New Look Wants Its Old Look Back

To market to market to buy a fat pig. US stocks had another down day yesterday; I saw a tweet from a US market commentator saying "What is this weird looking crimson colour on my screen?". The current drawdown in the market seems to be driven by a drop in commodity markets.

Market Scorecard. The Dow was down 0.59%, the S&P 500 was down 0.55%, the Nasdaq was down 0.47% and the All-share was down 0.56%. Naspers opened at an all-time high thanks to solid numbers out of Tencent yesterday. Naspers is now up 84% for the year.

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Company corner

Byron's Beats

We have often spoken about how being a pessimist makes you sound smart and being an optimist makes you sound naive. I find this very ironic and somewhat strange on the back of a globe that is constantly improving in so many facets of life. The stats don't lie. Poverty levels have decreased, healthcare has drastically improved and more and people are living better lives. Of course there are a lot of negatives out there that need improving. One of those is the environment.

It has also become very fashionable to beat down on Tesla. If you think Tesla will fail you come across as smart, cautious and articulate. If you believe in the Tesla story you come across as naive and a sucker to the smokes and mirrors that Elon Musk has managed to brainwash you with. That is more recently of course because the share price is down 22% from it's highs of September. To put that into perspective the stock is still up 44% so far this year. So who is actually wrong here? You be the judge.

Let's delve into the Q3 numbers they released a few weeks back and see why the stock has been so volatile.

Below is the revenue mix of the business. I have popped this in to show that this company is not just a vehicle manufacturing business, it is also an energy business. Although Energy generation only contributes 10%, it is growing fast. A big power supply agreement in Western Australia is just the start of what can be a very lucrative business.

Services and Other includes sales of second hand Tesla's as well as servicing of the existing ones.

Ok lets look at the vehicle segment. During the quarter they delivered their 250 000th vehicle. They delivered 26 137 vehicles in the quarter. The problem for investors was that only 222 of those were Model 3 vehicles. Elon Musk has promised 5000 a week by Q1 2018 with a potential 10 000 a week shortly after. Wall Street is not so sure. The company experienced some heavy bottlenecks this quarter, mostly with regards to battery assembly. This is why the share price has pulled back.

I understand the market getting a little jittery about failed promises. But this is a real business trying to achieve a very tough task. Soothing Wall Street is not their concern. Amazon went through the same 'yes they can', 'no they can't' seesaw for nearly 5-years before they achieved scale.

Tesla often gets compared to other vehicle manufacturing companies. But it is not just that. It is a utility, a software business and most importantly a battery manufacturer.

When all the other big car companies manufacture electric vehicles where do you think they will come knocking to buy those batteries? Tesla are first movers and have pumped billions into mainstream battery production. Solar and battery power will be a huge part of our future.

Their cars have an amazing allure, similar to Apple. They will continue to attract a premium because they are beautiful, simple and a great product.

Their current issues revolve around supply, not demand. Demand for electric vehicles will be massive for 50 years and more because of the low base it is coming off. Even when the other big vehicle players go mainstream.

Short term "investors" might be concerned about these bottlenecks but if you are patient I believe Elon Musk and his team will succeed. They have already achieved the impossible in a short space of time. As you can see, it is volatile but continue to hold tight.

As a side note, Elon Musk is making a very exciting announcement today about the Tesla Semi Truck. Jeepers he likes to keep his hands full. Rumour has it that these electric trucks will be able to follow each other like a train with only one driver needed to operate the first truck. Sounds amazing!

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Michael's Musings

Yesterday Brait released their 6-month trading update which has been keenly awaited due to their poor performance over the last 18-months. Since January 2016, the stock is down 70%. In February, after management wrote-down the New Look asset by R10 billion to R8 billion, I said most of the pain from New Look had been felt. I was wrong. Management has now written off the remaining R8 billion, so that their carrying value of New Look sits at zero. Due to the further write-down, Brait's NAV now sits at R66.62 per share. A 36.6% decline since September 2016.

A quick observation about the Brait share price. If you bought in 2012 you are still up 130%, which in most peoples books is a good return. See the graph below, where I drew a line from starting share price to the current share price. It doesn't look too bad? This is of little consolation if you bought in the last 2-years. It highlights though, your perception of a company and their performance is heavily influenced by when you bought.

Moving onto the numbers, we will start with New Look. Revenue was down 4.5%, life for like sales were down 8.6%, third-party e-commerce sales were up 17% and interestingly their own e-commerce sales were down 7.6%. The company says it best of what has gone wrong:

- its product positioning had moved away from its successful broad appeal, becoming too young and edgy.
- its customer messaging had become overly fashionable and in the process, no longer highlighting New Look's value proposition;
- excessive product options and increased complexity throughout the organisation resulted in the business being late to certain trends and as a result not clearing ranges by season end;
- reduced flexibility and speed as well as an increased cost base.

Management has a strategy to turn things around, which they say won't have a significant impact until next year. Going forward the carrying value of New Look can't hurt the Brait NAV but if Brait needs to put fresh capital into New Look that will have an impact. My rough calculations at the current run rate, New Look will have a couple of years worth of cash, so it doesn't look like Brait will have to pony up anymore for now.

Their other operations look solid though. Premier had a tough time due to the drought, which pushed down their profits. Their biggest asset, the Virgin Active gyms saw revenues increase and margins expand. Over the last year they added 17 new gyms, with more in the pipeline. Lastly their third biggest asset, Iceland foods, who are the leaders in frozen meals in the UK also looks to be on track. They are busy shifting to meet the changing consumer demand for instant and easy meals. Currently they are delivering 40 000 meals a week.

What to do with Brait? Currently the share trades at a 30% discount to the NAV, which is a big safety net; their other assets all look solid and are well-known brands. What is more likely, the share price going to R90 a share or to R22 a share? All things considered, it is more likely to go up than down.

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Linkfest, lap it up

One thing, from Paul

Here at Vestact we are keen investors in innovative healthcare companies. As people live longer, have better health insurance or fatter life savings, spending on complex therapies is rising sharply. This theme covers companies making medical devices, pharmaceuticals and hospitals. You should buy them all.

I thought that this was a great story, out yesterday. US regulators have approved the world's first tablet with an inbuilt sensor. It can be tracked inside the stomach, relaying data on whether, and when, patients have taken vital medication. The technology has been developed over 10 years by Silicon Valley-based Proteus Digital Health.

The immediate application is for patients who are not "all there", and may not be sure whether they have actually taken their meds today. That would be especially helpful for the elderly, and those with dementia or psychotic conditions. The data shows up on an app on their phones, and can also be accessed by their doctor, caregiver or nominated family members.

The tracking devices can be attached to all sorts of orally ingested drugs, which will be positive for pharma company sales.

More detail on the FT article: US regulators approve first digital pill with tracking system

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Bright's Banter

Michael once said that millennials like to spend money they do not have on experiences they do not need. This is true and probably one of the reasons why we hold companies like Priceline in our clients portfolios. There's been a surge in the number of people who aspire to travel the world, experience different cultures, unwind and meet new people. We think this trend will continue as we become more of a global village and millennials have more disposable income.

I know a lot of people who would like to go on a Greek holiday including myself, but we are not sure about the standard of living and how much the day-to-day costs would look like in Rands.

Here's a breakdown Rand for Rand from someone who went there a couple of weeks ago.

Fari is a friend I went to university with. Unlike me, she is well versed in travel. She's snorkelled in Thailand, parasailed in Mauritius, ascended the Eiffel Tower in Paris, walked the streets of London, chowed down on some Gelato in Italy, had camel rides in the deserts of Dubai and even stood on the edge of Victoria Falls in Zim. - How Much I Spent During My Trip To Greece

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Home again, home again, jiggety-jog. There were numbers from Mediclinic this morning that the market doesn't seem very happy with, the stock is currently down 2%. The Rand has strengthened today against all major currencies. Then this afternoon we have initial jobless claims out of the US.

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Not a good Look

"New Look was once valued (this time last year) at 34.8 billion Rand. By the first half of their financial year, the New Look value was 18.7 billion Rand. Around half. And now? I am afraid ..... 7 billion Rand."

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To market to market to buy a fat pig A stronger Rand held back equity markets for quite some time, eventually the Jozi all share index closed with a marginal positive bias, it could have been so much more. Shrugging off downgrades left, right and centre. What gives friends? Are you puzzled as to the strength of the currency when the ratings agencies are pointing to a worse to come scenario? Why are international investors piling into our bonds when local institutions are sellers? International investors have been net sellers of our local equities markets for months and months, Michael sent the Vestact WhatsApp group this graph he came across on Twitter, via Independent Securities. Which basically tells you everything that you need to know about foreign ownership of South African equities:

Basically, there have been outflows since August 2015. For over 20 months, foreigners have sold ZA inc. stocks. Naturally, local institutions and pension funds must have been buyers. I suggested to my colleagues the other day that if you take the high road scenario in South Africa, you may well find that people who are buyers of these stocks are getting at least a "half a generational" low on stocks. i.e. the price for some quality South African businesses, on an inflation adjusted level and even in Dollars, would prove to be a great price in the coming decades. That is of course, if you go with the high road scenario. I was also reminded by Michael too on the fabled Vestact WhatsApp group that this is what happens when your country melts down:

What is happening there? Well, for starters there is a thing called inflation going on. Venezuelan inflation hit 800 percent per annum last December. The economic policies disasters of the Maduro administration (yes, yes, the former bus driver) has led to chronic shortages of everything. Socialism does the very best to make everyone equal, equally poor that is. Herewith a graph of the inflation rate, courtesy of Tradingeconomics:

The other thing that is happening is that people buy hard assets, and equities fills that gap too. No matter how messed up things are, if you can still maintain hold over your fixed assets and the government does not seize parts of your business (always in the best interests of the people, you know!), they will be worth something when there is a downfall. It is inevitable, and the rebuild will happen. The problem is that doctors have fled. And are not coming home any time soon. I suspect that if "things" improve, the stock market will also fall to levels that are more agreeable, i.e. rerated as a result of stability. The short answer is that there are examples of stock markets that go to zero, namely Communist China in the late 1940's and Communist Russia around late 1917. So unless that happens, in a stressed environment, stocks hold their value better than cash.

Quick sticks, here is a breakdown of the Jozi market yesterday. Industrials added four-tenths of a percent, resources fell by that amount. There was unfortunate 12 month lows for the likes of Bell, Brait, Basil Read, Tsogo and Sun International, as well as Lonmin. Lonmin may be one of the biggest platinum miners in the world, the market values the business at 3.17 billion Rand. Or 250 million Dollars. According to the Mineral Resource and Mineral Reserve Statements, there are mineral reserves of 31.7 million ounces (and mineral resources of 180 million ounces).

All that matters is the cost of extracting said platinum. At current prices of 933 Dollars an ounce (Platinum price) multiplied by 31.7 million ounces, that equals 29.5 billion Dollars. Do the Math. If, as per their last results, the unit cost to mine an ounce was guided to be around 11,300 to 11,800 Rand. Multiplying the current platinum price (933) by the current exchange rate (Dollar to Rand) of 12.75 and you get to the current Rand price for an ounce of platinum - 11,898 Rand. The company is barely profitable and marginal at best with current prices. So ...... if you were a hardcore socialist, you may be doing the simplest of math and suggesting that these businesses are worth billion of Dollars, the truth is that it is teetering on the edge.

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Across the oceans in New York, New York, stocks rallied. The Dow closed at an all time high. The nerds of NASDAQ were back to levels seen at the beginning of last week. Yes, such was the anxiety of the tech sell off, that were are within one-third of a percent of the all time highs. It does show you the irrationality of market participants. Do you recall at the beginning of 2016, the NASDAQ sold off nearly 15 percent. Remember? The broader market S&P 500 was down nearly 10 percent. 45 days of carnage. Now just a distant memory really, at the time of course you were hearing people talk about the end of technology, the valuations were hairy and scary. They may still be, the point I am trying to make is that there are recent events in markets that felt like a scary and wild rollercoaster ride, equity markets are designed to transfer wealth from the fidgety to the patient. My advice when you feel like selling, buy a 20 Dollar fidget spinner, it may save you more money than you think!

The broader market S&P 500 added 0.45 percent whilst the Dow Jones was almost exactly the same, to the better. Tesla stock reached an all time high, the stock was up 4.7 percent to 376 Dollars (nearly) a share. Paul tweeted a link that is worth reading - Apple, Tesla shares are two of the biggest shorts in the world right now. They take their chances the shorts and are a necessary part of the market, in order to reach full price discovery. When the shorts really throw in the towel, you may see some irrational and explosive price action that defies some of the recent price moves. I suspect that 5.2 days of cover and margin calls coming, the "worst" for the shorts are pending, is my sense.

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Company corner

Whoa. Brait has been a disaster as an investment over the last 12 months. Yesterday the company suggested that it was largely to do with their revaluing of their fast retailing asset, New Look in the UK and that Brexit had a marked impact on the currency translation back to Rand. In fact, New Look was once 45 percent of the value of their portfolio, it is now 15 percent. There are two graphs worth noting from the presentation yesterday, firstly a reconciliation of the movement of the net asset value. Their net asset value is reflected in the internal valuations of all their assets, divided by the number of shares in issue (506 million shares in issue).

New Look was once valued (this time last year) at 34.8 billion Rand. By the first half of their financial year, the New Look value was 18.7 billion Rand. Around half. And now? I am afraid ..... 7 billion Rand. How is that possible? Firstly, there has been multiple contraction from 13.3 to 10.3 times, by their own internal metrics. So that is around 30 percent lower for starters. Another 20 percent is the currency, as per the slide. That is a collective 13.2 billion Rand less is their UK asset. The situation (Brexit) has worsened in recent days, a big backfire election on the incumbents has led to a moment of weakness where German Minister of Finance, Wolfgang Schauble (minus the umlaut on the a, bad for our html) has suggested that the door is open. i.e. If you are thinking about reversing that moment, you can. Politics ......

Wow. That is a massive fall off and a major embarrassment for a team that prides themselves on putting quality deals together. It has been nearly two years since they acquired New Look and since then there has been nothing but heartache for investors. These two slides, one taken from the last year annual report and the other taken from the recent results (we can put them on top of each other to save space), tell the story of the value of new look falling into a hole.

So what now? If you hold them, you can see that there is a discount to the NAV. That NAV has plunged. We like the business. We like the fact that Virgin Active should continue to grow (they have increased their footprint by 7 percent). We like their food businesses. Iceland and Premier. New Look do have debt of around 1.2 billion Pound Sterling. Consumer confidence in the UK remains subdued. Whilst several of their businesses have good prospects and remain solid, New Look may be more and more reliant on their expansion in China to start delivering. Those businesses roll outs will take time and be costly, as will their European expansion. We dig in our heels at these levels. Whilst it feels terrible as a holder to see a share price swoon from their levels over a year ago (down 60%), the management team and the biggest shareholder (Christo Wiese) certainly are working hard to deliver the superior returns that shareholder are used to.

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Linkfest, lap it up

If you go to a restaurant, the service is part of the experience, right? Ordering a gourmet burger, does that apply? What if your burger was cooked by a machine? This business (backed by Google) just raised 18 million Dollars to proceed even further down that path, the automation of basic cooking jobs - Momentum Machines Company. As they say: "Serving a burger this great at such affordable prices would be impossible without culinary automation." Who wins? The consumer. Who is the loser? The burger flipper, an iconic starting job for many Americans.

Netflix is up over 1 500% over 5 years and is the 'N' in the FANG acronym, here is the reason why - Netflix Surpasses Major Cable Providers in the U.S.

You will find more statistics at Statista

Another tech stock that has been on fire over the last 2 years is Nvidia, here is a great interview with the company's CEO and founder talking about the company and their products - The Most Important 24 Minutes of Your Year. They are positioned well for the explosion in growth that is coming from AI (Artificial Intelligence) and the IOT (Internet Of Things).

Here is the reason why tech companies are great businesses, their profit margins are huge! - The Top 100 Companies: Revenue vs. Profit

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Home again, home again, jiggety-jog. Stocks have started mixed to better here in Jozi, Naspers is recovering after a solid sell off days ago, now back at levels seen in early May.

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There is a New Look to Brait"s Assets

"The problem asset of the last 6 months has been New Look, where the valuation multiple has been decreased in combination with lower earnings. A double whammy on the carrying value of the asset! New Look has gone from their biggest asset to the number 3 position now."

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To market to market to buy a fat pig The rampant Rand rallies to a 16 month high against the US Dollar, yet somehow I don't see headlines suggesting that due to political stability confidence has returned. Twitter is full of crickets in this regards, not the T20 type, rather the evening in your garden type, happy that they have survived another day escaping the hadedas. I can bet your bottom Rand, Dollar, Euro, whatever currency you transact in, that if the Rand had experienced along with other EM (emerging market) currencies a sell off (i.e. was trading at 14 ZAR to the Dollar and above), Twitter would have been ablaze with the chattering classes calling the State of the Nation speech a shame and a disaster for investors of all sorts. Such is life, we neglect the good and try and reason and wrestle with the bad.

At the same time as this "good news" was presenting itself to Mr. Market, the inflationary impact is likely to be in the consumers favour, even if the CPI numbers from yesterday look horrid. Year on year increases for staples above ten percent, it is most especially tough for households that are always living from paycheck to paycheck. The only good news is that beer prices are only up 2 percent year on year, at least a brown bottle can help the pain of paying 17 percent more for bread and cereals, from this time last year. 21 percent more for sugar, sweets and desserts. Tiramisu anyone? 14.5 percent more for hot beverages, I presume that is tea and coffee, and not a hot toddy.

Check out the Consumer Price Index - January 2017 from StatsSA. In other news, did you know that the category "Books, newspapers and stationery" still make up 0.64 percent of the basket. Whereas tobacco takes up 1.93 percent of the basket, beer 1.98 percent and wine 1.05 percent. Bread and cereals? A mere 3.21 percent. Meat is a big one, 5.46 percent of the basket. Of course, no two baskets are the same, this is just a fair indication of the average basket out there, in both rural and urban areas.

Right back at markets quick sticks. The All Share inched higher by 0.04 percent, financials added just over one quarter of a percent, resources were the big losers, down just over seven-tenths of a percent. Gold miners sagged 1.4 percent, platinum miners gave up two and three-quarters of a percent. Amplats sank on a day that they released results, it seems that they are also forgoing a dividend. I am wondering what the parent is thinking about all of this? i.e. Anglo American, where to next, they seem to be boxed in here in terms of looking for buyers for certain assets. Nedbank, Remgro and MTN were at the top of the leaderboards, Amplats understandably (down nearly five percent), AngloGold Ashanti and Sasol (all Rand hedges) were at the top of the losers column!

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What the .... ? Banks, financial institutions and with false bids and offers is what the competitions commission is suggesting, on the US Dollar/Rand. "The Commission found that from at least 2007, the respondents had a general agreement to collude on prices for bids, offers and bid-offer spreads for the spot trades in relation to currency trading involving US Dollar / Rand currency pair. Further, the Commission found that the respondents manipulated the price of bids and offers through agreements to refrain from trading and creating fictitious bids and offers at particular times." Read the full release.

Very naughty for all the parties concerned to "monkey" with the spread, real numbers that importers and exporters use to price their goods and services. My only thoughts are as follows ..... each and every day I see adverts for Forex trading platforms with good looking people driving fast cars and enjoying the life of the rich and famous. These adverts are being targeted at retail customers, people who open accounts quickly and easily, and get trading with huge leverage, let loose on currency markets.

I suspect that most of these people who sign up, have no idea that they are swimming in murky blood laced full of great white sharks. You are going to get eaten. Yet ..... all these people with few forex trading skills and a credit card can be in the same waters as the sharks. And we think that the banks and financial institutions are somehow "fair" in all of this. Nope. The small guy runs out of oxygen, the pool is fake and the sharks feast on the flailing fish, whilst the big guys meet, greet in chat rooms and decide when they are going to "be involved". If .... of course the competitions authorities are right. Expect a settlement soon, is my sense.

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Stocks in New York, New York rose to record levels again, the Dow Jones Industrial Average added just over half a percent, the broader market S&P 500 added exactly half a percent whilst the nerds of NASDAQ nearly clocked a two-thirds of a percent gain. That tax plan .... my sense is until there is absolute clarity, the market participants, i.e.. the broader community are expecting fireworks. I hope for the sake of the levels and expectations that it is all justified, otherwise we all know the story, shoot first and then ask questions later.

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Company corner

Tuesday morning we had an NAV update from Brait for the end of their 3Q. The markets knee jerk reaction was to sell the stock down 6% but then as people read further and adjusted expectations, the stock price recovered to actually finish the day up around 1%!

The reason for the initial sell off was the NAV number coming in 21% lower than it was 3 months ago, now sitting at R82.45. The underlying assumption there though is that the Pound/ Rand exchange rate is 16.95 (currently at 16.13).

Since the Brexit vote the stock has had a very rough time, roughly losing half of its value. A big factor being the huge devaluation in the Pound. The Pound has lost around 25% of its value when compared to the Rand and given that their biggest assets, New Look & Virgin Active are valued in Pounds, currency translation matters in this case. See the current asset break down below.

The problem asset of the last 6 months has been New Look, where the valuation multiple has been decreased in combination with lower earnings. A double whammy on the carrying value of the asset! New Look has gone from their biggest asset to the number 3 position now. Why the drop? UK sales have been down, like for like sales are down 4.6%. Adding pain to the situation, the weaker Pound means that they are paying more for their stock, so lower margins.

There is a bright side though, their international push. International sales were up 17.9% thanks to their big move into China, store count currently sitting at 106. The international segment is still small for the overall business but as time goes on, will become more significant.

Going forward, I think the New Look valuation multiple will stay the same. It may take a few more quarters for the sales and by extension the profit numbers to stabilise but given the reduced size of New Look their impact should be muted.

I think going forward, the share price will trade in line with our currency (weaker Pound, stronger Rand being bad for the share price). If you have endured the sell off of the last 8 months, I would say that selling now will probably be around the bottom, time will tell though.

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Linkfest, lap it up

An update on the Elon Musk tunnel project, getting us around quicker and avoiding traffic will save us all bucketloads of time and money. It seems very difficult and very hard, to say the least - Elon Musk's Next Frontier Is Underground. for the record, we think the fellow is a genius, and have holdings in Tesla, which is trading near all time highs. As is the rest of the market.

Never sitting still, Showmax are taking on the low bandwidth areas of Europe, TechCentral has the story - ShowMax takes first step into Europe. We stay and remain long Naspers, and we think that this is still a fantastic opportunity.

I know it is a couple of days after Valentine's day, here is an interesting one on saving early, teach your kids and yourself (if you are young), the benefits of starting early - Four financial ways to say "I love you". The graphic goes with a 7 percent per annum return and shows that Lauren with her ten year head-start on Lulu, from a savings perspective, is likely to always stay ahead, despite the lower contributions. Courtesy Fidelity.

Added to that - The One Thing You Have that Warren Buffett Doesn't. Time. The same exercise from above, this presumes a 6 percent return. It really is as easy as saving 400 Dollars a month. The message is simple, start now, it is never too late.

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Home again, home again, jiggety-jog. Woolies had numbers, and so did City Lodge. Both look stodgy reflecting the current economy. We will cover those tomorrow.

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Make Brait Great Again

"We have interim numbers out of Brait on Wednesday. These numbers were probably more highly anticipated than usual thanks to the fall out from Brexit and Brait having major assets in the UK. Given that Brait is an investment company, the figure that people want to see is the NAV number that management feel is a fair representation of the value of their assets. "

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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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To market to market to buy a fat pig Stocks and all the major indices across the seas and far away closed better on the day, the Dow Jones up nearly one-fifth of a percent, the nerds of NASDAQ added three-quarters of a percent, technology stocks that were hurt last week and earlier this week are getting it back, whilst the broader market S&P 500 nearly managed to squeak out a half a percent gain. Would you believe that the broader market is reaching for the all time high, a mere one-quarter of a percent away now. And as good old Eddy Elfenbein said in his weekly letter, most major investment houses suggested that a Trump victory would strike disaster into the markets, volatility abound. That was all true for the first 18 hours and then ..... WRONG. Since the acceptance speech, there have been a few incidents, on the whole the new presidency is looking to be .... errrrr ..... more presidential?

Trump has met the old president and it seemed a little frosty (they had said some mean things about each other), Trump has met Shinzo Abe (they both have great hair) and Nigel Farage (not sure what, other than bigotry that they have in common). And markets have in the most part rallied. Bonds have sold off, that has possibly been the one thing that has kept us all guessing. Although, as I am reminded often enough, bond gals and guys shouldn't talk stocks, stocks guys and gals shouldn't talk fixed income. Unless of course you invest in both and need the steady income.

Quick check on the action from the street. There were results the night prior from Cisco that looked OK, the outlook looked cloudy. Funny that, in a world that is about the cloud, increasingly so. Walmart delivered quarterly revenues of 118 billion Dollars, that is nearly 1.3 billion Dollars a day, the outlook was also cloudy and "not as good as the market expected". Listen in and lean in (like Sheryl Sandberg does, anyone read that book, recommended?), a weeks worth of sales at Walmart is almost equivalent to the entire economic output from Madagascar in a single year. A fortnight worth of sales, the size of Afghanistan annual GDP. A month? The DRC.

The size of this company (Walmart) is just mind boggling, whether they will reach one trillion Dollars worth of sales first, or the fast growing Amazon will get there remains to be seen. Amazon is still around 1 quarter of Walmart in terms of sales, so there is a lot of very heavy lifting on that businesses part before they come even close. The market thinks that is likely to happen, Amazon (with loads of different businesses) has a market cap of 373 billion Dollars, Walmart has a market cap of 216 billion Dollars.

The other "big news" that isn't that big in market cap, and may change the world at some stage, is that both the shareholders of Tesla and Solarcity (sans Musk) approved the deal. Solarcity shareholders will receive 0.110 Tesla shares for each Solarcity one that they own. Timelines? Well, here goes - Tesla's Acquisition of SolarCity Receives Shareholder Approval: "With SolarCity's shareholders also having approved the acquisition, the transaction will be completed in the coming days. We would like to thank our shareholders for continuing to support our vision for the future. We look forward to showing the world what Tesla and SolarCity can achieve together." Done.

And then the most powerful woman in the world was at it again last evening. Not Ellen, not Oprah and not Michelle Obama. Or Angela Merkel. Nope, it is Janet Yellen. The Fed chair confirmed that she would stay on to the end of her term, she wouldn't be stepping down any time soon. She was being asked questions by a joint Congressional committee about the state of the US economy. That is right, you want to know what the little guy on the street thinks, ask the Fed chair. She knows . Janet Yellen suggested that rates need to go up. Yes. The Dollar index rallied to a 13 (odd) year high. Yes. The last time it was here was when Saddam Hussein was about to be captured and Sasol was about to list in the US, their ADR on the main board from the NASDAQ. Ernie Els bought the first share. Since then the stock in Dollars is up 123 percent.

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Back where the sun shines and there is not enough solar to go around yet somehow we must build nuclear power stations, markets had a ripping day. On or off the grid argument I guess, in a country where the economic policy must have the awesomeness of the guiding hand of the state/government, that is another argument all together. Can the state do better? The answer is probably always no, humans in their personal capacity always do better. Perhaps the answer is for us to always view ourselves as individuals who work as such (for ourselves) and enter into contracts with the organisations and companies in that way. View yourself as a tool supplying valuable services to the business. Rather than working for a company, work with a company. That may shake things up a little. The All Share rallied 1.23 percent by the close, back comfortably above 50 thousand points. Resource stocks were the leaders, up over one and three-quarters of a percent. Good work chaps.

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Company corner

We have interim numbers out of Brait on Wednesday. These numbers were probably more highly anticipated than usual thanks to the fall out from Brexit and Brait having major assets in the UK. Given that Brait is an investment company, the figure that people want to see is the NAV number that management feel is a fair representation of the value of their assets.

At the close of the period the NAV number came in at R105.06, which is down 23% from the R136.27 NAV number reported for their full year numbers ending in March. A big part of the drop in value is due to the weaker Pound, going from R21.21 (exchange rate at full year reporting) to R17.82 (exchange rate at current 6 month numbers) coupled with a lower earnings multiple being given to the New Look asset by management. Here is a quick overview of the underlying businesses.

New Look is 30 % of NAV, which has the bulk of its business in the UK. Like for like sales in the UK were down 8.8% (ouch), compared to international sales being up 16.5% and 3rd party online sales up 21.5%. For the current period 17 new stores were opened in China and for the next 6 months another 40 stores are planned to be opened. Good news for the group is that UK retail sales out yesterday were much higher than expectations, up 7.6% YoY, hopefully some of that strength filters down to New Look sales.

Their asset that we are probably most familiar with here in RSA, is Virgin Active which contribute 26% to the NAV. The asset looks strong with Revenue up 6%, EBITDA up 12% but probably more important, EBITDA margins expanding 1 percentage point to 21.2%. Over the next 6 months, they plan to add 8 clubs globally, 6 in South Africa, 1 in Thailand and 1 in Singapore.

The Premier Foods asset had good EBITDA growth of 36% YoY for the period and contributes 22% to the NAV. Iceland Food which is 12% of NAV had a slight drop in like for like sales over the year but are investing heavily in e-tail, which should pay dividends in the future.

Remember that Brait are also in the process of moving their residency to the UK and will then list on the LSE probably in the first half of next year. Given that and their asset locations, what happens to the Pound (and UK in general) is going to have a large bearing on the share price performance. The risk in Brait lies in their rather large high yield debt sitting in each of their underlying businesses. With high leverage, when things are going well they go very well, but when there is a large interest bill due periodically a miss-step can lead to profits being wiped out very quickly.

You can't bet against the Brait management team and Christo Wiese in the background. All their assets have entrenched market shares in their respective markets and New Looks expansion into China looks to be going well. All in all, the share price is going to be thrown around by the Pound in the short term but over the longer term the group will become more international and the value of their underlying assets should grow.

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Linkfest, lap it up

The numbers for last weeks singles day are rather staggering - Singles' Day Sales Scorecard: A Day In China Now Bigger Than A Year In Brazil. The amazing thing about those sales is that 82% were placed using a mobile site, something that the rest of the world is still playing catch up on.

Behavioural economics, do you like that subset of economics? I do, it is pretty much my favourite. As this article asks - Does Prospect Theory explain Trump and Brexit votes? "The slogans "Make America great again" and "Take back control" clearly refer to the lost grandeur of the past. This sets the reference point as a lost state that was much better than the current one."

Thanks Byron for this link! Remember the show Friends? That is so old that the jeans all look bad. Ross (my least favourite) and Joey (my favourite) and the rest of the gang. They still get 20 million bucks each a year. Why? They still earn 2 percent per annum each as a results of 1 billion Dollars of syndication revenue. Which is why ..... Amazon and Netflix are paying so much to lock down the world's best talent

Whoa! This is bound to shake things up a little in our office, we love running around here. Running is the Worst Way to Get Fit. Hmmmmm .... more gym work for the boys?

And then another one that is bound to not make you that happy. Or happy. Depending on whether you believe this or not - If You Want to Be Happy, Quit Facebook?

Staying with Facebook, and who uses what app where around the world, Paul drew us to the attention of this infographic - The Evolution of Instant Messaging. From an MIT time sharing system in 1961 to present day. So who uses what, the biggest in each country, great map?

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Home again, home again, jiggety-jog. Stocks across Asia are mixed. Shanghai is down, Hong Kong is up (Tencent is up a smidgen) and Japanese stocks are up over half a percent. US futures are flat, it has been a pretty spectacular two weeks in terms of the pricing action. Dischem list today. Retail clients got zero shares. I will visit the Dischem and see whether or not the staff or the people who shop in the stores care as much as South African Twitter finance suggests.

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Braixit

"Brait has been a stock that has sucked serious wind lately. And by lately, I mean in the last three months. Up until Brexit. And then basically everything changed from there, check out the share price taking a couple of legs down post the Brexit vote and the subsequent rerating of their UK assets."

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To market to market to buy a fat pig My mother in law used to sometimes get surprised when we would have a conversation about the market and I didn't know the exact levels or what Mr. Market did exactly today, or yesterday. I do check, it doesn't make much of a difference for our clients whether the market is up this amount or down that amount. At the end of the day, and we will beat this drum for as long as we do this (which is hopefully forever, our forever), it matters what you own.

In other words, the index is made up of all sorts of businesses that come and go over the decades, the businesses that you hold, you hope have the distance and endurance to continue to be around. There are some prime examples in markets all around the world of new businesses that are far bigger than long existing names. Newer businesses with better near term prospects certainly generate investment excitement, equally a business with a long track record can generate the same amount of excitement, based on current business trends.

If you are only interested in finding the best possible businesses to own and your choices are amongst the 70 trillion odd Dollars of global stock markets, then you are in a lucky space. The length and breadth of global equity markets is more than enough, perhaps there are too many choices . There is of course this pesky thing called exchange controls here, we are not alone. More for historical reasons than anything else. Russia, Nigeria, Pakistan, Brazil, China, Libya, Iran, the list is actually too long of all the countries that participate in trying to fart against the proverbial thunder of global market forces by instituting exchange controls. Luckily for us, we have a free floating currency and a pretty large allowance, perhaps less so in Dollar terms.

Unfortunately the worst thing about government overreach is that it always stifles investment. Stifling investment always leads to those further down the rungs of financial freedom to suffer. Those who have capital for historical reasons (inherited, generational wealth) will be fine, they will adapt and evolve. Those equipped with the new skills will survive and thrive. Those without skills as a result of poor base education and nutrition, and worse, poor implementation of government services, will unfortunately struggle.

There is somehow this misconception that wealthy people in society are not receptive to many more joining the ranks. False. In true capitalism everyone is encouraged to follow their dreams and give it a real go. Rather than failing to try. We have the will here in Msanzi, the recent political machinations may get you down, they are part of the wheels of democracy. In other countries (some of those that implement exchange controls) the opposition is dealt with in a different manner. i.e. Not favourably. We will be fine here in the end, pending downgrades or not. We are in a very tight spot, with little or no wriggle room.

OK, off to the markets, less politics, philosophy and scenario planning, that is not our "thing". Stocks in Jozi, Jozi sank nearly two-thirds by the close yesterday. We slipped away in the afternoon part of the session, we should catch a bid today as stocks across the oceans and far away, in New York, New York, caught a bid all the way through to the closing bell. The broader market S&P 500 added just over a percent, the Dow Industrials was a whisker from adding a percent on the session.

The nerds of NASDAQ were powered by Apple (up 3.4 percent to 115 and a half USD) to a percent and a half (give or take) higher on the day. Wow. Apple have certainly captured the imagination ahead of the release today of the new version of the iPhone, which happens to coincide with a big competitor of theirs having to recall a certain model. You know what I am talking about. See this related story - Apple's 21% Rally Is Tough Pill for 295 Funds That Bailed. Oops.

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Company corner

Brait has been a stock that has sucked serious wind lately. And by lately, I mean in the last three months. Up until Brexit. And then basically everything changed from there, check out the share price taking a couple of legs down post the Brexit vote and the subsequent rerating of their UK assets. Of course those Pounds are worth less Rands, a reverse Rand hedge if you will, as the hedge is NOT working in your favour:

In part the recent results have led the market to rerate the NAV again, which would probably fall further. And as such the price of Brait has given back some hard fought gains. Game over? Most certainly not, CEO John Gnodde has moved to London. With good reason, two days back the company announced their intention to list in London. First, they are going to shift business HQ to London. They give some background to the history of the business, in five years they have gone from a private equity business to a holding company:

"The Company raised ZAR8.6 billion through a ZAR6.4 billion rights issue and private placement on 4 July 2011, as well as a ZAR2.2 billion increase in its debt facilities. Since then, it has acquired significant stakes in a number of well-known South African and UK brands including Premier (in which it holds a 91.4 per cent. shareholding), Iceland Foods (57.1 per cent.), New Look (88.7 per cent.), Virgin Active (78.2 per cent.) and increased its shareholding in DGB (81.3 per cent.)."

DGB is Douglas Green Bellingham. The others you are familiar with, not so? If not, use the best library known to mankind, the inter-webs. Yet ..... Trivial Pursuit is still fun.

Why a London listing? The UK is their biggest market in terms of assets, that makes sense. It gives them flexibility (open market) to do deals quicker and of bigger size. It allows them to attract a multitude of new investors with more money, and that includes any further capital raising exercises. Inclusion into various high profile indices gives them the ability to raise money to execute deals at cheaper rates. Lower risk profile is synonymous with cheaper cost of capital. The way that the company views it from a tax point of view (as a result of where the assets are) is that it is tax neutral.

They are also teeing up shareholders for another capital raise, another rights issue, although it may not happen, this is all market dependant. There is no commitment, just be aware I think is what the company is saying. Timing? End of March next year. The common thread with Steinhoff and Mediclinic recently is that they externalise their business by acquiring assets offshore and then it makes more and more sense for them to list their businesses where it becomes cheaper to raise money.

It is better for Mediclinic/Steinhoff and now Brait to have access to capital in markets closer to their biggest assets. I have no idea why people in general feel like they are rushing away, we should rather celebrate these captains of industry. Well done. The shares are held here too, by South African pension funds and by extension large swathes of investors who have retirement savings. All three of these businesses have delivered market beating and superior returns to their stockholders and regardless of the currency, should continue with superior management skills and deal execution to be able to continue that trend. We endorse.

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Linkfest, lap it up

If you want to change someones mind, agree with some of their points so that they are not forced to stand their ground and then lay bread crumbs for them to follow the view that you want them to see - A philosopher's 350-year-old trick to get people to change their minds is now backed up by psychologists

Thanks to the curiosity of human kind we are pushed forward - The boundaries of science. "And the rate of progress is accelerating: the number of scientific publications has doubled every nine years since the second world war."

We are all linked, even more so as the globe gets smaller. As emerging markets become wealthier, thanks to better economic policy, this has a ripple effect across the globe that has winners and losers - The Global Poor, the Great Enrichment, and the American Working Class

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Home again, home again, jiggety-jog. Stocks are mixed to higher across the globe. Markets across Europe are touted to open lower, the leaders of the region are meeting in beautiful Slovakia, the capital Bratislava looks nice at this time of the year. Not so much for the UK, their central bank is still grappling with how to deal with the pending EU wilderness. We will see how it unfolds.

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Great Brait(ish) Pound

"There is little that you can do about the currency. There is nothing that you can do about the average British voter, even if 1.2 million of them suffer from voters remorse."

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To market to market to buy a fat pig Stocks sank yesterday in the city founded on the largest gold pile known to mankind, at the time. And now, I guess. In terms of single locations, the Grasberg mine in Indonesia may well contain over 100 million ounces of gold, South Deep, just down the highway from our offices has reserves of around 81 million ounces. The bronze medal for gold reserves (nailed it!) goes to Lihir, an island in PNG. Mponeng, a mine owned by AngloGold Ashanti near Jozi, has reserves of just short of 40 million ounces. I declare Jozi the winner! Yes please. Gold buffs, tell me if I am wrong or right, ok?

Stocks in the losing column included Brait (a NAV analysis below), South32 (the unbundled assets from BHP Billiton, a beast of a market cap at 106 billion ZAR), in the winners column was Amplats and Mr. Price. Or Senhor Price, if you are looking for the upmarket version. The Rand continues to strengthen, not so much as a result of whatever reason you are looking for, rather this graph from the The Daily Shot. Exhibit one sports lovers:

That is a basket of all emerging markets, courtesy Bloomberg and The Daily Shot, getting thrashed in January (as they were finished) and winning again as the global search for yield emerges again. Yields are going to stay low in the developed world, inflation is low, growth is slow too. The environment will change, for the better, I suspect that this will happen once the confidence returns. We need a few years without a stumbling from Greece. Help us from politicians.

Over the seas and far away, in New York, New York, stocks sank at the beginning of the session and it stayed that way through to the close. The Dow sank one-fifth, the broader market S&P 500 sold off around three-tenths and the nerds of NASDAQ ended the session down 0.4 percent. Energy stocks and the price of WTI (West Texas Intermediate) deflated the market, loads of supply and the market still looking for signs of balance. At least from where I sit. Perhaps I am wrong, we will use it all up before we move to Mars. Then I am reminded of the old saying, the rocks didn't run out when the stone age ended. We are nearing the end of earnings season, a few more stocks left to cover from our side. Alibaba, who report today, Twitter (a way back) and Under Armour.

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Investing is not an Olympic sport. Investing makes curling look like the 100m dash. Investing makes the Air Pistol 10m event (I am sure they are the finest in the world at their discipline) look like Modern Warfare/Halo. Or Wolfenstein for your older folks. Investing takes just as much discipline and hard work. The only difference is that the gold medal for investors is obtainable, you only have to do the basics right. Don't speculate, treat every cent earned and saved with the same respect each and every time you make an investment decision. You know how hard you worked to earn it and then save it (instead of spending it), treat it wisely. When you buy a stock of a listed business, you are buying a piece of the future. Nobody can see around the corner. There are dreamers who do, there are doers that dream. Be somewhere in the middle.

Too often I see people look at a specific stock price and suggest that is a good business. If the stock price is doing well, then so must the business. That is often true, sentiment does have a lot to do with valuations. Why did companies with non-existent revenues trade at crazy multiples back in 1999/2000? Businesses with basically little revenue, traded at billions of Dollars of market value. It seemed that people didn't care what the companies did, cynically one would say, if it had a dotcom at the end, it was good to go. That ended badly.

Amazon stock went from 107 bucks to 7 bucks during the meltdown. It didn't mean that Bezos didn't try harder to change the world. He possibly felt bruised and battered. He continued along his merry way, trying everything. Webvan was a concept that failed in the Dotcom era, the idea was brought back to life by the aforementioned Amazon, they became AmazonFresh. Born in 1996, Webvan listed at the top, in March 2000. They raised 375 million bucks and Mr. Market said they were worth nearly 5 billion Dollars on day one. According to Wikipedia, the company had revenue of 395 thousand (that is 395,000) dollars and 50 million Dollars in losses (that is 50,000,000). Why would any investor at scale part with 375 million (that is 375,000,000) Dollars? I suppose greed and fear is hard coded in all of us.

You could argue that if Webvan took small steps and didn't shoot for the stars, they may well be the number one fresh food seller via warehouses with sophisticated delivery and storage mechanisms. I mean, an internet business. Remember that the internet is a service, a tool, simply because a business uses that as a platform does not mean that they are "an internet business". 'nuff said. Pets.com, another high profile example of the dotcom bust, went from internet king and high profile IPO to liquidation in 268 days. Try not be the person that looks for Pets.com.

Be the marathon runner. Time your investments carefully with your life goals. If your life goal is to become the best amateur photographer in greater Johannesburg, then be that person and have enough resources to do that. Just as an aside, I have lived in the city of gold since 1999 and I still struggle to spell it, what is up with that? I stick in two s' and one n. Ignore the short term noise that is associated with equity markets, there are more distractions and more information than at any time in history. There are more formal savers today than at any other point in history. Opinions are like you know what. Have a strategy and stick to it. You may well look left (don't do it Chad) and see someone else #winning, competing is just as important. There is only one Warren Buffett, one Charlie Munger, one John Templeton, one Bill Miller, one Peter Lynch, one Jack Bogle and dare I say it, one Carl Icahn and George Soros. They have had their fair share of Chad moments. That does not mean that they don't try harder next time.

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Company corner

Brait, the investment holding company, released their Net Asset Value update for the first quarter of the financial year. The share price has taken a terrible beating lately as the impact of Brexit takes it's toll. NAV decreased by just over three percent for the quarter, largely due to the Rand. The release fleshes it out: "The impact of the UK referendum vote to leave the European Union resulted in the Pound weakening 7.5% against the Rand from ZAR21.21 at 31 March 2016 to ZAR19.62 at 30 June 2016."

So where is the Rand from there, the end of June? It is another 12.12 percent stronger since then to the Pound Sterling, compounding the matter even more. There is little that you can do about the currency. There is nothing that you can do about the average British voter, even if 1.2 million of them suffer from voters remorse. I read that, there are genuinely voters who thought they were doing x (they were doing an x) by voting for that. Whereas they hadn't really been doing that. The stock is down at the get go this morning, just over 6 percent as the collective mull the implications of the stronger currency.

First, let us look at what they own, and what they value it at. As Michael points out, if you are using a lot of gearing, then a Enterprise Value to EBITDA value is better to use. So cash generation to pay down debt is important. For better or worse, Brait owns mostly retailers, food and clothing. As you can see, New Look is the one investment that has been "not good".

Negative headlines and an outlook that looks a little less rosy means that consumers are likely to spend less. Paul tweeted a link to an article (Internet Of Clothes: Nanny Wardrobe Reminds You To Wear Items, Or It Gives Them Away) that says: "The academics behind it lament that as a society we own four times as many clothes as we did 20 years ago, but regularly only wear about 20 percent of them" What? So it turns out that we buy more clothes than we need and we wear them less often. The likes of H&M, Marks & Spencer, TopShop (the Arcadia Group), Debenhams, Primark (more so) and Next are all competitors, it is not an easy space to operate in. Yet, they should all benefit from this trend.

What to do now? The stock took some heat, ending the day down around 5 percent. Trading below the reported NAV, my sense is that calculating the worst of the recent performance of their main asset and adjusting for the currency, the market has got it about right. I am very sure that the Brait management team are feeling very bruised right now. I wrote to a concerned client yesterday: "The irony was that investors were scrambling to own stocks exactly like this. The Pound has almost everything to do with, equally Brexit sentiment. Whilst New Look will suffer locally (in the UK), the offshore business (i.e. China) will grow quicker. The other businesses are all fine."

Yes, they are weak at the moment, the share price, based on a weak home (UK) looking market. A good space, and they no doubt will sweat their assets even harder. Expect some of the best operators and allocators of capital in the ZA market, and now on a global scale, to drive the wagon harder. We accumulate the stock at these lower levels.

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Linkfest, lap it up

Thanks to our old pal, Prof. Mark J. Perry, at the AEI (American Enterprise Institute) for pointing this out, the price of New York City cab medallions is falling fast (see - July 2016 Medallion sales chart). See all of that and more from an excellent post by Prof. Perry about lift sharing, power (of politicians) and general disruption - Some ride-sharing links. Yellow? Can you hear me? It is the Black Uber calling .... we are eating your lunch.

A very long interview with Tim Cook, the Apple CEO, a great read for lunchtime, bedtime, breakfast, heck, all the time. He is quoted and nails the investment thesis in half a sentence: "I've always thought that Apple's primary role is to delight its customers." See - Tim Cook On Apple's Values, Mistakes, And Seeing Around Corners.

These are the globes top 10 most powerful brands, my question is: "Where is Apple?" - These are the world's 10 most powerful brands. The ranking was based on the following, 'The top 10 is calculated by awarding each brand a score out of 100, based on "factors such as familiarity, loyalty, promotion, marketing investment, staff satisfaction and corporate reputation" '

We have had a number of maps in the links showing how distorted the world map is. Here is another one, highlighting the potential that the African continent has due to it's size - Your view of the world is distorted. This interactive map will show you just how much

The Brexit fears/ jitters seems to have gone quiet, at least in main stream media. This law suit highlights the complexities going forward, where does everyone stand in front of the law? Well people are not sure - A Hairdresser's Lawsuit Could Spell Trouble for Brexit

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Home again, home again, jiggety-jog. Stocks are marginally lower on the local front, across the ocean to the north, Steinhoff have marginally upped their offer for Poundland by two percent or so. There Elliot, you are amazing, now take the money and run.

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