Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. We reached the worst point at midday, resources were getting a thrashing, in particular the precious metal producers. The platinum stocks sank nearly 2.7 percent. Lonmin talks have stalled and failed. The company has lost, by my back of the envelope calculations, a whopping 750 odd million Rands in production. Average platinum price over the last 30 days is 1525 dollars per ounce, the company has been losing roughly 2000 ounces of platinum production per day. Both the gold and platinum miners are facing labour unrest, collectively the stocks are down 18 percent plus this year, both sectors. Compare that to the top 40, which is up over ten percent and you can definitely see that "investors" have been voting with their feet. The all share index is up just over 11 percent this year, retailers are up 25 percent collectively and industrials are up a 23 percent year to date. Misery or cheer, depending on where you have been investing your money.
Wow. Again! EOH results hit the screens this morning. Revenue grew 50 percent to 3.643 billion ZAR, profits before tax rose 45 percent to 341 million Rands, profits after tax grew 50 percent to 223 million Rand. Earnings per share grew by nearly 30 percent to 254.9 cents, with the dividend increased by nearly one third to 70 cents. Cash on hand swelled by 130 million Rand to 452 million Rand, which is roughly 12 percent of the market cap. This translates to 4.54 ZAR per share, for a company that trades at 36 ZAR a share, last trade that I saw when writing this piece, of course. So roughly, the market affords the company a 14.1 times earnings multiple and a 1.9 percent dividend yield. Not cheap, not expensive, perhaps just right for a growth stock of this nature. Margins are not great, but I guess 6.2 percent for a business such as this is acceptable.
As per their presentation, which you can download, Reviewed Condensed Consolidated Results "EOH is a leader in technology and business services, the largest implementer of business applications and a provider of end-to-end solutions." Which is a pretty broad explanation of the business, but they basically provide any type of technology solution that you might want. Their customers are a broad bunch too, mining, healthcare, the state and financial services included. So it is fair to say that the company are not reliant on one specific industry to make headway. Services however form the largest revenue segment, and represents 64 percent of group sales. Software accounts for nearly 17 percent of sales, whilst infrastructure, which has the worst margins of the three accounts for nearly 19 percent of group sales.
Growth plans include leveraging off government spend, which is currently one quarter of their revenue. The rest of our continent is seen as another growth area for the group.
I quite like the company, they have certainly absolutely crushed most of their peer groups. Much of the growth has been acquisitive growth. But make no mistake, to bed down these transactions and even improve on the businesses bought, we all know that sometimes comes with enormous challenges. They clearly have the knack for spotting the competition that is worth buying, and executing on that. I am not too excited about the company looking for more government spend, and more government business, but I welcome the efficiencies that it no doubt will bring to the recipients. I am not too sure that the stock is still a screaming buy, and perhaps one should be a little more cautious than in the past. However, having said that, I suspect that their business will continue to thrive, but perhaps not show the same growth rates as in the past. However, most people have been saying that for years. And have been wrong.
Bart Simpson's shorts, digest this.
Need a new job? Mervyn King, oops sorry, Sir Mervyn is retiring as the Governor of the Bank of England. Still a way out, in June next year but the search is on for someone with "intelligence, independence and integrity". Well, good luck. My best pick is a name that has been thrown around, Jim O'Neill. But I suspect that perhaps the appointment might be under our noses, Paul Tucker. Check it out, courtesy of the WSJ: Britain Places Want Ad for New Bank of England Governor. I like that opening line: "Help wanted: Powerful central banker. Good pay, long hours, ornate office. Might get a knighthood."
Strasbourg, you know where that is right? The capital city of the Alsace region. If you know your World War One history, you will know that the city and region "went" to France. But there is peace now, lots of peace. Today however Strasbourg, as the capital of the European Parliament, sees European Commission President Jose Manuel Barroso deliver his state of the union. Here is some insight: Europe to outline banking union to tackle crisis. Right now, as I type this, Barroso is outlining the European Union as he sees it. He is calling for a federation, which will require a new treaty. He is calling for a banking union. Looks all good at face value, we will have comments tomorrow.
Lehman Brothers was a victim (and one of the culprits) of the financial crisis right? I guess so, the finger is often pointed at Lehman. So I guess you will be surprised to read that Lehman is alive and kicking, in a very different format, this New York Times article is fun to read: Lehman Brothers, We Heard You Were Dead. Lehman should be officially wound down in 2017, nine years after they declared bankruptcy. Tricky business, but I am guessing for the folks unpicking it, "nice" easy work.
The Zuck gave an interview yesterday. His first since the stock listed, you can catch it all here, from Techcrunch: Zuckerberg Talk Drove Facebook Stock Up 4.6% In After-Hours Trading. There is an associated video that I am trying to watch, it is rather long though. Still, I will try get to it! Clearly Mr. Market liked it!
Apple will supposedly unveil the newest iPhone today. Not quite the iPhone 4, because the 4S came after 4. There was of course no iPhone 2, we went straight to 3. For 3G, I think, the 3GS was a better version. Cnet are following it if you want to feel it and be a part of it: Apple's iPhone event: Join us Wednesday (live blog). And then the link to the live blog: CNET's Apple event live blog (Wednesday, September 12). Because each release comes with more anticipation than the last, the stock could have quite easily set us up for something big, another huge leg up, and equally another fall. One way or another, this is a huge event!
The German court rules on the ESM emergency "challenges". Paul told me that the verdict is 85 pages long and that it will take 90 minutes to read. The gowns worn by the judges have a certain sheen to it, red. Not so stylish. And their hats, well, I cannot say that I am a fan of those either. The actual finding was to allow ratification of the ESM pact, BUT there were certain conditions imposed. Which included a cap of 190 billion Euros, without the lower house approving it. Which sounds to me like the lower house could approve something bigger, if they wanted. Ah well, let this wash around for a while. Equity markets are making headway shortly after this ruling. Yields are falling on the peripheral debt. Sounds like good news to me. The Euro is much firmer, heading for 1.30 US Dollars per Euro. Improving outlook.
Want to make 104 million US Dollars? There is a catch though. You would have had to spend 31 months in jail. This actually happened, the IRS in the US awarded a whistle blower that sum of money for lifting the lid on dodgy rich Americans looking to skirt tax rules. Check out the story via Bloomberg: UBS Whistle-Blower Secures $104 Million Award From IRS. Two things here, banks will be more careful with their business and perhaps take less risks leading to lower profitability (but you knew that already) and secondly, compliance will be much higher at banking institutions. Leading to dare I say it, less revenue generating staffers. Which also leads to lower profitability. This is however good news.
Alongside the Apple event today, the most exciting event this week will be the FOMC announcement tomorrow. Citi reckon, which I gathered through this piece, Bernanke likely to announce QE3: Citi, the Fed is going to target Mortgage Backed Securities. And perhaps even announce that rates will stay lower for longer than initially anticipated, perhaps all the way through to the end of 2015. Whoa! But let us not detract from the Apple fanboys and girls, today is about them!
- Byron's beats is amazing today. He is passionate about this, but we all are, Lonmin.
The Lonmin saga is an emotionally charged issue with many passionate opinions from all social, cultural and income groups. In fact most of the commentary I have seen from a social context has been in favour of the miners. And this is from people who are privileged and understand the laws of economics. Here at Vestact we have covered it in a subdued manner, steering away from any emotionally charged debate because we mainly focus on the financial facts. Because this is an opinion piece I am going to give my honest opinion based on emotion, financial reasoning and conscience.
Firstly let's look at Lonmins numbers (I am getting these from a combination of financial reports, annual reports and media articles so please correct me if I am wrong). For the 6 months leading up to March this year the company lost $18 million. This was due to cost pressures from electricity tariffs, above inflation wage increases a low platinum price and capital expenditure to increase and improve mine shafts. Most of which are out of Lonmin's control. This was on the back of $1568/oz average platinum price achieved. The price as we speak is at $1629/oz but the average achieved in Lonmin's second half will be comfortably below $1500/oz because the price has only rocketed in the last few weeks because of these exact production concerns.
Now let's look at wages starting with management. Sasha wrote this the other day after looking at their 2011 annual report. "Non execs are paid handsomely, the total for the 2011 financial year was 861 thousand pounds. The three executive board members, Ian Farmer, the CEO, Alan Ferguson, the former CFO and Simon Scott, the current CFO collectively pocketed 3.416 million pounds, including 640 thousand pounds in annual bonuses. These are all clear as daylight in the annual report. That amounts to roughly 44.6 million Rands all in (including salary and benefits), and can actually be directly attributed to two persons. Two."
The 28000 workers are demanding to clear R12500 a month. According to Lonmim they pay the miners more than the R4500 they are claiming when you include bonuses, housing allowances etc. The real number is more like R9300. R12500 is 25% more than what Lonmin already pay their workers which should cost the company an extra R90 mil a year.
Now that we know the finances let's look at the options. If the execs took a pay cut, which I 100% agree they should, it will make a difference but only a small one. We also have to realise that the execs are highly skilled people with many options. If they are not paid enough they will move somewhere else and the company will lose the skills it needs to operate. A balance needs to be found. Management needs to take some of the blame for neglecting the conditions of the workers and believe me, many who own shares have paid the price. The stock is down 40% since April.
The miners cannot expect a 25% wage increase. I understand conditions are tough but the money is just not there. The company will have to shut down the mine which means 28000 people will be out of work. That is the hard truth. I understand that it is easy to sit in my comfy office and say this, but we are not a communist state. That system has proven time and time again that is does not work. These are unskilled labourers whose productivity has in fact decreased in the last year while wages have increased. This is unsustainable in the competitive world we live in. I say this again, the world is competitive so either compete or go it on your own. Just ask the people of Venezuela how that is going for them, nationalisation.
I also fully blame government for letting unions get to where they are. They have been allowed to mobilise workers as they please and to completely ignore previously signed agreements deeming them unreliable. Get the unions in check, labour laws are too rigorous in this country and it will bring us to our knees. For the 3rd time we need to compete with the rest of the world or go it alone. The former is by far the better option.
My solution for Lonmin. Install an incentive based remuneration system based on hours worked and productivity. That way, miners are paid in relation to how much they bring to the company. I am not sure however whether our labour laws will be flexible enough to implement this system. I'd expect unions will be also be opposed to it to. They should also pay more attention to working conditions. It erupted at Lonmin specifically for a reason, they have been slack with this. It is in their (Lonmin) best economic interests to keep workers happy. Lastly management must take a cut. The company is losing money, they do not deserve huge bonuses. The remuneration however must be high enough to keep the skills there.
My solution for government. Amend labour laws and get our unions in check. It's harsh, capitalist in nature but I honestly see no other way. (I understand that votes of the masses need to be considered, that is why this debate is so difficult. It needs to be done subtly.) This mindset of illegal strikes with an absolute all or nothing approach is spreading like wild fire and government need to intervene now. Starting with Julius Malema. He is causing havoc. Like skilled labour, foreign investment also has choices and right now everyone is losing faith in our once loved mining sector. That right there, is affecting all of us.
Currencies and commodities corner. Dr. Copper is last at 367 US cents per pound. The gold price is starting to head higher, last at 1742 Dollars per fine ounce. The platinum price, with all the above problems for the producers is higher at 1633 Dollars per fine ounce. The oil price is also higher, last at 97.93 Dollars per barrel, the highest level since May. The Rand is weaker, 8.20 to the US Dollar.
Partly cloudy with a chance of something. Hooray for the German chief justice! A fellow by the name of Andreas Voßkuhle, who is rather young, appointed two years ago when he was 46. But today will be about the Apple iPhone, until then we are much higher.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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