To market, to market to buy a fat pig. Markets in New York made a comeback late in the session, but still ended the day off from where they started. The weakening emerging market trend and the good news (that is sometimes interpreted as bad news) that the US economy is continuing to improve is certainly leading to some currency ructions globally. Meanwhile, as Paul said, the global consumer "under pressure" has paid record amounts in an art auction in London, Francis Bacon's triptych (Three Studies of Lucian Freud) sold for 142.4 million Dollars. A New York based dealer bought it for an unidentified (for now of course) foreign customer. foreign to where? Foreign to New York, or London or those countries? Oil money, new money? The most expensive artwork that I have ever bought is ... ummm... nothing. Sad but true, that is what happens when you do not pay attention in art and drama class.
Talking of which, in order to make a point to my kids of how English has changed over the last 400 years, promoted mostly by the "funny" English in Nursery Rhymes, I read them a couple of pages of Hamlet. Heck, in matric I struggled with the Shakespeare English, how were they going to understand, I was just trying to make a point. OK, not in English and not trying to just make a single point, the first releases of that Chinese communist party third plenum (of the 18th congress) were released yesterday.
The main thing that I could see was the change in the word "basic" to "decisive" role with regards to what role market forces have in the economy. What is in a word? Well, I guess a lot in this case. The word basic is exactly that, a sickle and hoe, or sickle and hammer type approach to one that would include more machinery, more consumption, it is time for a refresh of that logo chaps. The hammer and sickle was relevant 100 years ago. Even 60 years when the Urban population globally was more than double the urban population. I am sure that it is awesome to live in the country, but city living has its perks, stores opened until late in the evening, entertainment available all the time. Mostly. Of course you give away fresh air, space and peace. But who needs that anyway?! I'm kidding!!!
If you have not read any of the stories around, then do not let that muddy your opinion on what the reforms were, rather read the direct (or most direct source) that I can think of, the Xinhua news agency website. Xinhua is of course a government organisation, so who better to put the government's best foot forward, right? Third Plenary Session of 18th CPC Central Committee is where you can get all your information. Here are two paragraphs that say everything and nothing at the same time:
This time around, the country is standing at a new starting point of development. Facing challenges from inside and outside of the country, the Party decided to give a bigger role to the market as it seeks comprehensive reform.
The general objective of the reforms is to improve and develop socialism with Chinese characteristics and push on with modernization of the country's governing system and capabilities, said the communique.
Socialism with Chinese characteristics. Modernization. Comprehensive market reforms. Two out of three is not all bad, from where I sit. I am not Chinese so I possibly do not understand what direction the powers that be think is the right direction. How do you think the Communist Party thinks about heading in the direction of democracy? Or seemingly heading in that direction and thereby rendering themselves extinct, who wants to vote for state controls when people have more controls economically speaking? That is possibly the biggest threat to the Chinese economic miracle, how democratic reforms (or lack thereof) pan out from here. The more freedoms, economically speaking, you give people, the more they want to have full control of their lives.
Vodacom results, the other day, did you see them? Here they are: For the six months ended 30 September 2013. With the payoff line Power to you. Nice. Highlights for the period include the subscriber base having expanded to 53.8 million folks with the prepaid active customer base having increased by 927 thousand.
The company has invested (in this half alone) 3.1 billion Rand in infrastructure in South Africa. Think about that for a little. That number is roughly 22 and a half percent of the entire market capitalisation of Telkom, during the six months alone. Quarterly nominal GDP in South Africa (Q2 2013) clocked 836 billion ZAR, so this investment in South Africa is roughly 0,185 percent of entire GDP. Not massive, but in terms of making us work, communication and the ability to work seamlessly, this service is invaluable. And I guess you could also add in that Vodacom spent 1.029 billion Rand on publicity expenses and paid 2.289 billion Rand in salaries in that half just passed. An integral part of society they are, that is for sure! That is for the group, so it includes outside of South Africa.
The better the communication in our market, the more efficient the economy. So for that, I salute you Vodacom and I salute your shareholders for having made this decision (65% Vodafone, 13.9% Government and 3.16% PIC) to grow the network. As an aside, something that you possibly don't think about enough, the government stake in Vodacom is worth 24.5 billion Rand. The government stake in Telkom (39.76%) is worth 5.5 billion Rand. Government could do a book build with part of their stake and take out the minorities in Telkom if they wanted, relatively easily. If government wanted to, they definitely could.
However, with Vodacom having a juicy yield, and an intention to pay as much free cash as they can, it would not really make sense for government to sell. Think about it this way. Government own 206.825 million Vodacom shares. With the payout of 26.35 Rand a share in 9 dividend payments (including this one to be paid December 2nd), the Government has received dividends of 5.449 billion Rand from Vodacom. Would government pay tax on the dividends? Let me know you tax nerds out there.
But that is the point I often make, in money terms this Vodacom stake for government and by extension the citizens, is wildly more valuable. The dividend flow has nearly been more than their equity stake in Telkom currently. And to think that the Telkom share price over the last 12 months is up 58 and a half percent! But over five years is down 51 percent, the stock still needs to double from here. Which one do you think gets spoken about more, and which one do you think government thinks is more important? Telkom probably gets spoken about too much, relative to the value, but that is probably all to do with the shareholding size (40 percent versus less than 14 percent) that government has.
Back to Vodacom numbers though. What strikes me about these numbers is how quickly data continues to move, and the base is moving higher and higher at a rapid rate. Data revenues amongst the international customers (23.7 million strong) increased a whopping 100.6 percent, whilst data customers increased only 41 percent. Indicating to me that the users inside of that base are using the product a whole lot more, that is natural.
In the local market revenue topped 30 billion, strong tablet and smartphone sales (41.2 percent growth in equipment sales) saw data grow above 20 percent. Total contract customers are 4.8 million here in South Africa, so realistically if I were the company I would look at it that less than 10 percent of all my customers are actually locked in for contracts, the growth still exists. And do not tell me for a second that those folks don't want to have contracts and subsidised handsets that are a lot better than the prior ones. Of course consumers want that, aspiring to have the best handset that they can afford.
The next moves are natural, to grow data revenue which is less than one sixth of total group revenue and to grow the international part of their business, which is only a little more than that. I often make the comment that Vodacom is essentially a South African business, and it is, but that will continue to evolve as customers ARPU's in their international operations rise with the faster growing economies in those regions. You will be able to tell when the countries in the international cluster report with separate lines in the segmented analysis. That is when you will be able to tell that Vodacom is no longer a South African dominated business.
What is also important to note is that Vodacom essentially do not operate in the same markets north of our border. Lesotho (2 million people), Mozambique (25 million people), Tanzania (48 million people) and the DRC (72 million people) collectively with South Africa (52 million people) all add up to nearly 200 million people. That essentially is 20 percent of the continents population.
Whilst earnings growth is expected to be muted over the coming years, somewhere above local inflation, the stock remains very attractive from a dividend point of view. Expectations are for about the same amount to be distributed by way of dividends in the next three years as have been distributed since the company was a stand lone entity. Nearly 27 Rand on a 118 ZAR share price. Post dividend tax around 20 percent returned to you over the next three years. Sounds decent if not mind blowing. As you well know, we continue to recommend and own MTN in this space, their growth prospects continue to appear far better than Vodacom. But they (MTN) are of course priced for higher growth.
Glencore Xstrata list here today, share code GLN. So should you buy them? I saw that the JSE suggested that Glencore Xstrata was the biggest company in the world, perhaps by revenue, not by market cap nor profits, that is for sure. Because the Glencore part of the business is a trading business, where the margins are much (much) lower. Glencore Xstrata employs more people, has over three times the BHP Billiton turnover but one tenth of the profits of BHP. Margins are a whole lot better in producing than they are in trading. But these guys are right up there with the best. And Ivan Glasenberg (the CEO) is ruthless, cutting the fat at Xstrata in the same way that he did in their business. Paul said that he heard there was a special run with Glasenberg and his old pals at RAC at Old Parks off Jan Smuts there in Blairgowrie, I missed it. He is a champ, Glasenberg, a hard fellow who makes good decisions.
I would say that whilst this gives investors extra choices and according to Nicky Newton-King, the JSE CEO on her Twitter profile, she said that this was the 10th listing this year, this is a resource company. That number of listings sounds like great news to me! But should you own it? In our opinion the best geographically located quality assets are in the BHP Billiton stable. And because of their higher energy mix we will continue to own and recommend BHP Billiton over all the other diversified miners, including Glencore Xstrata. We should be so lucky as a result of historical reasons to have access to all these quality resource companies, but too many resources and not enough technology and healthcare listed here. That will change and has changed dramatically over the last two decades. Oh, and they (Glencore Xstrata) do not want assets that they cannot trade, i.e. they have a spot market that they can't dominate. No gold, no platinum, perhaps copper not by design. And apparently they were fairly cryptic about a go for Anglo American. But it makes me wonder why the iron ore exposure is non existent.
ABIL released their full year numbers to end September on Monday. And the associated rights started trading with the ordinaries, a reminder for you all, you will get the chance (provided that you owned the ordinaries last Friday) to purchase an extra 84 per 100 held at 8 Rand a share. The ordinary share is trading around 14 ZAR right now and the N shares accordingly are trading at the differential between the price at which the company is raising money (8 ZAR) and the ordinary share right now. 6 Rand, you got that part, 14 minus 8 equals 6. Got it? So for every 100 shares you held on Friday at 18 ZAR a share, you would have 100 ordinary shares at 14 bucks and 84 N's at 6 bucks, an effective value uplift of nearly 6 percent. Again, we have run short of time and space, and WILL get to it tomorrow.
Michael's musings. A property investment, pros and cons
I read a property report from FNB, and it got me thinking about if renting or buying a property is better, and then is it a good idea to buy property for investing purposes.
The first question that needs to be answered is, if you had R250 000 (R200 000 for a deposit and R50 000 for bond and transfer fees) would it be better to rent or buy? I have made many assumptions in my calculations, the main assumptions are that you bought/rented a property with the value of R1 million, property will grow in real terms at 2% and the stock market will grow in real terms at 7.5%. The two scenarios are that either you buy the property and then pay off the bond (interest is locked at 8.5%), pay the costs involved with running a house and doing renovations, or you pay rent and the money that you save by renting you put into the stock market.
If you live in the same house for the 20 years, you would be about R600 000 ahead in nominal terms, but if you decided to move once at the 10 year mark, to something exactly the same as you had, then you are only R100 000 ahead. The reason for the R500 000 disappearing, is due to the costs involved in selling and buying. In the 10 years that you lived in the house you would have paid off R240 000 of your R800 000 bond, which is then all wiped out by the costs of estate agents and transfer costs, and the bond on your new property comes in at R 780 000. Having said that the new bond is only about 40% of the new properties value, compared to the original bond being 80% of the property value.
In an inflation free environment, renting would mean that you would be R 1 000 000 ahead in real terms over the 20 years. The reason for this is because in the inflationary environment in South Africa, at about the 9 year mark, renting becomes more expensive in absolute costs than the costs involved in having a bought a property.
The reason that buying a house is attractive is because you are using leverage to buy an asset that has fairly stable prices, and it is the leverage that allows buying to keep up with renting.
As far as property for an investment assets, I have a number of reasons why I don't like it. My first reason is that there are only 84% of tenants who are in good standing with their rental payments. In order to shield yourself from bad tenants you would then have to own a number of properties, which then gets expensive. My next problem is that it is an illiquid asset, so you can't get out of it quickly when you need the money urgently, it will also cost you about 5% in estate agent fees to sell it.
There were a number of assumptions made when I did my calculations, and small changes to the assumptions will have a big impact on the final numbers 20 years later. When it comes to buying property, buy quality that you will not have to sell in the next 20 years, and in an area where the value should continue to go up due to there being a shortage of property in that area.
Home again, home again, jiggety-jog. Markets are taking some heat here today, down one and one quarter of a percent. The Rand remains weak, emerging markets are starting to lose their colour again relative to their developed market peers, where the fundamentals are improving.
Sasha Naryshkine and Michael Treherne
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