Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. Our market clawed back at least half of the losses in the second half of the session, to sink half a percent after all was said and done. But, across the board there was not too much in the green. Banks lost 0.81 percent on the day, resources sank a little more by 0.85 percent whilst gold miners squeaked into the green as there started to be more excitement for the yellow metal. Because of course there were heightened concerns about the European "situation" which became less clear with a change of power in the form of a new president elect in France and a shambles (hung, drawn and quartered) of an election in Greece, if you are looking for a majority government. That is probably in need of more urgent action from the central powers in Europe than the French hop to the left, the first socialist president in a while. That is a not a problem. Greece, well they have deadlines and votes looming in weeks to implement further austerity measures.
And this vote by the Greek people was a definite vote against austerity, because there certainly were some radical decision making on behalf of the electorate. The guys who managed to rack up second place in the polls, the Coalition of the Radical Left are only eight years old and their ideology is basically against capitalism, against globalisation, against all things that I would think is sensible for moving a countries economy forward. They now have 16.8 percent of the electorate. And a firebrand youth at the helm. Yuck, I suspect that for the very first time, the fellows over in Berlin and Paris are probably not that fazed about a Greek exit. Although our line over here is that nobody wants to be out of the circle. And I maintain (write this down) that there will be more members in the circle than out of the circle. Because one exit means that it becomes easier for others to exit. But the tribe has spoken. PASOK were crushed, losing 30.7 percent from the prior period and falling to third place. At the same time Vladimir Putin becomes Russian president for a third term. Yech.
Massmart with a whole lot of announcements this morning, firstly a trading update, this is for 44 weeks to end 29 April, so literally ten days or so ago. Total sales for the group at this stage clocked 51.7 billion Rand (FY 2011 sales were 52.950 billion ZAR and FY 2010 sales were 47.451 billion ZAR), which is an increase of 14.7 percent over a prior period, 44 weeks. Kind of a strange sales update, but I guess the nature of retailers is that the work never really ends, you can pretty much in the urban areas of Gauteng shop at any retailer on any day of the week. Even public holidays. There are very few days of the year where shops are shuttered for business, especially up here in Joburg, I pretty much think that shoppers expect that. And I guess in a way it stimulates our economy, meaning that there are more working hours in which economic activity takes place.
And cheaper too. You have heard me say this a number of times too, where I quote Warren Buffett's right hand man, Charlie Munger say that he thinks Costco has done more for society by keeping prices low and by function inflation low, than any other philanthropic cause he knows. And he is right you know, the consumer is always right.
Straight into a divisional sales update, Massdiscounters clocked total sales increase of 10.6 percent (3.8 percent comparable) with inflation of negative 3.8 percent. Price deflation? Prices of a similar item going down is not altogether a good thing for the retailer, but this is certainly good news for the consumer. Margin management is far easier when prices are going up Paul weighed in, this is very true. But you can't charge people more for that bag of rice when the underlying soft commodity price is trending in the other direction. And with regards to some electronic goods, which tend to get cheaper and not more expensive, the big black box discounters struggle there. Think Best Buy.
Masswarehouse saw amazing growth with total sales growth up 19.3 percent, comparable growth sales up 11.2 percent and price inflation a modest 1.8 percent. Across at the Massbuild division, encouraging signs that the building activity and home improvement activity is on the mend (just try and get a parking at a Builders Warehouse on a Saturday morning) with total sales 11.9 percent better, comparable sales 8.2 percent stronger and inflation a very modest 1 percent. At the other division, Masscash saw sales increase by 15.6 percent, comparable sales increased 11 percent with inflation in that division up by 6 percent. Interesting that the food, liquor and groceries warehousing divisions experienced the highest inflation, but that would make sense.
So, on balance I am pleased with the sales update at this point. The market however is not as happy as I am. The stock is down over two percent, which is more than the rest of the market. So, I guess you have to be with Mr. Market on this one. Then next there is a management shuffle at Massmart, not so much a shuffle rather than a strengthening of the team. The current CFO, Guy Hayward will become Chief Operating Officer (a newly created role) and report top Grant Pattison, the current CEO. Pattison is set to (as per the release) "focus on Massmart-Walmart's strategic growth priorities for South Africa and Africa, including the implementation of the Group's Retail Food strategy." So, are we going to see more Game Foodco's and Cambridge Foods? Yes, I am guessing yes. And not just here, elsewhere in Africa too. Lastly the Chief Financial Officer role will be assumed by Ilan Zwarenstein, who has been Group Finance Executive at Massmart since 2006. Experience all around. They are bolstering the board here in anticipation of growth. And that probably means more people are going to be hired. Anyone listening out there? Byron is listening, he is checking out Massmart today and will return with some good investigating in due course. I look forward to it.
Telkom. Have they finally touched tomorrow? Phew, I spent 40 minutes on a call to their call centre yesterday, a complete waste of time. This morning there is an announcement that KT Corp 20 percent stake is actually going to happen, but at a much lower price, 25.60 ZAR, which is a premium to where the market trades now. Phew, much lower than the initial price, and still at a premium to a rough looking price. Why would you ever want to pay a premium for Telkom shares? There are four pre conditions, which include support from strategic shareholders such as the PIC and Allan Gray as well as the South African government. Those three shareholders have to agree that this is a good idea for Telkom. Then, the fellows from KT Corp are closely watching the competitions authorities and the outcome there, the number that I have heard being bandied about is 100 million ZAR fine. Which is a lot less than the billions, but still too much.
And then something that is completely vague (to me anyhow) and could mean anything, the first of the conditions: "finalisation of the transaction agreements. The transaction agreements comprise a subscription and relationship agreement and a co-source management services agreement;" Sounds like a whole lot more talking about the previous talking. I think that the Koreans are either brave and going to shake things up here, or have delusions that they can actually do that. I said to Paul, well, Naspers should buy Telkom. Naspers has a market cap of 193 billion Rands, whilst Telkom only has a market cap of just over 12 billion Rands. I am pretty sure that they (Naspers) could sweat that asset a whole lot better and provide South Africans with the network that really made business work. But it is not going to happen, not whilst the South African government has that stake in Telkom. Here are the major shareholders from the 2011 Annual Report:
At least the Government and the Government Employees Pension Fund have control at this shareholding levels, a twenty percent dilution would see that diminish. What do you think out there fellows? Do you think that the government are going to give up control of this, well, titan of yesteryear. Sarcasm alert, I preferred the Post and Telecommunication Corporation that made things possible! Telkom, their own worst enemy. If you don't believe me, phone up their call centre and see what lightening service you get. Anyone who does NOT value their client as number one is in serious trouble.
Currencies and commodities corner. Dr. Copper last changed hands at a lower price than yesterday, down at 372 US cents per pound, the gold price is lower at 1626 Dollars per fine ounce, whilst the platinum price is also lower at 1519 Dollars per fine ounce. The oil price is also lower, NYMEX WTI is at 96.87 Dollars per barrel, Brent is 112.96 Dollars per barrel. The Rand is taking a bit of a drubbing as risk off visits our screens again today, last at 7.86 to the US Dollar, 12.70 to the Pound Sterling and 10.24 to the Euro. We have started lower here today. And unemployment statistics don't look that good either.
Sasha Naryshkine and Byron Lotter
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