To market, to market to buy a fat pig. Gold stocks, platinum stocks and generally commodity stocks as a whole had a horrible no good day in Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E, sending the broader markets lower. The Rand was firming up, but generally metal prices were trending softer through the day. As such we trended lower, we caught a bit of a revival from the US markets, but that was short lived. The only thing that irks me about summer time is the less US trading time that we get. And the void that is the first hour, when we wait for European markets to come online. And of course the traffic lights that don't work that snarl up my traffic progress. That irritates me about summer time, the poor JRA must be pulling what ever hair they have left out!
I guess locally we should talk about a PMI number which was improving, but still below the 50 mark. 49.5 to be exact. Check it out here, the Kagiso Purchasing Managers Index, November 2012. On the negative front the business expectations number was lower but that was marginally offset by an improving employment picture. That is always a very good thing, right? Improving employment is an absolute must in a South African context, sadly the headline from TimesLive this morning about our inability to be mathematically efficient is somewhat disturbing. Ok, deeply disturbing, this is the article: SA pupils can't read, count. And as usual, of course there is no person who says that they are to blame for anything. Nope, wasn't me! I am guessing we are all in this together. Unfortunately another negative in the PMI was the fact that the costs picture looked worse too! So, we can't read and write and we can get paid more, something does not quite stack up there. We have to improve education in South Africa. Make it a passion, or somehow cool.
There were two big announcements from Sasol which we will explore a little later in the newsletter, first there was the CFO quarterly letter, which was a little disappointing for the market I suspect, but that was also with a generally weakening commodities market, as I said above. Inside of the letter was a huge announcement. Something that we have been waiting for, for a long, long time. I shan't spoil the surprise, more on that later.
And then there was an announcement as the market closed yesterday, at five pm. And forgive me for getting outraged here, but seriously, WTF are Telkom doing changing their name to Telkom SA SOC Ltd? Seriously? SOC is state owned enterprise. Now, unless I am wrong and the government have increased their stake to 50 percent plus, how can Telkom be a state owned enterprise? Remember this piece that I wrote back in June: Telkom, Vodacom and government holding. Government owns less than 40 percent, which means that they are a minority. Sure, the PIC might own 10.89 percent, but isn't that the pensions of government employees? Not government, but people who work for government, surely those are two separate things. And by the way, changing the name does nothing for ordinary South Africans getting cheaper bandwidth, or even access to bandwidth. Ordinary South Africans have been voting with their phones, smarter handsets means greater bandwidth, which means lower mobile data charges.
Markets were unfortunately heading in one direction in New York, New York. 40o 43' 0" N, 74o 0' 0" W and that was down. Stocks started much higher at the beginning of the session but then faded to close around half a percent lower for both the Dow Jones Industrial Average and S&P 500. Tech stocks just managed to hang onto the 3000 mark, falling around one quarter of a percent. A rather sloppy looking ISM Manufacturing number which derailed somewhat the positive sentiment that has been floating about. The general idea that the economic news has been improving. I suspect that it has, the outlook is less problematic as more issues have been solved. The small matter of the fiscal cliff needs some sort of resultion.
The SASOL CHIEF FINANCIAL OFFICER UPDATE, 3 December was released yesterday. The highlights are many, including a production record at Oryx in Qatar, as well as another cracking (no pun intended) performance from Sasol Synfuels. The weaker Rand helped Sasol, the currency has of course weakened by 5 percent since the end of the Sasol financial year. And the Rand continues to remain weak, whilst the oil price has stabilized at these sorts of levels currently, which have been surprisingly stable. Amazing, in fact, if you think that for the better half of two years the oil price has been range bound and mostly in the 90 odd dollar range for WTI. Occasionally, like at the beginning of last year the oil price spiked when there were more than just a few issues in North Africa, the Arab spring. Sadly for the people of Syria, this is ongoing. It is disastrous to think that in a time like this, 2012, there are atrocities like that happening. I guess progress is relative to where you live.
The announcement that struck us as a "this changes everything" type announcement this: Sasol commences the front-end engineering and design (FEED) phase for an integrated gas-to-liquids and ethane cracker complex in Lake Charles, Louisiana, which of course is in the US of A. Why does this change everything in our opinion? Because if you do not have a serious presence in the US, even though you posses world class technology at that sort of scale, then prepare for a lower valuation. I guess that is the sad way of looking at it. Costs for this plant in Louisiana are expected to be between 11 to 14 billion Dollars. A mere 97 to 124 billion Rands. As a percentage of their market capitalisation, at the top end of the range, that is more than 50 percent. Now you get the sense of how big this really is. Add on top of that the cracker costs at the same place of between 5 to 7 billion Dollars (44 to 62 billion Rands) and at the top end of the range this plant collectively at Lake Charles will cost 186 billion Rands. That is more than three quarters of their current market capitalisation. Wow. Now you can appreciate the size and scale and our comments earlier that this really does change everything.
At full production, sometime in calendar year 2019, Sasol will produce 96 thousand barrels a day of "high quality transportation fuel, including GTL diesel and other value-adding chemical products" as per the release. And the cracker will "produce an estimated 1,5 mtpa of ethylene with downstream derivative plants." Let me just make this clear to you, this will be the biggest project of its kind in the US, and the second biggest gas-to-liquids plant on the planet, after the disastrous Shell project (Pearl) in Qatar. Disastrous for Shell because of the overruns and costs that exceeded budget by a factor of three! The cost ended up being a whopping 19 billion price tag for Shell. And costs, operational costs for Shell were more than they anticipated. So, as you can understand right now, there are more than just a few concerns about Sasol's ability to be able to execute on this sort of size and scale project.
This is the culmination of long and hard work, getting it "right" in Qatar after lots of teething problems, and exploring the USA option for about a decade now. The fact that I can read into the US being a better option over the Canadians is fairly interesting, perhaps location was key. As Sasol say about Louisiana in their wonderful (you must read it) report titled Value through excellence. Unlock the full value of natural gas. Gas-to-liquids: "The area was clearly poised for further growth and investment, and Sasol envisioned a partnership yielding significant benefits for the company, the community and state. A sizeable capital investment made a multi-million dollar impact on the region, yielding 50 new positions for research scientists, chemists and engineers. Also, by partnering with Louisiana universities, Sasol's R&D facility has helped enhance university programmes and enrich the educational experience of numbers of Louisiana students." This is hugely beneficial for the local economy, but the New York Times in the aforementioned article has their reservations.
The full release, jumping back to the guts of the Sasol announcement yesterday, indicates that the synfuels guidance for the full year was re-affirmed at 7.2 to 7.4 million tonnes for 2013. Interestingly the guidance for earnings for the full year uses the word "solid", I am not exactly sure how you would quantify that. Solid suggests no problems.
So that was the biggest announcement for us here, on the Sasol front yesterday. And even though first production in Louisiana might only be 2018, that is a full six years away. Jacques Kallis would have retired by then I guess. He is amazing. And to think that he had many detractors whilst he was on his way to greatness. Perhaps Sasol are a little like that too. A South African gem with unrealised greatness by the investment community, nothing like a full production plant in the USA just to attract a different set of investors. Who could of course re-rate the stock to a better valuation for all concerned.
In trying to explain this not so technical to understand piece, the analyst community have pencilled in 45 ZAR earnings for the current financial year and 44 ZAR the next year. So to be fair to the current share price, earnings are expected to taper off through to June 2014. And 2015, which seems like a long way away the expectations are for just less than 47 ZAR. But even if the stock was re-rated to a 12 times earnings multiple, at the current expectations we would be closer to 540 ZAR. Instead of that that lofty price, we find ourselves at 370 ZAR, there and there abouts. Roughly 8 times forward earnings, with a forward yield of nearly 5 percent. This is not uncommon though for oil and gas companies, just yesterday I was looking at the largest Italian oil company Eni SpA trades on a 9 times earnings multiple with a 5.7 percent dividend yield. ExxonMobil, the big daddy of them all trades on an earnings multiple of 9.25 with a dividend yield of 2.6 percent. Sasol are going to have to do a lot to convince investors that they should pay up for a more profitable entity. Therein lies both the key and the risks currently. This is a huge step forward into exciting territory. We continue to accumulate the stock on weakness.
- Byron's beats
Bidvest have been very active over the last few weeks. Well I say last few weeks but these deals have obviously been discussed and evaluated in meeting rooms for months. Besides that point, the company has made two announcements indicating intentions to buy two separate companies.
The first announcement was a firm intention to purchase the remaining stake of listed company Amalgamated Appliance Holdings or AMAPS for R740 million. They already own 27.5% of the company and want to buy the rest. Amap's specialise in the sales and marketing of branded household goods like Hoover, Russell Hobbs, Tedelex, George Forman, Pineware, Sansui and TDK. They have the rights to sell many more of these brands.
The company has been doing well, from 2009 until the end of last year the company traded in a range around R2 a share, the Bidvest offer came in at R3.50. Revenue for the year ended June 2012 was up 20.5% compared to 2011 while operating profit was up 21.7% (to R84 million) compared to the previous reporting period. It is understandable, as households grow and more people enter the middle class these appliances will be bought. When the long awaited housing market turns in SA this company will be perfectly situated to boom. Here is the rational from the Amaps SENS.
"Bidvest believes the Transaction will enable AMAP to continue to service its customers more efficiently and after forming part of Bidvest the offering to AMAP's customers will be significantly enhanced. Conversely AMAP will benefit from being able to offer its products to the wider customer base of Bidvest."
The next announcement is to buy the entire issued share capital of Brandcorp Holdings from private equity group Ethos. Paul and Sasha reminded me that Brandcorp was once listed (before my time) and were taken off the market by Ethos. According to their website they are a similar company to Amaps, distributing niche industrial and consumer products. Consumer products include Polo, Disney, Barbie, Cellini, Hello Kitty and Hannah Montana. Industrial Brands include Hitachi, Wera and Pratley. For the same reasons that Amaps has a bright future, so does Brandcorp.
As shareholders of Bidvest, even though both these announcements are fairly insignificant in the bigger scheme of things for the company I take away two things. The first is that Brian Joffe still sees opportunities out there, especially geared towards the South African consumer. That is certainly a good sign because he has a knack for making good acquisitions, probably amongst the best deal related timing in the country.
The second is that both these companies have good potential synergies with each other and the Bidvest group. By gaining access to their massive distribution and client networks these companies can take it to the next level. Bidvest using their size and scale to dominate, that is what conglomerates do. We are happy to see the company doing what they do best.
Crow's nest. We are lower here today to start with. It is non farm payrolls week, which means that everyone starts up the prediction machines, starting tomorrow.
Sasha Naryshkine and Byron Lotter
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