To market, to market to buy a fat pig. The ECB had their rates decision yesterday, obviously there was nothing to be done in that regard, the most important thing is the statement and the Q&A segment after that. There were concerns expressed by "super" Mario Draghi about the strength of the Euro. Unintended consequences, there you go! The FT leads with this: Draghi move fuels currency war fears. Hmmm... So we (the European we) want a better perception of the area, but not so good that it starts to impact on exports. Phew, what a tough balancing act. Too strong is a problem. Anyhow, I am mostly just interested in the progress that they are making, moving forwards and perceptions continuing to improve. But, the Europeans felt the brunt yesterday, the Euro sold off the most in seven months. Ah well, at least there is no talk of an exit here or there. That reminds me, someone still owes us for suggesting that Greece would be using the Drachma as we speak......
Meanwhile tensions between the Chinese and Japanese continue to rise as the two continue to tussle for what is essentially fishing rights around some non descript islands where nobody ever plans to live. See, people love to eat, and eat a lot and fish is tasty. Plus also, add into that centuries of distrust of one another, that is not such a good mix. And a history of conflict, well, not so long ago either. So expect more of the same. All I can say is that humans are a lot more aware of what conflict does to their countries perceptions, so I suspect that can be sorted out at some stage and peacefully. I hope.....
Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E This morning we have a trading update from Sasol and perhaps it is not what you expect. They are basically waving goodbye to Iran and their investment in Arya Sasol Polymers Company (ASPC). According to Wikipedia, ASPC is one of the biggest polymer projects in the world. But, if Sasol want to be taken seriously in North America, then they have to ditch their Iranian asset. This is not new news however, this asset has been for sale for a while now. The only burning question however is, who is going to buy this business? I suspect that the other shareholder, the state owned petrochemicals company could offer them a discounted price, take it or leave it. The Iranians can't divest from Iran. And not too many people are friendly in the region, due to religious differences between Shia and Sunni Muslims. And ethnic differences too. I shall never attempt to understand religious intolerances of one another, I shall always steer away from that subject, it spoils ones get togethers. And I would like to think that I have friends everywhere of every walk of life. End of story before I trip over my own tongue here!
OK, back to Sasol here. Trading statement for the six months ended 31 December 2012 is where you can download the full release. The company cites a weaker currency as both a good thing and bad thing, in terms of costs. Overall costs however were also impacted by higher labour and maintenance costs. The story of South Africa, but we must live with this, the intention has been made clear by the powers that be that we do not intend to build a low wage and labour intensive economy. A client told me yesterday that every factory that he knew of in and around King Williams Town had closed over the last half a decade or so. And there used to be thirty plus. Uneconomical to run a clothing and textile plant, the loser I guess is almost everyone. That is another argument.
The guts of the announcement are as follows: "We continue to actively engage with interested parties to divest from our share in ASPC. During the current reporting period, the investment was impaired by R1 974 million based on our assessment of the fair value of the asset, which takes into account the uncertainty associated with the Iranian environment in which we operate. In terms of International Financial Reporting Standards (IFRS), further losses relating to the foreign currency translation reserve of approximately US$100 million may be recognised in income once we finally divest from ASPC."
So, another 100 million Dollars charge could be taken as a result of the weakening Iranian Rial at some stage. According to Wikipedia, and this does not really bode that well for MTN either, the Iranian Rial is the Least valued currency unit globally. The Zim Dollar is not on the list, that would be worse. That is not a list you want to be on, here is hoping to never making it, OK?
The Sasol statement continues: "There may be further potential impairments linked to the fair value of the asset as a result of a deteriorating Iranian environment and the accounting requirement to continue recognising operating profits, which might not be recuperated through the divestiture. Despite a solid operational performance by ASPC, results for the six month reporting period have been negatively impacted by the devaluation of the Iranian currency, which resulted in translation losses of approximately R1 015 million being recognised in the income statement."
That is about as awful as you can get I think. And perhaps it is best to push through as much as possible for shareholders at this point. It all ties back to that point that I made at the beginning of this piece. The Americans only care about investments if they have an American operating business. And that is what Lake Charles is set to change. It is going to be huge. Remember we wrote about it back in December: Sasol. This changes everything. Almost 190 billion Rands is what it is going to cost. That is roughly three quarters of the current market capitalisation. This is basically like moving all the chips in, if you are that way inclined. A bold move, a very bold move. But one that I suspect will pay handsomely. But. And this is the big but, you are going to have to be very patient as a shareholder. And, as we discussed with a favourite client yesterday, perhaps the dividend will go sideways for a while. Until then, wait for results around the 11th of March, a month and a weekend away.
- Byron beats the streets. Yesterday Apple was in the news again. Actually Apple is in the news most days but this was quite an interesting turn of events. David Einhorn, the famous hedge fund manager who started Greenlight Capital, publicly requested Apple shareholders to vote against a proposal which would eliminate the company's ability to issue a preferred stock that pays a dividend.
He has proposed a solution for shareholders to extract cash and value using pref shares. Basically Apple issue pref shares to existing share holders, say $50 billion worth with a 4% dividend yield. According to their calculations this would value the pref share at $32 per share. The Apple share price would drop less than $32 because Einhorn believes the cash portion of Apple is not valued correctly. This could create 7% more value for Apple shareholders which when you look at Apple's size and scale could create billions of dollars of value.
When asked why Apple doesn't just pay out a special dividend or buy back shares, Einhorn said his proposed structure would create immediate value without requiring Apple to pay out a big lump sum immediately. They can keep the cash for whatever they want, only have having to yield out 4% on the pref shares annually.
You must bear in mind that Einhorn is a hedge fund manager so he probably has a geared position in the stock. A 7% gain will be a lot more for his fund. He is definitely talking his own book and looking for instant gratification. But it is interesting to see how shareholders can rally up the troops and try and push a company for more value. The $137 billion is miles more than the company needs to run its business.
Apple do come back with a response. It is nicely summed up here by Business Insider Apple Issue Statement on its Massive Cash Pile. I know that Steve Jobs will be rolling in his grave as management ''waste their time'' caring about shareholders and not focusing on what is important, innovation. And as a shareholder myself I agree. Company's these days are way too pressured to keep investors happy on a quarterly basis. And this is one of the main reason's Dell are delisting. Businesses are successful because they focus on the long term picture. Somehow Jeff Bezos of Amazon has managed to convince investors to be patient.
I have a feeling we will look back at this era of instant gratification and realise that patience was your biggest asset. Ever since I entered this industry it is a lesson that is re-learnt every day.
We were just having a look at CGT prices yesterday, and I was suddenly struck by a few things. SARS put out their base price spreadsheet with the starting price in October of 2001, Value of listed financial instruments for Capital Gains Tax purposes. The first thing is that "things" change rapidly in the number of businesses. If you scroll down the list there many that are not around anymore. Many had been recently listed in the listing booms of the late nineties. There are many more listed entities on that list (2001) than there are now. So, the tough times and perhaps bigger demands of being listed leaves investors with fewer choices. Back then there were 638 entries, today as I check, and this includes suspended companies, there are only 370 listed companies. 268 less. Not all companies mind you, some of those listed instruments were (and are) pref shares. I found 206 stocks with share prices under 50 cents. 281 with share prices of under 100 cents. There were only 12 stocks with share prices over 100 Rands a share, if you want to talk about the inflationary impact on share prices over time. A separate discussion for another day.
Some big stocks and big companies back then have barely made headway, that was the next thing that struck me. AngloGold was at 285 ZAR a share, that was even before the company changed name to AngloGold Ashanti, following that deal in 2004. The stock closed at 255 last evening. There are roughly 160 million more shares in issue now, largely due to the cancelling of the hedge book. Anglo Platinum was at nearly 300 Rands a share, the stock last evening closed at 470 ZAR a share. Equally, there are a lot more shares in issue now, back in 2001 there were 214 million shares in issue, today there are 261 million shares. And then perhaps the two most fascinating ones for me, two companies that start with a S, one Sasol had a share price of 71.30 ZAR and the other, Sappi had a share price of 72.74 ZAR.
Today, the changes between the two companies and the divergence since then are amazing. Sappi, after admittedly two tough days after a poor quarter closed at 28 ZAR last evening. But listen to this. Number of shares in issue have ballooned from 229.5 million in 2001 to the current 520 million mark in 2012 after a massive, truly massive restructuring process and rights issue back in 2008. 6 new ones for every 5 you held back then. If you have not followed your rights you well and truly got thrashed. Err.... more than you had already. But their market cap is lower today than it was back then in late 2001. And then Sasol, who closed last evening at 389.3 ZAR. And, listen in closely here, there are actually fewer shares in issue now than there were all of those years back. In 2001 there were roughly 664.9 million shares, last June that number was 644.8 million. Buying back shares.
So how do those two things stack up, Sasol surging and Sappi getting slammed? Is it as simple as saying that if you were making an investment in Sasol back then and buying the business on the basis that commodity prices were in general going to remain at these recent elevated levels for longer. That was a tough call to make back then, bearing in mind that commodity prices had been anaemic for the better part of two decades. In December of 1998, which was less than three years prior to that, the oil price, Brent Crude had sunk below 10 Dollars a barrel. The next decade proved to be amazing for Sasol and their shareholders, Brent is currently trading around 116 Dollars a barrel. In the big washout of 2008 and 2009 however, the oil price went below 40 Dollars a barrel. Now, it has been steady at these "new normalised" levels. But you were certainly making a big call back then on greater global consumption underpinning a rising commodity price and as such earnings from the company growing strongly in the coming years.
Sappi however has been a disaster. Softwood pulp prices are higher now than they were back then. But I guess fine coated paper is being consumed less in the digital era. How were you supposed to know that such a thing as the iPad could exist? Or that Amazon.com would sell more electronic books than real ones? And the purchases done in the years prior to that, how were you to know that they would prove so costly that you would pay dearly in the coming years? You might have been forgiven for thinking that greater magazine readership in emerging markets would see demand for one of their core products grow strongly. And unfortunately you were dead wrong. Sappi suffered from a little of the same as the lyrics of "Video killed the radio star". Although that is not entirely true, Radio still has a massive captive audience, captured in your car of course.
So what does this exercise prove, other than you can get something right or completely wrong on how you see the future? There are also many smaller listed companies that vanish over time. The trick I guess is to own the quality businesses with a positive future. As Paul said yesterday, I don't like to own businesses where I can see clouds on the horizon. Be that next year or in half a decade’s time. Any company that is likely to run into more regulation. Companies that are likely to attract more market share with their products that customers are more likely to buy. Companies with good margins. Sounds so easy, doesn't it? The other trick is to avoid disasters. Stay the course with quality. Do not be steered off course because of noise. Try hard to carry on accumulating stocks when you can.
Crow's nest. Record highs here again. Chinese trade numbers perhaps have everything to do with it. And they are excellent, where was that hard landing?
Sasha Naryshkine and Byron Lotter
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