Money with a dash of Funny: Bidcorp

Showing posts with label Bidcorp. Show all posts

Friday, 2 March 2018

Buy Bidcorp, Not Bitcoin

To market to market to buy a fat pig. The 'Trump rally' seems to have come to an end thanks to the interest rate concerns; February was the first down month since Trump was elected. I can't say that I am a fan of the term 'Trump rally'. In my opinion, if Hilary had won markets would have also done well. Maybe markets would not have run as high, without the Republican the tax cut benefit, but higher none the less.

What makes this recent run of gains amazing is how long it lasted, without an interruption. Global markets went higher for 15 straight months, the longest streak ever! Since 2009, the market has been on the up. There have been a few hiccups along the way but many more up days than down days. The problem with that is we now have a generation of investors who think that markets only go up. We have seen high returns and low volatility (the calm waters of the last 15-months).

Found at Global stocks end a winning streak that's never been seen before

Market Scorecard. The US market wasn't sure which direction it wanted to go yesterday, bouncing between red and green for most of the morning. Then at around mid-day Trump announced that he was going to implement trade tariffs on steel and aluminium, pushing markets firmly into the red. The Dow ended up down 1.68%, the S&P 500 was down 1.33%, the Nasdaq was down 1.27%, and the All-share was down 0.69%. As Larry Summers said to Bloomberg yesterday, there are far more people in the US using steel and aluminium, than people who produce those metals.

If you live in the US and make use of any of the following products, you are about to pay more. Also, if you work in an industry that produces any of these products, your job security just dropped a few points.

Company Corner

Bright's Banter

On the 21st of February I went to Bidcorp's results presentation which was held in the beautiful Standard Bank head office building in Rosebank. The company was reporting their half year results to the end of December 2017. Just a quick refresh, this business has diverse food service operation across 30 countries. 90% of Bidcorp's earnings continue to be offshore. Only 10% is earned locally, making it another useful Rand-hedge.

We've seen the Rand strengthen in recent times, so that's not helpful. Notwithstanding that headwind, the company reported total revenues of R61.4 billion, that's up 7.7% from the previous year. Headline earnings per share were up 8.6% to 640c and the company increased the interim dividend by 12% to 280c.

The segmental analysis below shows that the Australasian region continues to be largest contributor to both the top and bottom line. Food inflation was mixed and muted on average (never forget the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average). Wage inflation has been relentless across the board, management worry about that.

The company confirmed that they were reinvesting in their business and expanding capacity in Australia & New Zealand in order to fill territorial gaps and be closer to the consumer. In those two countries Bidcorp is expanding from one distribution centre each to about three to five smaller, more manageable urban facilities.

Trading in Europe was fantastic with revenues up 16.2% and trading profits up 32.9% in constant currencies with improving margins from 3.6% to 4.2%. Overall the businesses in Europe are making steady progress notwithstanding some avian flu outbreaks which led to a shortage in eggs and dairy products. The disruptions were temporary.

They business continued to make small bolt-on acquisitions as a way to enter new regions or to supplement existing capacity for broader reach. Emerging markets revenues were up 0.7%, trading profit was up 1.7% but the margins stood at 5.9%. The business entered the Vietnam market and Malaysia is starting to contribute. The Greater China region was also affected by the dairy and poultry situation.

The CEO Bernard Berson was asked if the likes of Uber Eats and Delivery Hero were eating their lunch? He explained that in order for a restaurant to deliver food directly to the customer, they still need Bidcorp for the ingredients. Ex-restaurant or ghost/shadow kitchens use platforms like Uber Eats to get the food to the customer but they need food ingredient suppliers. Bidcorp will benefitting from more eating out and more takeout food delivery. Sounds good! #KaChing.

I would argue that Bidcorp's edge is their complex infrastructure, and "routes to market". They have spent billions over the years to develop the infrastructure to reach their customers. Adding more customers to that system is easy and adds to margins. I don't want to get too excited here but management mentioned that they are using "big data analytics" to better understand their customers. They have all the data already! This tech spend makes good sense.

The food services industry remains fragmented with only a few big players spread across the globe. Bidcorp is a consolidator and sees more opportunities to grow. The company trades at a historic PE of 21 which is cheaper than its peers. Bidcorp believes that a low-debt balance sheet is a strong competitive advantage. For the moment, the strong Rand is a bonus when considering capital purchases.

Linkfest, lap it up

One thing, from Paul

Boston-based Harvard University has an endowment fund worth $37.1 billion. That's permanent capital that they have saved up, or received from alumni grants. The university uses the income that the fund generates to supplement student financial aid and develop its infrastructure and teaching programmes.

The management of that portfolio has always been the subject of much debate. In addition to conventional equities and bond holdings, the fund has huge bets on natural resources. It accumulated a $4 billion portfolio of Californian vineyards, Central American teak forests, a cotton farm in Australia, a eucalyptus plantation in Uruguay, and timberland in Romania.

The current endowment chief, Narv Narvekar, decided to write down the value of that natural resources portfolio last year by $1.1 billion, to $2.9 billion.

Over the past decade, Harvard's fund posted a 4.4 percent average annual return. That's worse than its university peers, and worse than a market-tracking index fund (60/40 equities/bonds) which would have earned an annual 6.4 percent. Vestact's all equity US portfolio generated average returns of around 10% per annum!

So much for the best brains at the world's top university. Read all about it here:

Harvard Blew $1 Billion in Bet on Tomatoes, Sugar, and Eucalyptus

This week on Blunders: Xi Jinping is now Chief for Life in China, Cape Town is Superdry, Egypt is awful and Snapchat has a Kylie Jenner problem - Blunders: Episode 90

Michael's Musings

As your smartphone becomes your most important possession, having access to the internet is something you can't live without. Here is how each South African network ranks in terms of coverage - The mobile network with the best coverage in South Africa.

When times get tough humans adapt to get stronger and more efficient - How this 78-year-old Cape Town company became one of the most water-efficient manufacturers of Coke in the world.

Home again, home again, jiggety-jog. As expected, our market is down this morning, in line with global markets. The most important thing on our screens today will be day two of the test between the Proteas and Australia; not much out today in terms of key market data.

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Wednesday, 15 November 2017

Even Kings Fall

To market to market to buy a fat pig. The downgrade that many people have been calling is scheduled for next week Friday, after our market closes. Having a look at our current bond yields and the currency, I'm not so sure that a downgrade is a foregone conclusion. There is no doubt that the current trajectory of our budget deficit is horrible given our anaemic growth, but if confidence returns and GDP growth spikes, our deficit situation looks very different.

Wayne McCurrie's tweet from yesterday shows that investors still want our bonds at current levels; the yields on our bonds were much higher last year than they are currently. We were saying in the office yesterday, that our current saving grace is that global interest rates are at historical lows, meaning our risky debt attracts an interest rate of less than 10%.

Market Scorecard. GE had another painful day, down a further 6% which didn't help US markets in general. The Dow was down 0.13%, the S&P 500 was down 0.23%, the Nasdaq was down 0.29% and the All-share was down 0.51%. Brait released their 6 month numbers this morning, which seem inline with market expectations. We will have a breakdown of them tomorrow.

Company corner

Bright's Banter

Bidcorp had a markets day on Monday where the management spoke to shareholders and analysts like us and analysts get to ask management some tough questions.

The company said that trading in the first quarter has been reasonably positive in their core foodservice business. All their businesses performed well in their local currencies. Management is putting efforts to down scale in non-core, underperforming Logistics businesses in the U.K. as trading remains tough. The U.K. logistics business is not a material player in the groups overall business.

The company continues to see organic growth in the Foodservice business and opportunities for bolt-on opportunities in all their different geographies. This is on the back of increasing inflation in some of their product categories such as dairy.

In my last meeting with David Cleasby, one of the things he said was that the company will focus more on increasing the basket of goods purchased by its customers. If they can convince the customer to add more products to their basket, that becomes pure margin as the delivery truck was coming in that direction anyway. In the update the company makes reference to this point where it emphasises the fact that they have been focusing on the correct segment of the markets (growing segments I'm guessing), adding value to the clients offering through innovation and improved service delivery. This is when they use their system to help chefs improve their menus for example.

The main takeaway here is that Bidcorp bought a few businesses to expand into new territories, which is their preferred strategy. These acquisitions cost the company R608 Million in aggregate and the company expects earnings of R104 Million from these business if they continue to perform as planned.

Linkfest, lap it up

One thing, from Paul

This Forbes magazine cover from 10 years ago has been going around the world, because it is a good example of corporate hubris. A big, dominant product provider that seemed to have an unassailable lead over its competitors. See what it says there: "Can Anyone Catch the Cellphone King?". I guess that they did not see Apple and Samsung coming!

We actually held Nokia in New York client portfolios until June 2010, when we sold Nokia and switched everybody into Apple. At that point Apple was about to launch the iPhone 4 and Nokia was already taking strain. As I said in my year-end message in December 2010.

"During the year we finally made the switch from Nokia which did poorly for some years (and was also down 19.9 percent in 2010), into Apple which continues to go from strength to strength. In retrospect, we should have made the transfer much sooner."

Turns out it was not too late. From that date to now, Nokia fell another 42% and Apple is up 350%.

Michael's Musings

If I have the choice between reading fiction or the history of markets, companies and the people who built them, the latter generally wins - Most Valuable U.S. Companies Over 100 Years. Having a look at the list, only Standard Oil (Exxon) appears on all three; Exxon happens to be the only stock on the 2017 list that I don't own.

Until Elon Musk can crack using rockets to travel around the globe we will have to make due with the A380's and Dreamliners. The current tough decision for airline execs, is whether to go for the dreamliner which is more cost effective or do you go with the A380 which allows you to transport more people to airports where there are limited parking spaces. Going forward that decision might be made for them - We may have just witnessed the end of the Airbus A380 superjumbo. It is interesting to me that the airline industry has not had a major change since the 747 first took off in 1969.

Home again, home again, jiggety-jog. Asian markets are all well in the red this morning, and Tencent is down around 1%. Expect a red open for the All-share. Very big news out today, we will find out if we are hosting the 2023 Rugby World Cup at around 15:00. Holding thumbs!

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Wednesday, 20 September 2017

Quantifying Quantitative Easing

To market to market to buy a fat pig. Today is Fed day. Later this evening the Fed will probably announce no interest rate increase, but more importantly, they will give details around how they will unwind their $4.5 trillion balance sheet. Rewind a couple of years, the short-term interest rate was already very low at 0.5% but long-term rates were much higher because people were scared. Ben Bernanke's Fed came up with the idea of Quantitative Easing (QE), to bring down longer-dated rates.

Economics 101; higher demand means higher price and conversely a higher supply means a lower price. The Fed stepped into the bond market to create extra demand, pushing up the price of bonds, which results in a lower interest rate attached to those bonds. At QE's peak, the Fed was buying $85 billion worth of new bonds a month, with one of their main focuses on the housing market, where they currently own $1.77 trillion worth of mortgage-backed securities. The Fed slowly reduced the value of bonds they bought a month until November 2014 when they stopped buying new bonds.

Given that bonds have set maturities, the question then becomes, what to do with the money from the mature bond? When QE was first thought up, their exit plan was to buy bonds for a short period, creating confidence and financial support, and then just let them runoff, which would reduce their balance sheet again. QE 1 then expanded into QE 2 into QE 3 and then QE 4, lasting longer and becoming bigger than anyone had originally imagined. There is a fear that the Fed, just stepping out of the bond market will result in a sudden shock to the financial system. As a result, instead of just letting bonds runoff, the Fed has been rolling over bonds that reach maturity.

Today Janet Yellen will give us an idea of how quickly they intend to shrink their balance sheet. Full steam ahead will be them not rolling over any of the bonds and baby steps will be them only letting a small percentage of the bonds runoff. I expect it to be somewhere in the middle. The Fed will always err on the side of caution; they won't do anything unless they are sure the US economy is strong enough to handle it. Basically, whatever the Fed announces today around their balance sheet, will be a non-event to most people, apart from economists and academics.

New York, New York Yes, you guessed it, another day another record. Here is the scorecard, the Dow was up 0.18%, the S&P 500 was up 0.11%, the Nasdaq was up 0.1% and the All-share was up down 0.07%. Unfortunately, the list of stocks at 12-month lows is growing and the list of stocks at 12-month highs is shrinking.

Linkfest, lap it up

One thing, from Paul

What on earth is Kim Jong Un thinking?

Experts disagree with Donald Trump (no surprise there). 'Rocketman' is not suicidal, they say. North Korea's nuclear missile program is best understood as an emulation the Chinese strategy of the 1960-70s. China was a rogue nuclear state and economic backwater, but became a military and economic giant and undid the US-Taiwan alliance. Kim Jong-Un hopes force concessions from the US, win reunification with South Korea and become a global power. This plan will likely fail though, since North Korea is economically decrepit. Here's Max Fisher on the topic, in the New York Times - North Korea's Nuclear Arms Sustain Drive for 'FinalVictory'

Michael's Musings

Would you drink milk that was created in a lab? How about eating beef that was created in a lab? Animals have a negative environmental impact due to all the resources needed to sustain them - Infographic: The Future of Food.

Positive and negative responses from cities, over Amazon's new HQ is interesting. The fear is that Amazon will increase the population density, which increases property prices and increases wages. Surely more economic activity is always better than less though? - The $5 billion battle for Amazon's new HQ is getting even more heated

Bright's Banter

On Monday the 18th of September I had the pleasure of meeting with Bidcorp's CFO David Cleasby at their head office in Sandton. Bidcorp as you may know is our largest holding in the food sector.

The business has presence in over 30 countries and are market leaders in countries like Australia and New Zealand. Bidcorps offshore businesses account for 90% of earnings and RSA is only 10% making them the perfect Rand hedge.

Bidcorp's typical customers are the owners of restaurants, who happen to be chefs most of the time. Bidcorp's growth will come from increasing their 'Routes To Market' (selling more things to the same customer), from entering a new market organically and through small bolt-on acquisitions, where Bidcorp can bring in their 'Know-How' and systems to the table. They focus is on increasing the basket of goods purchased by chefs; since the truck is already heading that way, any additional items purchased is pure margin. In the near future, there is big margin growth to come as a result.

The food industry is very fragmented and this translates to plenty of opportunities for Bidcorp. Their reps have their ears on the ground and they help spot gaps in the market. This kind of attention to detail allows Bidcorp to see exactly what the needs of the customers are and fulfill them. If the customer is happy with the service, they will ask for repeat business, and the income becomes annuity in nature. As long as the eating out trend persists and the middle class emerges, we expect Bidcorp to benefit handsomely and are happy to own this one for our clients for the long term.

Home again, home again, jiggety-jog. Our market opened slightly in the red this morning, being pulled down by Sasol who are down 3.5% on the news that they have had to take a $900 million hit on their BBBEE scheme. STAR who listed this morning, are off to a strong start, opening at the top end of their expected range.

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Friday, 25 August 2017

Bidding for Food

To market to market to buy a fat pig. Yesterday was a wild ride on the market, keeping things interesting for market participants. We started the day off with weaker than expected numbers out of Woolies resulting in their stock price being down over 5% and okay numbers from Bidcorp, with their shares being slightly up. As we were getting to the bottom of all that was said from Woolies and Bidcorp, news broke that Steinhoff was being investigated further for tax evasion, German media reports of 'balance sheet forgery'. Shares promptly dropped around 8% and then slid further to be down over 14% at one stage.

Even though Steinhoff was getting crushed and Woolies was down, the All Share broke new ground to record highs and the Top 40 index reached 50 000 points for the first time, JSE on record-breaking run as indices reach new highs. By mid-afternoon, Woolies and Bidcorp had switched places, with Bidcorp now down 5% and Woolies ever so slightly in the green. What? Then shortly before the market closed Steinhoff released a SENS addressing the news, Response To Press Statement Published By Manager Magazin, which helped to push the share price higher but they still closed down 9.8% for the day. Woolies closed down 2.5% and Bidcorp closed down 2.2%.

Based on the Steinhoff SENS it seems that most of the allegations are from a disgruntled ex JV partner. I have little doubt that Steinhoff pushes the limits of tax laws (like most large multinational's) but they hire top lawyers and accountants to make sure they stay on the correct side of the law. As we saw from Apple's tax fine, where the line can be very blurry and subjective, you have Apple and the Irish government with one opinion and the EU with another. For Steinhoff, the tax evasion allegations date back to 2015 and since then, Steinhoff hired an outside firm to do their own investigation, which would have cost a pretty penny. The external investigators determined that there was no wrong doing from Steinhoff. I expect the Steinhoff share price to have a significant rebound today, let's see what happens at 9:00.

For the second day in a row, US markets are down when our markets were up. Here is the scorecard, the Dow and Nasdaq were both down 0.11% and the S&P 500 was down 0.21%. The dreaded debt ceiling is creeping back into the minds of traders. Trump says negotiations are a mess and law makers say they are on track to pass a bill increasing the debt ceiling before the end of September deadline. What a time to be alive though, where the presidential mouth piece to the world is Twitter. You get to know what Trump is thinking, when he thinks it.

Company corner

Byron's Beats

Yesterday we had solid full year results from Bidcorp. These are the first full year numbers since the Bidvest split. This business is well diversified geographically, operating in over 30 countries. Ironically Rand strength had a big negative impact on the numbers. Headline earnings per share grew 9.4% to 1181c. On a constant currency basis, this would have been a 19.1% uptick. That is encouraging considering the developed markets they operate in such as Australia, the UK and big parts of Europe. For a good idea of the segmental analysis you can look at the image below. Remember there are still a few irregularities there from the Bidvest split.

As you can see, the UK is their biggest revenue driver although Australia is more profitable. I guess that is why CEO Bernie Berson is based in Aus. South Africa has been included in the emerging market segment. On the TV yesterday Bernie mentioned that growth in South Africa was a cracking 24%. A very different contrast to the Famous Brands numbers. Maybe it is the more high end, sit down dining that is doing well?

The other day we put a link in the message on the trends millennials were following. One of those was ordering in and eating at home. This trend suits Bidcorp because instead of buying from a grocery store, they are using Uber Eats or Delivery Hero to buy meals from restaurants. Essentially they become Bidcorp clients.

The share trades at 25 times earnings which is by no means cheap. Sysco, a $27bn market cap competitor in the US trades on the same multiple. These guys have shown interest in Bidcorp before, I wouldn't be surprised to see more interest in the future. The company has R1.2bn in debt, next to nothing compared to their R100bn market cap and R5.5bn trading profit. I mention this because there is still huge room for consolidation in the industry. During the year the group concluded small acquisitions in Spain, Australia, Brazil, Belgium, Italy and the UK totalling R1.7bn. Expect a lot more of that this year.

To conclude, we are pleased with these results. Considering the geographic spread, low gearing and room for acquisitions we are happy to carry on adding at these levels. This is a must have in every local portfolio.

Linkfest, lap it up

Michael's Musings

If you were wondering what Whole Foods under Amazon will look like, here is an idea - Whole Foods is about to get cheaper for everyone starting Monday. Also, a number of Whole Foods's products will be available on Amazon. Scary stuff if you are a retail competitor.

Even though Uber is privately owned, there are a number of funds who own them so their numbers become available to the public - Uber's sales more than doubled to $1.75 billion in the second quarter, despite all its drama. Amazing to see the number of trips taken up 150% and probably more mind boggling is their cash burn of $645 million for the quarter.

In the next decade India is forecast to overtake China as the most populous country - Animation: Comparing China vs. India Population Pyramids.

Bright's Banter

American foodies finally have an appetite for brains, yes like zombies they're eating animal brains. Famed Italian chef Mario Batali is being credited with launching the organ meat movement (Lies Mzansi did it before him), and its flourished in major food cities from Los Angeles to New York - Americans Are Eating More Brains As Offal Goes Mainstream .

I've been eating chicken brain, pigs head, chicken gizzards, like forever!!!! Welcome to the dark side America, I mean welcome to some of Mzansi's best delicacies.

Home again, home again, jiggety-jog. Asian markets are mostly in the green, locally there are currently more green stocks than red. Woolies down another 2.3% and Steinhoff is flat. The global, market moving news for today is what comes out of Jackson Hole with speeches from Janet Yellen and Mario Draghi.

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Monday, 27 February 2017

Buffy the naysayer slayer

"Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle."

To market to market to buy a fat pig Let us keep this section short and sharp, there is much to do on the companies front. Friday saw another steep drawdown in the commodities section, down over three percent on the session. That brought with it the rest of the market, down over a percent by the end. Bidcorp had another dig day, the stock was up over four and one-third of a percent by the close. Reinet and BATS also rallied hard, Hammerson and Amplats added over a percent.

It was unfortunately the negative end of the scoreboard that outpaced the "winners" over two to one, Glencore, Anglo and Kumba all down over 5 percent. Some concerns that the rally in commodity prices is waning a little. The stronger Rand (relative) also brought with it most of the dual listed stocks lower on the day. Speculation still continues to swirl on the appointment of a new finance minister, the rumour mill is talking about a deputy shuffle to Mr You-know-who. Time will tell sportslovers.

Across the oceans and seas vast, stocks in New York, New York managed to just eke out a gain by the time the closing bell was rung (pushed) on the floor. That is very much a ceremonial process these days, in reality the floor is not really needed and is a shadow of the former self. More efficient in the age of the machines no doubt. We still read books where there are Kindles and e-books, I meet many people who tell me that they enjoy reading in physical format, the smell of the book and the feel. Not the fact that you may lose your place, not that. I read nowadays exclusively on my phone, I prefer that to reading on my Kindle, really .... that is me.

Stocks rallied into the close (after a weak looking futures market) and the Dow Jones managed another positive session, albeit only 0.05 percent to the good by the close, 11 days in a row now. The broader market S&P 500 managed three times that, still, a modest gain of 0.15 percent on the session. The nerds of NASDAQ added a little more than that. We are coming to the end of the last quarters earnings season, so far, I suspect that Mr. Market liked what they saw, within reason really. It looked like big banks and energy were trumped by big pharma and industrials on Friday.

It was Warren time again over the weekend, you can download and read his annual letter, it is ALWAYS worth a read. The Berkshire Hathaway website looks like it was made in 1996 and the format has been stuck with since. I guess that is Charlie and Warren's style, keep it very simple. That has worked for them over the years.

The 2016 letter can be found amongst all the others, dating back to 1977. For anyone in investing, looking for insight from a great investor, it is all available there for you. All you need is an internet connection (not free) and a piece of hardware (not free either). I commented to Michael this morning that I thought Super Rugby was dead, I started reading the letter rather than watch the Lions squeak through against the Currie Cup champs. Nerd, I guess. I had watched the cricket earlier.

There were a few favourites inside the office, Bright liked this:

" .... every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do"

What Warren means is that when the times get tough, they (Berkshire) must definitely NOT be meek, they must capture the opportunities with both hands. i.e. When stock prices are depressed, scoop them up with aplomb. And these opportunities do not come around all of the time, they definitely do not. Often, in my experience, retail investors get scared off when good companies have lower share prices. It happens. The "right" thing to do, is to buy more. Of course, not all of us have the liquidity that Berkshire has.

Michael quite liked the fact that Buffett recommended the Phil Knight (Nike founder) book, Shoe Dog, as the best book he read last year. Agreed, it was pretty epic, read it if you have not had a chance. Michael also liked in particular the second part of this paragraph:

"American business - and consequently a basket of stocks - is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle."

Exactly. The point is brilliantly made. What he suggests is that there are always people telling you that the world is going to end, the outlook is terrible and so on ..... if they had to short the market in perpetuity, lucky for them they would wipe out quickly (the pain would be swift). The short answer is to stay long "forever". Don't necessarily resign yourself to never selling shares, just know that quality trumps all.

And then my favourite piece of the letter:

"Charlie and I cringe when we hear analysts talk admiringly about managements who always "make the numbers." In truth, business is too unpredictable for the numbers always to be met. Inevitably, surprises occur. When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers."

It goes to the core of one of our previous messages, from just over a month ago titled Expect Analysts to Expect. It is not our job to get excited or disappointed about the immediate results. That is for the balance of the markets. Sure, it "feels nice" when the company executes relative to the market expectations in a hurry and "feels nice" when the share price pops after results. Equally, it feels awful when the opposite happens. You should though temper your emotions to only change your mind if you think that the opportunity is too good to pass (buy more shares) or if you think something has changed fundamentally and the business is in terminal decline (then sell it).

All in all, once again a riveting piece, worth the read for investors of the professional and novice kind. Being able to articulate your investment style and get that through in the easiest possible way is an art in itself. He may not be able to serve up a cordon bleu dish, or day trade forex, he certainly knows a lot about investing in real businesses over decades. So listen to him. And keep on keeping on.

It is also Oscar time. I always think that the "winners" are those who get the most at the box office, that means all the people who watched (and bought a ticket) thought that was the best film. For instance, during 2015, 5 of the top 11 biggest grossing films of all time were released. From the Furious 7 to Minions, Star Wars: The Force Awakens, to Jurassic World and Avengers: Age of Ultron. I have only watched Minions. Not one of these films was nominated for best film, yet the "fans" all bought more tickets to see these over Spotlight, The Big Short, Mad Max and the Revenant, as well as Room, bridge of Spies and Brooklyn. I have seen most of those, the nominated films, and thought they were all excellent.

My only question is this .... like with the Trump win as president for the US and with the Brexit vote (72 percent voter turnout), are the Hollywood elite out of touch with the wishes of the masses? If entertainment is chosen by the masses and they choose to watch movies about dinosaurs coming to life, people shooting lasers at each other in a far-far away planetary make-believe land, or movies about good looking people and fast cars (or little yellow creatures wandering the world, looking for a new master), should one view these awards as an "artist perspective"?

Isn't it the same as saying to the Olympians, look, I know you jump the furthest and run the fastest, I think that in terms of technique, you are not quite good enough, we are going to give the gold medal to the person in 10th place, they had a superb jumping and running technique. Or am I wrong? I know it is about the art and the enjoyment, surely all those buying tickets are "voting" for best movie, whether I prefer Tom Hanks to Vin Diesel or not. For the record, on a highest grossing films of all time, adjusted for inflation, Gone with the Wind is in first place. Avatar and the original Star Wars in second and third place respectively. Art is subjective, box office numbers don't lie. Even if the wrong envelope for best picture was given out.

Company corner

Bidcorp reported results for their first half to end December last week Thursday. Since the results, the stock price is up around 15 percent, in just two trading sessions. In fairness, the stock price was trading near (about four percent above) an all time low before their rally. Before you saw "WHAT?", remember that the company was unbundled from Bidvest less than a year ago, so their unbundling has been less than 12 months. So perhaps it is more fair to say that they were trading at a 12 month low.

The stronger Rand does not help the group, they are no longer just a South African business, as they were in the past. We prefer the foods business over the services business, both are "good", we prefer the expansion plans and geographical reach, as well as the margins. Bidcorp (or BidFood as we like to call them, they are rolling that brand out internationally) has a market cap of 90 billion Rand, relative to the services business Bidvest, which has a market capitalisation of 55 billion.

So let us peek at the numbers. Headline earnings per share increased 20 percent to just over 600 cents for the first half of the 2017 financial year, on revenues that were essentially flat (pro forma). The distribution was/is 250 cents per share, the group was really chuffed that they had managed to also pay down net debt by 2.6 billion Rand and slash it to 1.7 billion Rand. Trading margins also improved substantially, from 3.6 to 4.2 percent. As you can tell from their size and scale, they are relatively un-geared.

I suspect that the market likes this too, the fact that they may be in a position to continue to acquire businesses here and there, which has always been the style. As they noted during the six months, whilst there were no material acquisitions, they bought nearly 500 million Rands worth of other businesses in Australia, Brazil, Belgium, Italy and Fresh UK. Fresh UK? Bidvest Fresh UK - Campbell Brothers, Oliver Kay, Hensons. They are always "busy".

Herewith a breakdown of their "global" business, all markets bar for the UK business firing on all cylinders:

Why own this business? I mean, what makes this business so very interesting? For starters as Paul always says when someone points out that cigarettes are addictive, food is more addictive. People are getting busier and richer, which means they are more likely to favour eating out or packaged food. The more handling of fresh food for the consumer and customers out there, the better for Bidcorp. The "prospects column" deliver you a little about the strategy in the coming years, and sums it up *nicely*:

"Our foodservice businesses worldwide are executing on the strategy of rebalancing the exposure between contract, national and independent customers in their respective markets. We see our future as a "foodservice" provider, as opposed to a "logistics" operator. Innovative technology-based solutions for customers and global procurement opportunities continue to gain traction as part of our value-add service to grow market share. Fresh produce, Meat categories and Value Add Processing continue to be areas of unexploited potential in many regions."

We continue to add to this wonderful business. We like the management team, we like the global reach across developed and developing markets. Did you know that this company is the largest listed Foodservice outside of the US? Great team, great trajectory and adding stability to your portfolio.

Linkfest, lap it up

No surprise seeing Brazil and Turkey on this list, political instability has resulted in poor economic performance which is a good reason to find "greener pastures". I suspect that a few terror attacks in France coupled with an unfriendly tax code is what is making people consider moving - Millionaire Migrants: Countries That Rich People Are Flocking To. As the internet makes the world a smaller place, it gets easier and easier to move countries. We live in a global village, governments need to realise this.

Investing isn't easy or everyone would do - I Survived The BULL Market of 2017.

"As fun and profitable as this boom has been for so many, it is not easy to make money investing. The hardest part of this last boom has been getting and staying invested. For those that did, you are smart, if even for just ignoring all the headlines that have scared most out along the way."

Home again, home again, jiggety-jog. It is Naas Botha and Graeme Pollock's birthdays today, that is pretty special that two of our favourite sporting sons share their special day today. I saw Pollock once as a kid, he was batting 4 for the "mean machine", made just less than 50 and smashed 10 fours, nothing in the air and no obvious chances. Obviously it was later in his career, which meant that running was only for youngsters. The scoreboard said "The Maestro", I recall it well. Naas? Nope, never live, only on the box on the weekends. Markets are lower across Europe and have opened mixed here today.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Friday, 9 December 2016

Since Sliced Bread

"Who are Puratos? As they say in the release, this is a bakery solutions business. I snooped out their website a couple of days ago, Puratos (a Belgian based business) supplies chocolatiers, bakeries and patisseries with ingredients."

To market to market to buy a fat pig Wow. That was pretty impressive for stocks here locally, up over two percent on that day, or over 1000 points on the Jozi all share index. The gains were wide and deep, there were new 12 month highs for the likes of Anglo and BHP, as well as Invicta that continues to power ahead. Imperial, that also touched a twelve month high, as did Barclays Africa The Foschini Group and Telkom. So you see, a pretty broad based recovery across many stocks that represent many different and diverse sectors of the economy. At the opposite end of the spectrum, in the 12 month low segment was UK Pound Sterling and European property stocks Hammerson (although they did close up on the day) and NEPI - New Europe Property Investments. I suspect that depending on what you are trying to achieve determines whether or not you would own property stocks en masse, or be comfortable with property you own in your personal capacity. A different kind of argument on a per client basis.

Steinhoff once again roared ahead, the stock was up another 6 percent (and a bit) on the day. Clearly Mr. Market enjoyed the results from the retail giant, those were released two mornings back, if you are looking for a refresh, here it is - Steinhoff numbers - beat expectations. Glencore also ramped up 5 percent, along with the Qatar sovereign wealth fund are buying an 11 billion Dollar stake in Russian oil company Rosneft. The two entities (Qatar and Glencore) will split the 19.5 percent stake. There are all sorts of "things" at work here, firstly, this is the biggest deal done in Russia since the sanctions post the Ukraine crisis. This is part of the process of privatising Russian entities, Rosneft churn out just less than 5 million barrels a day.

Why Qatar and Glencore? Remember that Qatar are the biggest shareholders of Glencore, and must be keen to look for deals together. An oil deal in Russia though? Business is business, what do I know? Qatar (the country acting in their capacity of oil ministry in the recent OPEC talks) was apparently the go between and the glue that held them all together, being instrumental in the "agreement" to cut oil production. Whether the oil production cuts will work or not (methinks that the Frackers and others will pick up the slack) is debatable. Russia gets money and a partner, Qatar cements their ties with a key friend of OPEC and Glencore .... they are wily old cats.

Sasol, staying on the subject of oil markets, announced that they would be entering into some oil hedges. In other words, wanting to secure a floor to their price received - "we have entered into hedges against the downside risk in the crude oil price to increase the stability and predictability of our cash flows." 48.68 Dollars a barrel for 7.6 million barrels, for the current quarter and then 47.06 Dollars a barrel for 16.8 million barrels for the following two quarters (the second half of their financial year). And as the company says, they are currently reviewing other commodity (I guess natural gas being one) and currency hedges. My experience with these things are that they are binary, if it works, you are a genius, if it doesn't, then you were stupid. And if there is no change, or little change, nobody notices. All the company is looking for is predictability, which can be incredibly difficult to achieve with volatile commodity and currency prices.

Over the seas and across the oceans, in New York, New York, stocks rallied again to close at some all time highs. Again. Sounds like groundhog day, right? The broader market S&P 500 tacked on 0.22 percent, the Dow Jones added 0.33 percent, whilst the nerds of NASDAQ rallied into the close to end the session 0.44 percent better. Sounds good, right? 0.22, 0.33 and 0.44 percent. I suspect that there are many reasons why stocks continue to rally, you must expect that regardless of the political affiliation of Wall Street money managers, they for one are glad that the election noise is out of the way and that they can allocate capital in a less hazy environment, two and more importantly, the mood of business has changed. Regardless of whether or not reality dictates otherwise, confidence in putting money to work and making decisions flows back to reality. In other words, the more confident you feel about the future (getting great "again"), the more likely you are to make investment decisions.

Cullen Roche also came up with this little nugget to explain something that many would grapple with - Repeat After me: "Bonds Don't Necessarily Lose Value When Rates Rise". He uses a practical example, herewith the following explanation that you may want to use. Again, it all depends on where you draw your line in the sand: " .... if interest rates rise then bonds prices fall in the short-term. Take, for instance, the case of a 5 year bond with a face value of $1,000 paying 2% per year. If interest rates rise by 1% every year that bond still pays you 2% every year plus you get your principal upon maturity. Here's how the value of that bond looks over the course of your 5 years:"

Why is this important? Since Trump became the President elect, equities have been bought and bonds have sold off to an about equal 2 trillion Dollars. Does that mean that the bonds will lose their value permanently? No. Bonds are issued for a multitude of reasons, some people think that debt is a horrible and no good thing, some people think that debt is very useful for cashing in on the future at current rates. Regardless of where you sit, the money that South Korea "borrowed" from the US to build their economy post the war that still to this day separated their countries, was a bargain. In fact, that may not be a very good example, obviously the US has intentions of keeping communism at bay, and by extension did all the free market capitalists of the world a huge favour. Thanks. Huge aid flowed to South Korea from the US, official US aid to South Korea from 1953 to 1960 was 1.745 billion Dollars. Roughly 15 billion Dollars on an inflation adjusted basis. Of course it depends what you do with the money at the time.

Oh .... before we forget, the ECB met yesterday, the WSJ has a *nice* summary - ECB Extends but Tapers Stimulus Program. It seems like more of the same from the European Central Bank, there has been a cut back in the stimulus from April, there has been a date put on the review, through to this time next year.

Company corner

Bidcorp made a relatively low level announcement two days ago, one that possibly has further reaching implications in time. The SENS announcement is as follows: BidCorp Food Africa and Puratos establish a joint venture. Who are Puratos? As they say in the release, this is a bakery solutions business. I snooped out their website a couple of days ago, Puratos (a Belgian based business) supplies chocolatiers, bakeries and patisseries with ingredients. In other words, in the busy lives of a bakeries, you need and want a proper partner to deliver your key products on time and make sure that they are of a very high standard. Puratos supply everything from glazes to fillings, emulsifiers (not the favourite of everyone), bread improvers and the like. Good looking bread is sometimes better tasting bread, is that right?

This is just the South African businesses getting together, with the possibility to expand and partner together globally. I guess. Bidcorp's business here is previously well known to all and sundry as Chipkins, and has a long history here in South Africa, nearly 100 years. Nowadays is it referred to as the Bidcorp Food's Bakery Solutions Division (BBS). For Puratos, this gives them a wonderful opportunity to find a reliable partner on a continent that has loads of potential. The combined entity here will now be known as Puratos Chipkins. Food is an emotive issue for many, most especially those who may be at the bread line.

Bernard Benson, the Bidcorp CEO is quoted as saying: "The proposed transaction provides BBS with an opportunity to grow its existing business and to develop new products and tailor-made solutions for the baking industry Employees will be exposed to new skills and job opportunities, innovative products and international best practices." Nice, good work. We really like this investment theme of food being made easier inside of urban living that has become tougher, from a time perspective. Whether the consumer wants more bread, more fresh fruit or vegetables, all neatly packed, fresh and healthy, that is what businesses like Bidcorp will deliver over time.

We continue to accumulate what we think is a fantastic opportunity. There will continue to be multiple opportunities in many geographies for the group to consolidate and follow the classic model of bolting on businesses that make sense, year in a year out.

Linkfest, lap it up

Where is the best place to work? Well, not the South African list, rather where is that place in the USA. According to Glassdoor, The Best Places to Work - 2017 Employees Choice is in order, Bain and Company, Facebook, Boston Consulting, Google and then World Wide Technology. Bain ..... really?

The deepest gold mine in the world is here in South Africa, a mine called Mponeng (translated to English, "Look at Me"), owned by AngloGold Ashanti. 4 000 employees travel one and a half hours a day to get to the "coal face". In an elevator that has a maximum speed of over 60 km per hour, faster than the speed limit in urban areas. It is the tallest (deepest) elevator in the world. At 2.5 miles, or 4 kms under ground, one gets to a 75 centimetre gold seam, that is it. And in getting so deep, a rare bacteria called Desulforudis audaxviator was discovered. A wonderful piece from the Visual Capitalist - Descend Into The World's Deepest Gold Mine.

PlayStation2 sold 158 million units. Version 4 has just clocked around to 50 million units. They (Playstation) have four out of the top seven consoles ever sold - PlayStation 4 Hits Milestone, Still Trails Its Predecessors. Would you own Sony shares though? Over a period of ten years the Sony share price in Dollars (the ADR) has managed a minus return of 27 percent. It turns out that wasting your time engaging in EA FIFA was better than owning Sony shares over the last decade. The one you engaged in an entertainment form, the other .... you lost money.

Two articles about the fact that other technology startups are contributing to the role of big pharma. Firstly, via Byron - Why is Johnson & Johnson getting into startups? And then ..... via the WSJ - Big Pharma, Short on Blockbusters, Outsources the Science. Peter Thiel, Google, Mark Zuckerberg and the like all looking to move their technological skills to solve big pharma problems. All the better for humanity I say. A whole lot of money is spent on R&D (12-15 percent of total revenues typically) when the truth is as follows:

Home again, home again, jiggety-jog. Stocks are mixed. We have started lower here today, Naspers lower as a result of TenCent being down two percent in Hong Kong trade. The Rand is a little weaker, that is giving some of the other Rand hedges a bit of a lift. Oh .... and the South Korean parliament have impeached their president.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Friday, 25 November 2016

Hold. . . Hold. . .

"Yesterday the SARB MPC delivered their verdict of the lay of the land. Their view anyhow. Which has been a little rosier than most over the years, perhaps they share my optimism. Firstly - Statement of the monetary policy committee. The flows post the US elections have been away from EM. The Reserve Bank Governor Lesetja Kganyago said something that we are all worried about: "The prospect of rising protectionism and its implications for world trade are also a concern." "

To market to market to buy a fat pig Yesterday the SARB MPC delivered their verdict of the lay of the land. Their view anyhow. Which has been a little rosier than most over the years, perhaps they share my optimism. Firstly - Statement of the monetary policy committee. The flows post the US elections have been away from EM. The Reserve Bank Governor Lesetja Kganyago said something that we are all worried about: "The prospect of rising protectionism and its implications for world trade are also a concern."

With these new levels for global bond markets and expectations for interest rates to rise, the expectations for inflation has risen on the local front. The inflation outlook has deteriorated a little as per the Selected forecast results: MPC meeting November 2016. Some of the hardest things to do are to make these types of assumptions, equally they had these Summary of assumptions on growth and exchange rates, as well as food prices and government debt. For those with debt the REPO rate is not expected to rise through 2018, that is at least the forecast based on the current assumptions.

Growth rates are anaemic. It is possibly fair to say that any government intervention in the economy has not yielded the results that they would have wanted. That is a political ideology debate, one that you will not win. It is not easy for the haves to understand the past as much as the have nots, most especially as a result of our history of separation of races, which was also a separation of economies and opportunities. Eduction is key to the change of everything, if everyone has quality education, the doors to extra opportunities open. Again, the ideological debate around what the state should or should not do in the economy is another matter entirely. For the time being the large part of the voting base has given their mandate to the state that has their own ideas of how economies should work. So, until either the ruling party changes their ideological approach, or someone else is given a chance, expect more of the same for the time being.

And. Wait for it. There is the small matter of Moody's making their decision on South African sovereign credit ratings today. Standard & Poor's decide next week. Fitch before the year is out. Last week Bloomberg had the following article - South Africa Junk Rating Seen Inevitable, This Year or Next. The article suggests that even if we get a pass now, the chances of us hanging onto investment grade through next year is around 20 percent. Like Lloyd Christmas says to Mary "Samsonite" in Dumb and Dumber, "So you mean there is a chance?"

Seeing as yesterday was when turkeys were being devoured left right and centre, pumpkin pie and all the rest, thanks being given for all sorts of small (and big) things, volumes and direction was hard to come by. At the end of the session the all share index had lost 0.11 percent, resources rallied nearly a percent and a half, financials fell nearly one and one-quarter of a percent. The gold price since the Donald became president elect, the gold price is down around 8 percent. Why? The strong dollar often brings about softer commodity prices. Yet ..... commodity prices, other than precious metals have caught a strong bid as Trump suggests big infrastructure build. We will see if he (the US) can afford it, or has the gumption for it. And, at the same time the Fed is likely to raise rates in December. No, not likely to raise rates, definitely will raise rates, the markets have it at 100 percent.

Company corner

Bidcorp delivered another trading update to analysts yesterday. It was a Management update on general trading conditions. This follows on a similar type of statement from two weeks back at the AGM. They talk about Brexit and currency volatility. In their UK operation they have managed to lock in a customer for the next five years and the pipeline looks good, the market is fragmented and they have an opportunity to consolidate further. Eastern Europe looks better than Western Europe. The South African business amongst their emerging market businesses looks decent enough. Mainland China is good, Hong Kong not so much, the tourist numbers are lower. Things in Brazil have seemed to have steadied.

What is pretty amazing is that they have managed to make 8 bolt-on acquisitions. And it is all around, Brazil, Italy, the UK, Belgium, Australia (3 businesses) and New Zealand. They even suggest that they could be in the business of looking for new geographies. All in all, a lack of food price inflation is a bit of a negative (that may change), in the UK there are early signs that it may pick up. My take from this general update to the investor community is that the company has seen volatility, all is good in the hood though. Better than people anticipate. We really think that this is a great investment theme. Food preparation and more people eating out. We maintain our buy rating on the business.

Linkfest, lap it up

This is a great display of what solar can do - Tesla powers a whole island with solar to show off its energy chops. The article doesn't say how long this solar system needs to be in place to recoup the cost of building the system, none the less this shows where the globe is heading.

Having context of market history doesn't help us predict the future but does help us understand the different emotions that drive markets - How Things Have Changed on Wall Street in the Last 50 Years. The biggest change is probably how fast information is spread and the rules limiting insider trading.

The next generation of computers is quantum computing, which will use quantum physics to change the way computer chips process information - Microsoft Spends Big to Build a Computer Out of Science Fiction. If Microsoft makes the break thorough to develop this system, it could be huge for R&D breakthroughs in the drug industry.

Home again, home again, jiggety-jog. It is a half day in New York today, expect another low volume day. Japanese markets are marginally higher, Chinese markets are looking better. US futures are around one quarter of a percent higher on the Dow, a little less on the S&P 500 futures. We should start a little better here. There will be Naspers results today. And whilst it may be the hustle and bustle through Black Friday today (and Cyber Monday), as well as just being one month to Christmas. Yes. Today is a month away from that.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

Attention: One of our sub-tenants is moving to Cape Town so we have some open offices to lease. There are 2 spaces available, one is 32 square meters, the other is 12 square meters. Fully serviced, in Melrose Arch. Please get in touch if you are interested.

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