Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. Yesterday was a fairly interesting day for equities markets, as every day almost always is, but because we are in the first bit of earnings season, it is *nice* to see the market responding to earnings, rather than getting anxious about Greek elections of Spanish bond yields. Don't get me wrong, I am not suggesting that those "things" are not important, but ultimately the levels of companies stock prices are determined by their past, current and more importantly future earnings. And not what happens in Greek politics. Or whether Spain must struggle to meet their future obligations, their funding costs might be high now, but they have been much higher in the pre Euro era. That does not matter over the long run. And wait for it, as I read on Twitter, someone pointed out that six countries had negative yields on their very short term debt. And the fellow suggested that was a bubble. Probably right too, why would anyone ever think of that as an investment, rather these instruments are being used to park money for the short term.
Session end here in Jozi we saw the all share close up 329 points, or 0.97 percent to 34035 points. Back above 34 thousand points! Yeah. Sasol had a cracking day, thanks to a much higher oil price, which some are suggesting have been manipulated. The oil price, and not Sasol. Phew, the participants are many and the trading of oil contracts is huge. Plus, we all use the stuff all the time, I used the processed product on my way to work this morning, you would have used it too. The goods you buy, the services that you use, they were all connected to energy prices, oil prices. So, until we all travel on transportation powered by the suns rays, or battery that gets its energy from elsewhere, oil is going to be the most useful everyday commodity.
Every day we use around 86 million barrels of oil a day, collectively. Oil consumption is expected to peak in around 2030, to be around 105 million barrels a day. Resource stocks added over one and one tenth of a percent, no thanks to the gold stocks, which sank one and two thirds of a percent. Retail stocks sank 0.6 percent, notwithstanding the very good retail sales number locally, but these were for the month of May, here in the middle of July, seems a bit slow, not so? Check it out Retail trade sales (Preliminary) May 2012 from the StatsSA website. Nice, upside surprise.
And that tees up the announcement out of the MPC a little later this afternoon. Governor Gill Marcus and the team would have fresher data at their disposal, including the release of Consumer Price Index June 2012 yesterday. And as per the release: "The headline CPI (for all urban areas) annual inflation rate in June 2012 was 5,5%. This rate was 0,2 of a percentage point lower than the corresponding annual rate of 5,7% in May 2012. On average, prices increased by 0,2% between May 2012 and June 2012."
Annualise the monthly rate and you are looking at a very tame inflationary environment, which would and could mean that the MPC would have scope to cut rates. But I suspect that they will not. I wouldn't be surprised if they did cut rates, but in the bigger picture credibility is also key. I am reminded that JC Trichet hiked rates too early and was stubborn about cutting rates later on as his tenure came to an end. I am expecting no rate cut.
Vodacom have released a trading statement this morning, for the period to end 30 June 2012. Subscribers have topped 50 million across the whole group, that is an increase of nearly 30 percent over the year. In South Africa the number of subscribers jumped to 31 million and grew by the same click. Operations outside of South Africa (Lesotho, Tanzania, the DRC and Mozambique) increased to 19 million folks. There was a big jump in M-Pesa (mobile payments) numbers in Tanzania, up to 3.6 million users, a monster gain of 120 percent. Group data revenue contributed 16.6 percent of overall revenue, whilst overall revenue gained 9.3 percent.
In South Africa the group saw strong growth in active smartphone users, jumping over 40 percent to 4.9 million folks. Average usage though looks still pretty low at 120 megs per user per month, we use too much around here, we are heavy, heavy users of data, by South African standards. But here is the part that gets everyone anxious, the data revenues increased by only 10 percent because Vodacom (in this case) reduced their pricing per megabyte by 26.1 percent. So that is why Vodacom struggled and saw revenue growth of only 1.8 percent to 11.769 billion ZAR. But that was more than offset by strong revenues from their International businesses.
From the official release, Vodacom Group Limited trading statement for the quarter ended 30 June 2012, outgoing Vodacom CEO, Pieter Uys made the following very valid point: "The connectivity revolution is well underway with close to 16 million customers actively using data, up 43% from the prior year." This is of course why we think that the mobile companies are not ex growth, as management quite clearly point out, they are seeing more people using more devices to access data, the connectivity revolution.
There were two things that made me scratch my head, I wondered why the number of subscribers outside of South Africa had fallen so much, but then I read the fine print under the subscriber numbers: "During the quarter ended 30 June 2012, Tanzania, Mozambique and Lesotho changed their disconnection policy from 215 days inactivity to 90 days inactivity. Prior period numbers have not been restated." That was solved, but the other issue was the fact that ARPU's are under pressure here, which is good for the consumer, but not necessarily good for the mobile service providers. Blended ARPU's are falling, currently they are 130 ZAR per month, whilst in the December of 2010 quarter, ARPU's were 186 ZAR per month. There are of course 12 million more subscribers in South Africa now, than there was back then. The mix is shifting, the challenge is for the handsets to become cheaper over time, which I guess is not good for someone else, think Nokia in that regard, they have just discounted the Lumia heavily. We will pay closer attention when the numbers hit the screens in the coming weeks.
Oh dear, not another trading update like the last one. I am referring to a late announcement from Amplats, after the market had closed yesterday. Here goes the ugly: "Headline earnings per share ("HEPS") for the period is expected to decrease to between 270 cents and 280 cents from 1,236 cents reported for the six months ended 30 June 2011." Is that it? Well, the stock got completely crushed this morning at the beginning of trade, down to as low as 407 Rand a share. It has settled to be down around two and a quarter percent on the day, on a day that the markets are doing pretty well.
OK, so why are "things" looking worse than the horrible environment that we already know about? Well, there are some things that you would have known about if you were paying attention a little closer: "The expected decrease in HEPS is primarily due to lower sales volumes and lower realised prices during the first half of 2012. Platinum sales volumes for the period were lower primarily due to the delayed restart of the converter plant post its annual maintenance." And then of course the more important factors, some would say that these are permanent in a sense: "HEPS for the period has also been adversely affected by higher than expected industry cost inflation, particularly for labour, diesel and electricity." Perhaps diesel prices, those will fluctuate the most out of these three costs.
But wait, it gets worse than this, because as a result of "a loss of R256 million resulting from revaluation of the Company's investment in Wesizwe Platinum Limited and once-off accounting charges of R388 million (post-tax) and R505 million (post-tax)for the writedown of the Tumela 4 shaft project and suspension of Marikana operations respectively," basic earnings per share are expect to show a loss of between 175 to 185 cents. Ouch. Like I said when Aquarius announced that they were mothballing shafts, we tend to just shrug our shoulders, but on more emotive issues, such as a painting, well then we will march. I suppose the one is linked to the economic woes of Europe (Amplats product), but the other we should be talking about. And raising the issues around higher wages linked to productivity. I mean, why not?
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Markets rocked last evening on Wall Street, Microsoft, Intel, IBM all made great gains during the course of the session. Only financials were a drag, Bank of America looked like a beat in earnings to me, but the stock sank nearly five percent. Wow, the ride recently might have been volatile, but over the last ten years the stock is down nearly 80 percent. Granted that most of that sell off was from October 2007 (52 Dollars a share) through to March of 2009 (just above three Dollars a share) to the current share price, present day of 7.53 Dollars. So, as ever, it depends where you bought the stock. Back in the go-go days of 2007 the company was paying 64 cents per quarter worth of dividends, when they hit on hard times the best that they could do in 2009 was a single cent worth of dividends per quarter. Yech.
It is still at that level, the dividend, one cent a quarter. Peanuts, but better than nothing. The explanation on why the stock took a beating is apparent in this piece in the New York Times Dealbook section: Bank of America Posts $2.5 Billion Profit, but Mortgage Woes Remain. See that, the mortgage book continues to weigh heavily on the business, some deals with the benefit of hindsight seem to have been ill conceived, but the Countrywide Financial one, well that was just plain awful! Some folks still think that Bank of America is quite possibly the best opportunity in years, others, well, not so much.
Byron's beats looks at a sector that I like a lot. Food. Fast or not, food is something that humans need, in the same way that we need fuel for our vehicles. Sadly we all like eating a lot more than we ought.
- Yesterday we had first quarter results from another multinational company which I'm sure you are well aware of. Yum! Brands the owners of KFC, Pizza Hut and Taco Bell (which is a massive Mexican food chain in the US) managed to grow earnings by 1% but maintain their full year growth target of 12%. Here is how the company introduce their presentation.
"Louisville, KY (July 18, 2012) - Yum! Brands Inc. (NYSE: YUM) today reported results for the second quarter ended June 16, 2012 including EPS of $0.67, excluding Special Items. Reported EPS for the quarter was $0.69. Based on first-half results and current solid sales trends, Yum! reconfirms full-year EPS growth forecast of at least 12%, or at least $3.22, excluding Special Items. The Company also raises new-unit forecast to a record 1,700 new international units for the year, including at least 700 new units in China."
Let's take a look at the numbers. Total revenues for the quarter grew 12% to $3.168bn. The reason for the big increase in revenues compared to a small growth in profits was a margin decrease in China due to food inflation. The country had bad weather last year but this is being normalised, we have seen this from recent Chinese inflation figures. So expect this to change in the second half of the year. Margins in China went from 19.7% to 15.6%
The share trades at $64 putting them on a one year forward PE of just less than 20. McDonald's trades on a one year forward of 16.6 while here locally Famous Brands trades on a one year forward of 18.7. Many have been calling Famous Brands expensive following their fantastic run recently but I guess these figures put things into perspective.
They put huge emphasis on China and as you saw above plan to add 700 units in the country this year. That is 41% of all new stores and have already added 160 this quarter. In the US same store sales grew by 7% while margins improved drastically from 11.7% to 17.5%.
The company has good international exposure, great brands and is expanding in the right areas namely China and India. It is certainly one we like but I will have to agree with Sasha on this one. McDonalds is our preferred entry into this sector. It looks cheaper and the brand is just as good if not better.
Currencies and commodities corner. Dr. Copper is higher, at 350 US cents per pound, the gold price is a little higher at 1582 Dollars per fine ounce, the platinum price is also higher at 1413 Dollars per fine ounce. The oil price is last at 90.71 for NYMEX WTI. The Rand is firmer, last at 8.15 to the US Dollar, 12.77 to the Pound Sterling and 10.06 to the Euro. We are over half a percent better.
Sasha Naryshkine and Byron Lotter
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