To market, to market to buy a fat pig. Better than anticipated German confidence numbers gave us a really good lift across the board, Germany's DAX rose 1.6 percent and some change. France's CAC went better, adding nearly 1.9 percent on the day, the FTSE closed up nearly a percent on the news. Most of these markets all buoyed by that ZEW data. The ZEW is a non for profit research organisation, staffed by 183 odd (very smart no doubt) folks who publish all sorts of economic papers. And this monthly sentiment read as per their website is where around 350 financial experts are surveyed. Interestingly, not only does the survey ask about Germany, but also the large economies of the world too, including the Eurozone.
Unfortunately the yellow metal is getting no loving. This is really bad for our local miners, who after having worked hard at downsizing to more profitable ounces produced, now they have to deal with a weaker metal price. The most unfortunate part comes as Gold Fields unbundles Sibanye Gold from their stable, to focus on their higher quality assets. Adding the two share prices back together and unfortunately the move has coincided with a gold price that has been crushed. When the company announced the split, the Gold Fields share price was at 105 odd ZAR a share. Add the current Gold Fields price, last at 8269 and Sibanye Gold, last at 1269, and I get to nearly 95 and a half Rands. A drop of over 9 percent. Granted, the Rand has strengthened and the gold price has fallen in that time, but at face value many will say, "oh well that didn't work". A year or two of results first before making those comments, but it might not look pretty in a while from now.
We have a long standing {insert word that rhymes with spoke/smoke/broke} in the office here, where Byron can't sleep before the BHP Billiton results because he is so excited. Of course that is not true, but we always have a chuckle. Not laughing I guess is Marius Kloppers. Or perhaps he is, who knows? We did know that he was going to retire at some stage, that was telegraphed last November. This morning, along with interim results, Marius Kloppers has announced his resignation. No doubt to spend more time with his fishing rod, I mean his family and garden. Kloppers has been at the helm of BHP Billiton since the 1st of October 2007 when Chip Goodyear resigned. Previous to that Kloppers ran the Non-Ferrous Materials division, and has been at the group since the beginning in 2001. Kloppers went to school just down the drag here, at the corner of Jan Smuts and Empire, at Helpmekaar.
Kloppers has worked at Mintek and Sasol for a short amount of time. He first however obtained a chemical engineering degree from Tuks and then he managed a Phd from MIT. That was not good enough, he went on to get an MBA from INSEAD. And he is a vegetarian, so no horse meat has passed through those lips. I found quite a *nice* old bio in the FT of Kloppers, it is worth a read: Man in the News: Marius Kloppers. Because the retirement coincides with an expected slump in profits, comparisons are drawn between Cynthia Carroll of Anglo American and Tom Albanese of Rio Tinto. But, if you quickly look at the respective share prices from when Kloppers took over, you can quickly tell that he has done a whole lot better. Kloppers took over on the 1st of October 2007, the month coincidently that the Dow Jones and S&P 500 reached their all time highs, so that should have been near the top I guess. Since then, to present day, BHP Billiton is up 35 percent in London. The FTSE 100 is down over a percent since then. But more importantly, if you want the Carroll and Albanese comparison, then you will quickly see that Anglo American is down 37 percent since then, and Rio Tinto is down 8 and a quarter percent. So there you go, if you needed a comparison.
Kloppers is young, only 50, I suspect that he will pop up somewhere soon, there would be a certain irony if he went on to replace Andrew Liveris (an Aussie by birth and in contention for the BHP Billiton job when Kloppers got it) at Dow Chemicals in the US. So, good luck to him and what looks like a really tight family. The fellow replacing Kloppers looks like a magnificent replacement. He has extensive mining and petroleum experience, having worked for both Rio Tinto and BP. This replacement does tell me that BHP Billiton are increasingly going to move towards the energy side of their business, something that they have been doing already of course. Andrew MacKenzie was actually hired by Marius Kloppers from Rio Tinto, where he spent 4 years, the previous 22 years had been at BP. In his last years at BP, MacKenzie was working for BP's petrochemicals business in the US. He seems like a wonderful replacement, I suspect that he definitely will be a one term guy, six odd years, because by that time he will be 62 or so. An excellent end to a career at BHP Billiton and a wonderful replacement in the form of MacKenzie ushers in the "energy" era for BHP Billiton.
Now, we can actually get to the interim results themselves having dealt with the management change over at BHP Billiton. Revenues decreased by 14.1 percent to 32.2 billion Dollars. Phew, that is a big number for a materials company. Underlying EBIT fell 38 percent mostly as a result of inflationary pressures, a weaker US Dollar and of course the most obvious one, lower commodity prices. Better volumes and good cost controls were not enough to offset the decline in underlying commodity prices. Profits excluding exceptionals clocked 5.7 billion Dollars, but attributable profits including exceptional items of 1.4 billion Dollars slumped 58 percent to 4.2 billion Dollars. This is the part that you could be forgiven for thinking that Kloppers was pushed as a result of lower profits. The last time I checked, Marius Kloppers himself had very little sway over commodity prices. The company continued to divest from non-core assets, remarkably asset sales totalled 4.3 billion Dollars (announced and completed) for the half. Astonishing, translate that to Rands at the current exchange rate, 8.835 and you get to almost 38 billion Rands. Or basically a company locally that would just sneak into the top 40. Wow.
The impact of the lower commodity prices was across four divisions, Iron Ore where total price variance was 3.169 billion Dollars. Phew. Metallurgical coal experienced a similar thing, total price variance in this half topped 1.6 billion Dollars. Add in energy coal at 439 million Dollars and the Aluminium and Nickel business at 385 million Dollars, and there you have the difference. Held sway by the fast moving commodity prices and a function of supply and demand, restocking and running down of inventories, who knows the truth behind the Chinese slowing? That leadership change conference in November was key, both to confidence in the Chinese economy as well as the newer leaders being committed to continued infrastructural development. That said, Chinese commodity demand is moderating, expectations are still however that demand growth rates are set to be in the 2 to 4 percent range per annum for BHP Billiton's core products. Energy, copper, iron ore and metallurgical coal no doubt.
The sensitivity of the moves in the underlying commodity prices is remarkable, a one Dollar a ton move in the iron ore price has a 110 million Dollar impact on the company. A one Dollar move in the price of a barrel of oil amounts to a 45 million US Dollars swing. The other big factor is a one cent move in the Aussie Dollar relative to the US Dollar, that swing is as much as 110 million Dollars. All these important swing factors are found on slide 34 of the BHP Billiton interim results presentation. The last slide is most interesting, their three core businesses, the petroleum, iron ore and base metals all separately have higher EBIT margins than the average group margins. Equally, margins have been falling in an "uncertain" commodities pricing environment.
The company announced cost savings of 944 million Dollars, around 1.9 billion Dollars on an annualised basis, shareholders will no doubt be pleased with these initiatives. But the part that we care about most is direction, and perhaps always in the present, valuations. Excluding exceptional items, the company made 106.8 cents per share, a 43 percent drop, but still boosted their dividend by nearly 4 percent to 57 US cents. At current Rand/Dollar exchange rates that translates to 9.43 ZAR of half year earnings and a dividend of 503 cents per share. On these numbers if you annualise the half, the stock is not dirt cheap anymore. But, and this is a big but, I suspect that the gas assets will start becoming more and more important to the future of the company.
The few research notes that I have read so far suggest the appointment of MacKenzie means business as usual at BHP Billiton and no earth shattering deals. The company will continue to invest in their businesses where they see future demand. This is key to the future, it might sound like a simple thing to get right, but this company has importantly the quality, the geographical and commodity mix diversity to see you through the cycles. And the last cycle was severe, about as bad as you are going to see. We continue to recommend this company as the core part of our client portfolios to leverage off the longer term commodities consumption story in developing countries.
- Byron beats the streets. Yesterday we had another trading update from a big recommended stock, Bidvest. And it sure was a nice surprise. But, like the Massmart one, there were lots of moving parts. You see, last year they sold a stake in Mumbai International Airport which resulted in an abnormal profit of R399 million. That means that the last comparative period has an abnormally high base.
The statement says that if you exclude the abnormal profit (which is perfectly normal as it is a once off) headline earnings per share are expected to be between 17% and 19% higher for the 6 month period ending December 31 2012. This is compared to the 6 months in December 2011 where the company made 613c.
If you add 18% middle of the range to 613c we should be expecting R7.23. Expectations for the full year are for around 1527c of earnings. This makes sense, the second half normally outperforms the first. Trading at R232.50 the stock trades at 15 times this year's earnings. But that is not the only reason we hold them. We feel there is a lot of value to be unlocked and the sum of the parts is worth more than what the market affords the stock.
As far as growth in earnings is concerned, 18% is very commendable for a company who boasts revenues of over R139bn. They are a great proxy for growing economies around the world and then of course you are buying the M&A skills of the legendary Brian Joffe who I am told is one of the most talented negotiators in the country and clearly has a great eye for a good deal.
Bidvest made two deals at the end of last year which looked very compelling, targeting the growth of the South African consumer. That is how conglomerates work. They use their size and scale to take a small business and grow it faster than if it were operating independently. It makes perfect sense, access to capital, lots of potential synergies and of course the intellectual talent the company has built over the years.
We are optimistic about global GDP growth and even more optimistic that Bidvest can outperform that. The stock price has had a good run of late, coming from R180 midway through last year to R232 today. When the full set of numbers come out we will look at the actual business in more detail but as far as the trading update is concerned, we are happy to add to the stock even after the share price has rallied.
Crow's nest. Local CPI was lower than anticipated, which is great. BHP Billiton is getting drilled, this is not what people were looking for, even though surprisingly it was a beat. It is pretty much lower across the commodities complex this morning. The gold price is below 1600 Dollars per fine ounce. Yech.
Sasha Naryshkine and Byron Lotter
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