To market, to market to buy a fat pig. Markets rocketed here yesterday, financials leading the charge. The Rand got a solid afternoon whack in the afternoon, down two percent plus to the US Dollar moving beyond the 9 mark. That of course was due to a record trade deficit in January. South African Trade Statistics for January 2013 is where you will find the results, the biggest culprit, regionally was Asia, "The deficit increased from R 8.81bn in December 2012 to R 18.73bn in January 2013. Exports decreased by R 2.63bn to R 18.05bn and imports increased by R 7.29bn to R36.79bn." Imports from Asia have surged, as have imports from Europe, and the only market of ours from an export point of view that increased, was Europe too.
There is some fascinating insight into our economy when you look at the bigger picture. Our exports are, as per the document, 29.2 percent minerals and 21.4 percent precious stones, bringing to more than 50 percent the value of our exports. And then base metals constitute just shy of 12.6 percent of total exports, a whopping 63.2 percent of all exports are from mining, is that a fair assumption? Imports, those are also big in certain departments, minerals (which I presume means loads of oil) is at nearly 23 percent of all imports. Start fracking sports lovers. If not for energy independence, then for the trade balance and the health of the broader economy. And for a whole new industry to create a whole lot of jobs, change lives. And I am sure that the small businesses of the Karoo will boom. Machinery and Appliances are the other major import, over one quarter of all imports. Wow. You can't fight the consumer on that one.
The only good news that I can see is that exports to Europe are rising (one swallow does not make a burger, I mean a summer) and in particular trade with the rest of our continent is improving. But it is still so small. 9.3 percent of imports and nearly 17 percent of exports are with the rest of the continent. I wonder if there is any importing of clothes and textiles from Lesotho or Swaziland from China in any of these numbers, there must be. African trade is still very "low". And it needs to dramatically improve in order for the continent to take themselves seriously and to dispel the concerns that plague us.
Add to that Kenyan elections over the weekend between what can only be considered two connected individuals of their political history. Indeed, Raila Odinga's father was the first vice president of Kenya and Uhuru Kenyatta's father is considered the founding father of the nation. Jomo Kenyatta was the first prime minister and president of Kenya. A Facebook friend of mine, who is Kenyan said, no matter who wins there will be tax increases. I guess the one thing that we are hoping for is that there is no violence. Violence associated with election results does nothing to dispel the whole idea that Africa is still a basket-case as an investment destination. Here is to 14.3 million votes being cast safely and fairly over the coming days, leading into the actual vote being cast on the 4th of March. There are four parties that are mostly cobbled together.
British American Tobacco had full year results yesterday, and they were favourably received by the markets. Adjusted earnings per share (207.5 pence) and dividends per share (134.9 pence) grew 7 percent, operating group margins increased *nicely* to 37.4 percent, that is a 160 basis points improvement. Profits after tax increased 22 percent to 4.122 billion pounds. Revenues were 1 percent lower across the board, the biggest slide in Western Europe with a 4 percent slide. Asia Pacific is the most profitable of their regions, 30 percent of all profits from there, with 24.7 percent from Eastern Europe, the Middle East and Africa. So these two regions are the growth regions. The group have announced another 1.5 billion Pounds buy back this year, on top of the 1.25 billion Pound last year.
My biggest concern as always is that stick volumes are declining, down 2 percent. Mostly as a result of a 5 percent slide in Western Europe. For the second half all regions showed contraction, 3 percent lower in stick volumes. The companies biggest region by stick volumes are Eastern Europe, the Middle East and Africa, our continent. 33.8 percent of all the sticks that they sold last year were sold in this region. Asia Pacific accounts for 27 percent of their stick volumes. It is amazing to think that they sold 694 billion sticks last year. But that was 11 million less from last year. And the trend is going backwards. Now, I don't care how many widgets or individual items you sell, in the long run you need volume growth. And in an industry that is under pressure from a regulatory point of view, that is not good.
For the records, the average price was 13.05 Rand to the Pound Sterling. So, those numbers translate to a 3.6 percent dividend yield and a price to earnings multiple of 17.7 times. Is that expensive? Are you being rewarded enough? For the risks that you are taking, that is what I am steering you towards, are the rewards enough? What is the tipping point for their customers? Well, the company still has incredibly strong free cash flows. The first excise duties were levied in 1643 by the King of England, Charles the second at that time, in order to pay for wars. Believe it or not, that information comes from the SARS website. Nowadays they are used to pay for health initiatives because governments recognize that the balance must be weighted in favour of their citizens.
It is one of the few industries globally that governments have banned the advertising and restricted the sale of their product. And there are some cases in highly industrialized countries where governments want to eliminate the product entirely. In Tasmania the government are looking to institute a "Tobacco free millennium generation initiative" banning the sale outright to anyone born in the year 2000 and beyond. So, when it gets to 2018, those 18 year olds won't be able to try the product. Ever. Like in never again. In Singapore and Finland they are thinking the same thing. And in New Zealand, they are trying to have a smoke free country by 2025.
You see, the investment might meet all the criteria that you are looking for, great yield, addictive product, strong cash flows, fairly undemanding multiple. I suspect that the company trades at a rich valuation, given that the environment in general is heading back towards one of risk and less defensive. That is another issue entirely. But I think that their days are numbered. It could be a long while until we see a marked impact on their business, but I can see it already in volume growth heading in the wrong direction. For how long can you cut costs and streamline your business until you need volume growth? Perhaps years. Because our investment horizon is years, and many of them, we continue to avoid this rather well performing stock. The egg is dry on our faces, after each and every result, that seems to suggest the company is just fine, thanks very much.
Groupon is all messed up and proof of how quickly folks can change their mind, last night the CEO and I guess "inventor" of the idea, Andrew Mason was fired. He wrote this message to his staff:
- "People of Groupon,
After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding - I was fired today. If you're wondering why... you haven't been paying attention. From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that's hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable...."
That is refreshing in two ways, one, we could learn about accountability around here, there is seemingly very little recourse when you do something wrong. Secondly, the truth, no gardening or family time, good old fashioned fired, because he was not able to do his job. On the Groupon Wikipedia page the Herb Greenberg is quoted as saying that Andrew Mason was the worst CEO of the year, last year 2012.
So now what for Groupon shareholders? The stock was down nearly 25 percent in ordinary trade, bouncing a little after hours when the news of Mason's dismissal came through. The stock is worth "only" 3 billion Dollars, Google tried to buy it in December 2010 for 6 billion Dollars. True story, talks broke down. Google at the time were willing to pay three times projected annual revenues, a very handsome sum by any stretch of the imagination. Do you feel sorry for these people, Major Holders? No. I don't. They take their chances. The business was easy to replicate. And there have been many pretenders. I still think as a customer, having used a Groupon easily and seamlessly a few times that the business is still a good one. Valuations as ever are important, and difficult when trying to value something of this nature. As ever, if you don't know, stay away.
Crow's nest. European data in the form of unemployed have hit an all time record, the unemployment rate across the zone is 11.9 percent. That sucks. What sucks also is that we must welcome in sequestration. I am not sure that it is welcome for anyone, other than the tea party types who I suspect would want larger cuts on governments part. It is amazing that the market reaction is a whole lot less muted. Ah well, what should I worry! We buy companies, not government policies, although companies can be impacted by that, as we know well.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
011 022 5440
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