Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. We started off well enough, led by positive surprises in Chinese and US manufacturing data, but the wind was taken out of the sails with weaker than anticipated European country manufacturing data. Plus, it seems that the unemployment situation in Europe is worsening, with youth unemployment being a large part of the focus. Sadly we know exactly how they feel, but those are rich people problems whereas the same problems we have here are poor people problems. Not to detract from the issues in Europe, but the safety net and the family help is far greater than the ones that we have here. Nevertheless, problems are problems. We managed to hang on to our gains here in Jozi, even though we slipped into the red for a little in the late afternoon. The Jozi all share index ended at an all time closing high of 34482 points. Up one quarter of a percent on the day, or 83 points. Led higher by resource stocks, perhaps reacting positively to the Chinese PMI data released early Wednesday morning.
We saw a Vodacom trading statement after the bell yesterday, these are for the full year numbers to March 2012, which are expected to be released on the 21st of May. Basic EPS is expected to be 20 to 25 percent better than the prior years 561 cents, so expect the range to be between 673 to 701 cents per share. Headline earnings per share are expected to be between 5 and 10 percent higher to be between 689 to 722 cents. Nice, that looks like decent enough growth for a company that was supposedly "ex-growth" with a mature market here in South Africa. This is the shift from voice to data, albeit at lower margins, people are going to consume a whole lot more data on their newer and fancier handsets. Even at the lower end, phones are going to become smarter. But is the stock expensive at one hundred and seven and a half Rands? Let us explore this later. Byron always tells me that an iPhone consumes three times more data than comparable smart phone users. Either the iPhone is more intensive in terms of data usage, or/and easier to use.
With basically an 80 percent payout ratio, you should/could expect 295 cents for the second half, bringing your total for the year to around 555 cents worth of dividends. So, the ratios for the fundamentals junkies looks as follows: 14.9 times earnings at the TOP end of the range and a dividend yield of just more than 5 percent. Factoring in the dividend tax of course, around five percent yield is very juicy. And that, I think is the part that attracts the international investors to Vodacom, because you can bet that Vodafone, the 65 percent shareholder (and the South African government, who own 13.91 percent) will want to extract as much as they can. One could on that basis expect the payouts to continue to be high, and as such perhaps the stock will continue to attract a higher valuation. I guess when government bond yields (on the "safer" bonds) start to tick up, then this "endless search for yield" might actually change. Until then though.
Byron's beats explores the trading update from African Bank yesterday.
- Yesterday we had a trading statement from one of our recommended stocks which indicated a 24%-26% growth in earnings for the 6 month period ending 31 March 2012 compared to the corresponding 6 months last year. In that period the company made R1.095bn or 136.3c per share. Taking the middle of the range, 25%, that means we should expect around 170c for the 6 month period. Before we talk about the fundamentals let's look at the valuations.
Last year the company had a better second half, making 155c vs. the 136c in the first half. The company has been growing fast on a 6 month basis so we should expect the same. Let's say they make 180c in the second half and 350c for the year. The share is trading at 3888c and a forward PE of 11. Last year they had a very generous dividend cover of 1.57. Assuming they maintain this we should expect around 220c at a current yield of 5.7%. Those are some (very) favourable valuations and a great yield.
The two biggest risks for this company are increasing competition and a possible unsecured lending bubble which has been discussed by many analysts. Let's talk about competition first. Competition is always going to happen in a market where companies are making big profits. Capitec have done really well and now the big 4 are targeting this market because the return on equity is so strong. African Bank have also ramped up their book very aggressively using the Ellerines stores as kiosks. This has been their niche which has been very successful and finally showing some returns to that Ellerines purchase. Although competition is strong I think Abil are more than equipped to face up to this challenge whilst the SA economy still has ample room to provide clients.
So what about this so called bubble? I don't think there is an issue. According to Rene Van Wyk, the registrar of banks whose office is currently conducting a survey on the issue, there is no bubble being caused by the increase in unsecured lending. Unsecured lending only makes up 8% of total credit assets. I also believe that our informal sector is heavily underestimated and these people who earn reliable salaries have to use unsecured lending for credit. Wages are increasing fast in SA, way above inflation and if rates do increase, we are at 25 year lows, we can still handle an increase.
All credit to management for growing the book and therefore the earnings so well. We believe this can be maintained going forward and continue to add at these levels. More analysis will be done when the results are released.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. It could have been a whole lot worse than the final print, but I guess with a disappointing ADP employment read we should have been happy with the final number. The monthly precursor to the nonfarm payrolls number registered only 119 thousand, whereas the expectations had been closer to 175 thousand. Weirdly though, remember that last month the ADP number exceeded expectations, but the actual nonfarm payrolls number was a sizeable miss, relative to expectations. Perhaps the opposite could happen on Friday? Who knows. What I do know is that Standard & Poor's upped the Greek credit rating to triple C, what is thought as a largely symbolic move. Not sure if it means anything.
There were results from the folks over at MasterCard, it looked like a beat to me, versus consensus, but the stock fell in ordinary trade. Payment systems companies, some folks are starting to get excited about eBay because of course they own PayPal. The precursor to PayPal of course had names like the South African Elon Musk (who now is into fast electric cars) and Peter Thiel (who is perhaps the smartest Facebook investor, he bought 10.2 percent of the company as an angel investor back in 2004), but those two have since made money elsewhere. We prefer Visa (ha-ha) as an investment, the stock took some heat afterhours with an announcement that coincided with their earnings release, and a US anti-trust investigation.
So, Visa had results post market yesterday, here is the full release here:Visa Inc. Posts Strong Fiscal Second Quarter 2012 Earnings Results. EPS of 1.60 Dollars per share, which was a beat of ten cents per share, and a dividend of 22 US cents per share. Net income increased 23 percent when compared to the prior year to 1.1 billion Dollars, with GAAP net operating revenue higher by 15 percent to 2.6 billion Dollars. Total transactions processed were a whopping 13 billion, which was 8 percent higher. Or, 141.3 million transactions per day. I said to Byron that does not sound like a lot really, and he pointed out that 85 percent of all transactions globally are still in cash. WHAT? And which way do you think the regulators want this to move? Electronic payments will tell you everything that you want to know of course, all governments from a safety point of view. There is a holding cost of cash.
What I found quite interesting is this line: "International transaction revenues, which are driven by cross-border activity, grew 17% over the prior year to $733 million." Cross border activity? That means that people are buying stuff from other countries and using Visa's secure network. Or, tourists are using their debit and credit cards for buying stuff or services, trusting the network more and more. Which is interesting in a way I guess, but not surprising really. 17 percent? And as we said, look at that, still there are many cash transactions. And strangely, as they mention on their website: "70 percent of Visa payment transactions in the United States are not credit, but debit and prepaid" So, folks are transacting in electronic "cash" transactions.
Back to these results, which were a beat of course, and guidance for the full year which was as follows: "Annual net revenue growth in the low double digits", I read that as around 12 to 13 percent or so. Perhaps higher. Marketing expenses under 1 billion Dollars looks a little high, bearing in mind that the quarterly marketing expense ran at 170 million Dollars. Just looks "high", but perhaps just guidance. As ever there are always risks, they spell it out, rules capping the charges and further government "reforms". And then Visa talks about economic conditions like European sovereign issues, other global "problems" and currencies are also an issue too. On balance, the stock forward looks cheaper than MasterCard, and we will continue to accumulate shares of the major electronics payments system globally.
Currencies and commodities corner. Dr. Copper is lower, last at 380 US cents per pound, the gold price is also lower at 1642 Dollars per fine ounce. The platinum price is also lower at 1550 Dollars per fine ounce. The oil price, well the NYMEX WTI price is last at 104.73 Dollars per barrel, the price of Brent was last at 117.65 Dollars per barrel. The Rand is last at 7.74 to the US Dollar, 12.52 to the Pound Sterling and 10.16 to the Euro. We are marginally lower here this morning, just a little bit though! The ECB meet today, expectations are for no rate cute, but I have a sneaky outside suspicion that they could cut rates here by 25 basis points.
Parting shot. Art. I certainly do not understand the willingness to pay 119.9 million Dollars for the Norwegian artist, Edvard Munch's "The Scream". There are four of these, not all the same, but this one is the pastels version on a piece of cardboard done in 1895. The third version. I wonder what they would be sold as a set? Anyhow, this is a unique piece, so you cannot actually compare this to any other investment. Or so that is what the art people will tell us. But if you bought 120 million Dollars worth of stock, would you be better placed? Or enjoy it as much? Perhaps the enjoyment factor would be so much less, for some people. There is only so much you can get out of staring at the same painting, or have I got this wrong? Anyhow, the idea I guess will be to sell that version of "The Scream" for so much more and make a large capital gain. One just hopes that it neither burns, nor gets spoilt along the way. Pastels on cardboard? That was my initial reaction, madness, but then as far as art is concerned, I am an absolute heathen.
Sasha Naryshkine and Byron Lotter
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