bill before passing it. Here is a picture posted by a Democrat Senator showing that some of the changes to the bill were made so late, that they didn't even have enough time to type them all up. Worse is the fact that not all the words are legible.

As a South African owning US stocks, the only thing that really matters to me is what the corporate tax rate is. 20% is much better than 35%. Long term though a strong US is good for everyone, as such it would be nice for lawmakers to take at least a weekend to read through all their amendments and think what the long-term implications could be. From here, the Senate and the House need to agree on a final version of the bill before Trump then signs it into law. Both the Senate and the House's bills are similar, meaning things are still on track for a final version to be through by the end of the year.

Market Scorecard. Even though markets tanked n the Flynn news, they mostly recovered by the end of the session. The Dow was down 0.17%, the S&P 500 was down 0.20%, the Nasdaq was down 0.38% and the All-share was down 0.54%. Friday on the local market, Naspers had another red day, down over 4%. Tencent in Hong Kong is up 2% today, Naspers should be well in the green to get the week going.

Company corner

Byron's Beats

Last week we received interim 6 month results from Naspers. Being by far the biggest company on the JSE, this event now attracts a lot of attention. As expected, the results looked stellar on the back of another incredible period for Tencent. Let us take a look at the numbers which remember, are now reported in dollars.

Revenues increased by 33% to $9bn. This resulted in a big leap in core headline earnings per share, up 65% to $3.50. In Rands that equates to R48 a share. Let's assume they grow earnings by a very conservative 10% in the second half. That would mean they would make around R100 a share. Currently trading at R3531 a share, the stock trades at 35 times earnings. I remember a time when Naspers traded at 150 times earnings. Despite the phenomenal rise in the share price, the stock has actually become cheaper related to earnings. People often forget that.

Here is a nice visual of their revenue mix. SNS (social network services) includes Tencent and Mail.ru

We often cover Tencent separately, in light of that I want to focus on the rest of the business.

Ecommerce grew revenues by 15%. This division includes Etail, Travel, Payments, Classifieds and Food Delivery. All areas with great potential, especially in the untapped developing markets. Classifieds (OLX) have just become profitable. Etail which includes Takealot and Flipkart will suck funds for a while to come. That makes sense, building distribution centres and sorting out logistics is capital intensive. We can see how long it has taken Amazon to build scale. But once you have that scale, you are almost untouchable. Flipkart has a 70% market share of online retail in India.

The Ecommerce division used up around $318m whilst the Video Entertainment division made around $234m. They are still using the old profitable video business to fund the new exciting ecommerce division.

Video entertainment had a decent period. Trading profits grew by 4%. The Rand has stabilised to the dollar but many of their operations throughout the continent suffered on the back of weak currencies. Showmax is doing nicely in South Africa and also has a solid presence in Poland. Maybe they got there before Netflix?

All in all these numbers look solid. We are comfortable that the rest of business is on the right track, continuing to grow and become more influential within the massive shadow of Tencent.

The current allegations against Multichoice are upsetting. Their silence on the matter has also been disappointing although they did announce on Friday that they have implemented an internal investigation. As a Naspers shareholder, I wouldn't be too concerned, the rest of the business is far too big and separated to be heavily influenced. As a concerned South African however I will follow this story closely. If the allegations are true, I hope we see some heads roll and the consequences dealt with accordingly.

Michael's Musings

On Friday morning, AdvTech released the following SENS, Voluntary disclosure of fraud. One of the head office financial managers had been stealing from the group since 2015. In total the cash stolen was around R 5 million, which they should be able to recover through insurance and from the individual. As part of the SENS announcement, they stated revenue figures had been inflated and expenses were understated, resulting in a R35 million once off adjustment.

I'm not sure how the financial manager was stealing, but in my mind if you are stealing you would decrease revenue and increase expenses, creating a gap for you to take money? This incident shows the risks that come from owning and running a business, it is the reason why equity holders demand a higher return on their investment. The once off adjustment is rather small in AdvTech's life, around 1% of their revenue.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: Multichoice is paying big bucks for bum content; Winter Olympics coming up on the North Korean border; Takelot crashes on Black Friday: and fancy app Expensify uses humans behind the scenes - Blunders - Episode 81

Bright's Banter

Pharmacy-retail giant CVS Health agreed to a $69 billion acquisition of health insurer Aetna in one of the biggest M&A deals of the year.

CVS is trying to get ahead of Amazon's expected move into the pharmaceuticals business , which has several pharmacy-retail companies tucking their tails between their legs.

Aetna is one of America's oldest health-insurance groups and CVS is one of America's largest pharmacy-retail companys making this one a very big deal indeed - CVS To Buy Aetna Reshaping Health Care Industry

Vestact in the Media

Forbes has written a nice detailed piece on Discovery and their new bank, Michael gets a few comments mentioned - Bank On This Man.

Home again, home again, jiggety-jog. Following Asian markets, our market is off to a green start too. Nothing major on the news front today. Steinhoff announced this morning that their audited numbers would not be released this week as expected but sometime in January. They will however release unaudited numbers on Wednesday. Not what you want to hear as a shareholder.

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