Money with a dash of Funny: Naspers

Showing posts with label Naspers. Show all posts

Tuesday, 27 February 2018

Buffett, Bekker and Bezos

To market to market to buy a fat pig. If you do any form of long-term investing, Warren Buffett is the man you aim to emulate. As such there are two big 'Buffett' events investors look forward to, the first is the annual Berkshire AGM and the second is Buffett's annual letter to shareholders. The man has an amazing ability to make complex matters sound simple! Here is an awesome example of his way with words and concepts.

"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

Why the purchasing frenzy? In part, it's because the CEO job self-selects for "can-do" types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it's a bit like telling your ripening teenager to be sure to have a normal sex life."

I came across this WSJ article on Friday, Investors' Zeal to Buy Stocks With Debt Leaves Markets Vulnerable, which ties in rather well with another point Buffett made. Using debt, backed by the stocks (margin) is a sure fire way to blow up at some point. Someone who comes to mind, is Christo Wiese, he used margin to increase the size of his Steinhoff holding. The result is that he was a forced seller, locking in huge losses (not to mention the losses to the banks!).

Anyone would agree that buying Berkshire 50-years ago would have been an inspired purchase, one that would set you up for stress-free retirement. If you used debt to buy them, you probably would have sold them in the early 70's. The below table shows the four biggest pullbacks in the Berkshire share price over the last 51-years. Note that even great investments over the long-term can lose half its value in the short term.

"This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."

Lastly, here is a breakdown of their top stock holdings. Note how big their Apple position is, not bad considering that they only started buying it during 2016. Buffett was asked when he is going to buy an iPhone. His reply was along the lines of, for as long as he doesn't own one, the market is not saturated; there is scope to sell more phones.

One thing, from Paul

Our most important local stock holding, by far, is Naspers. Its our largest holding in almost all JSE portfolios. In our view, it should be trading at twice the share price that it is today. The aggregate value of its various Internet and media assets far exceeds its current value on the market.

So it's pleasing when we see other market participants who hold the same view. London-based Goldman Sachs analyst Lisa Yang had this to say about Naspers in a short note issued overnight (I have lightly edited her comments, and spelled out abbreviations, to improve the readability):

In our view, Naspers' recent underperformance was mainly driven by technicals and currency moves, overshadowing several positive developments surrounding fundamentals, transparency and improvements in the political and macro environment in South Africa. With the stock down 15% relative to JSE All Share Index over the past three months and its net asset value discount back to 41% (near all-time highs), we see a compelling entry point and reiterate our Buy rating (on our conviction list).

We believe local selling pressure has largely played out and Naspers should benefit from an increase in foreign inflows into South Africa.

While currency moves may be a further headwind for the stock, we note a lack of relationship historically. Additionally, a stronger Rand would benefit Naspers' Pay TV division, (22% of 2018 earnings, >100% excluding Tencent and Mail.ru).

Disclosure and transparency have improved, and we also see management optionality to navigate technical headwinds through increasing the liquidity of their depositary receipt listing in New York, or a full dual listing.

Fundamentals are showing a positive inflection as demonstrated by interim (6 month) results, and we expect further improvement and potential corporate action to crystallise the value of the private assets. Overall, our sum of the parts-based 12-month price target changes by around 10% to R4,198, mainly due to currency issues.

Naspers is currently trading at around R3,300 per share, so this target of Yang's at Goldman Sachs is almost 30% higher. Consider buying some more here! Of course, the trick with successful investing is to own stocks before everyone else starts liking them.

Market Scorecard. Green on the screen all around. The Dow was up 1.58%, the S&P 500 was up 1.18%, the Nasdaq was up 1.15%, and the All-share was up 0.26%. Looking at the list of companies at 12-month highs, it is packed with retailers and banks. Pointing firmly to local consumer and business confidence. The cabinet re-shuffle last night, was a bit of a mixed bag. Reputable people are in the key positions though, which should boost confidence further. In time, the list of ministers will shrink as departments are removed, which will probably see some questionable appointments removed? The one thing that the re-shuffle shows though is that change takes time. It also means that this song will make a comeback - Stomach in Chest out.

Linkfest, lap it up

Byron's Beats

I have always enjoyed reading Business Insider USA. They have a unique style which keeps things interesting. It may not always be deep analysis but they do manage to find facts and stories which demand my attention.

Business Insider SA is now up and running. Subscribe to their newsletter or follow them on twitter. You will enjoy their articles. Like this one about our new (and returned) finance minister, Nhlanhla Nene.

He farms cabbages and sold life policies - 8 things you didn't know about Nhlanhla Nene.

Bright's Banter

Amazon A Monopoly Or Nah?

The latest sector that Amazon has put in jail? The shipping sector! Amazon announced it was getting into delivery of goods. Immediately, the share prices of UPS and FedEx tanked five percent on opening bell or around $8 billion in market capitalisation, continuing a pattern of cascading stock prices within hours of Amazon announcing interest in any given sector.

Analysts claim the threat is overblown, pointing to UPS and FedEx's complex infrastructure. Amazon accounts for approximately just five percent of total revenue and pointing to all the CapEx expenses of about $5 billion each for FedEx and UPS in the most recent year. Last year after seeing Amazon lease delivery jets and buying tractor trailers, my colleagues alluded to the fact that Amazon might be planning on taking some of the delivery burden in-house and maybe taking over the sector once they understand it's ins and outs.

However, Amazon's Spokeswoman Kelly Cheeseman said "Our own delivery efforts are needed to supplement that capacity rather than replace it" referring to the surge in holiday demand and basically brushing off any speculation of Amazon becoming a full-time player in the delivery sector. Well it would appear that FedEx and UPS should get ready to be supplemented. It doesn't matter what the reality is — the perception that Amazon will win is a self-fulfilling prophecy as they will begin choking access to the mother's milk of business: capital.

FedEx and UPS, regardless of the reality, will lose a big chunk of their value as analysts begin to sharpen their pencils and look at a new gangster in the town of shipping: Amazon!

Below is an article which is the total opposite of my argument.

Here's why Amazon isn't a monopoly

Vestact in the Media

Bright chats to SAFM about Sasol's 6-month numbers yesterday - Sasol's liquid fuels volume down.

Home again, home again, jiggety-jog. Asian markets started well in the green but have since slipped into the red, Tencent is down 0.7%. On the data front, it is a rather quiet day. New Fed Chair, Jerome Powell, will appear before congress later. Given how Fed sentiment has been driving markets this year, I'm sure every word he says will be scrutinised.

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Monday, 4 December 2017

Takealot of Cash

To market to market to buy a fat pig. American politics is driving markets at the moment. Another Trump advisor, Michael Flynn, has been linked to Russia. He pleaded guilty to lying to the FBI, while they investigate Russia's involvement in the 2016 US elections. Markets tanked on the news.

More significant though is that the Senate passed their version of the tax bill. They managed to get the bill through without needing to increase corporate tax from the initially proposed 20%. Considering that tax legislation is arguably the most far-reaching and important legislation a government will pass, you would think it is something you would take your time deciding on. Well, at least enough time to read the bill before passing it. Here is a picture posted by a Democrat Senator showing that some of the changes to the bill were made so late, that they didn't even have enough time to type them all up. Worse is the fact that not all the words are legible.

As a South African owning US stocks, the only thing that really matters to me is what the corporate tax rate is. 20% is much better than 35%. Long term though a strong US is good for everyone, as such it would be nice for lawmakers to take at least a weekend to read through all their amendments and think what the long-term implications could be. From here, the Senate and the House need to agree on a final version of the bill before Trump then signs it into law. Both the Senate and the House's bills are similar, meaning things are still on track for a final version to be through by the end of the year.

Market Scorecard. Even though markets tanked n the Flynn news, they mostly recovered by the end of the session. The Dow was down 0.17%, the S&P 500 was down 0.20%, the Nasdaq was down 0.38% and the All-share was down 0.54%. Friday on the local market, Naspers had another red day, down over 4%. Tencent in Hong Kong is up 2% today, Naspers should be well in the green to get the week going.

Company corner

Byron's Beats

Last week we received interim 6 month results from Naspers. Being by far the biggest company on the JSE, this event now attracts a lot of attention. As expected, the results looked stellar on the back of another incredible period for Tencent. Let us take a look at the numbers which remember, are now reported in dollars.

Revenues increased by 33% to $9bn. This resulted in a big leap in core headline earnings per share, up 65% to $3.50. In Rands that equates to R48 a share. Let's assume they grow earnings by a very conservative 10% in the second half. That would mean they would make around R100 a share. Currently trading at R3531 a share, the stock trades at 35 times earnings. I remember a time when Naspers traded at 150 times earnings. Despite the phenomenal rise in the share price, the stock has actually become cheaper related to earnings. People often forget that.

Here is a nice visual of their revenue mix. SNS (social network services) includes Tencent and Mail.ru

We often cover Tencent separately, in light of that I want to focus on the rest of the business.

Ecommerce grew revenues by 15%. This division includes Etail, Travel, Payments, Classifieds and Food Delivery. All areas with great potential, especially in the untapped developing markets. Classifieds (OLX) have just become profitable. Etail which includes Takealot and Flipkart will suck funds for a while to come. That makes sense, building distribution centres and sorting out logistics is capital intensive. We can see how long it has taken Amazon to build scale. But once you have that scale, you are almost untouchable. Flipkart has a 70% market share of online retail in India.

The Ecommerce division used up around $318m whilst the Video Entertainment division made around $234m. They are still using the old profitable video business to fund the new exciting ecommerce division.

Video entertainment had a decent period. Trading profits grew by 4%. The Rand has stabilised to the dollar but many of their operations throughout the continent suffered on the back of weak currencies. Showmax is doing nicely in South Africa and also has a solid presence in Poland. Maybe they got there before Netflix?

All in all these numbers look solid. We are comfortable that the rest of business is on the right track, continuing to grow and become more influential within the massive shadow of Tencent.

The current allegations against Multichoice are upsetting. Their silence on the matter has also been disappointing although they did announce on Friday that they have implemented an internal investigation. As a Naspers shareholder, I wouldn't be too concerned, the rest of the business is far too big and separated to be heavily influenced. As a concerned South African however I will follow this story closely. If the allegations are true, I hope we see some heads roll and the consequences dealt with accordingly.

Michael's Musings

On Friday morning, AdvTech released the following SENS, Voluntary disclosure of fraud. One of the head office financial managers had been stealing from the group since 2015. In total the cash stolen was around R 5 million, which they should be able to recover through insurance and from the individual. As part of the SENS announcement, they stated revenue figures had been inflated and expenses were understated, resulting in a R35 million once off adjustment.

I'm not sure how the financial manager was stealing, but in my mind if you are stealing you would decrease revenue and increase expenses, creating a gap for you to take money? This incident shows the risks that come from owning and running a business, it is the reason why equity holders demand a higher return on their investment. The once off adjustment is rather small in AdvTech's life, around 1% of their revenue.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: Multichoice is paying big bucks for bum content; Winter Olympics coming up on the North Korean border; Takelot crashes on Black Friday: and fancy app Expensify uses humans behind the scenes - Blunders - Episode 81

Bright's Banter

Pharmacy-retail giant CVS Health agreed to a $69 billion acquisition of health insurer Aetna in one of the biggest M&A deals of the year.

CVS is trying to get ahead of Amazon's expected move into the pharmaceuticals business , which has several pharmacy-retail companies tucking their tails between their legs.

Aetna is one of America's oldest health-insurance groups and CVS is one of America's largest pharmacy-retail companys making this one a very big deal indeed - CVS To Buy Aetna Reshaping Health Care Industry

Vestact in the Media

Forbes has written a nice detailed piece on Discovery and their new bank, Michael gets a few comments mentioned - Bank On This Man.

Home again, home again, jiggety-jog. Following Asian markets, our market is off to a green start too. Nothing major on the news front today. Steinhoff announced this morning that their audited numbers would not be released this week as expected but sometime in January. They will however release unaudited numbers on Wednesday. Not what you want to hear as a shareholder.

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Tuesday, 21 November 2017

Groans over David Jones

To market to market to buy a fat pig. Yesterday we spoke about Naspers, today we will move onto the first derivative of Naspers, Tencent. The stock is up 126% this year, which has propelled it to become the first Asian company to break the $500 billion market cap milestone.

I remember reading about Tencent last year in US research notes, where the author was talking about them as an insignificant participant on the US market. Since the Alibaba listing, Jack Ma's company have been the go-to stock to take advantage of China's growth. I would say that is no longer the case, Tencent is firmly on the map and in play.

Market Scorecard. Green, everywhere I look I see green. The Dow was up 0.31%, the S&P 500 was up 0.13%, the Nasdaq was up 0.12% and the All-share was up 0.62%. Even though our market is sitting at record highs, I was interested to see that the list of stocks at a 12-month low is much longer than the list of stocks at 12-month highs. Good to see Mr Price on the 12-month high list, they had a solid set of numbers out yesterday. Another stock that is on the list, sitting at 12-month high and an all-time high is Capitec who is about to cross the R1 000 a share mark.

Company corner

Michael's Musings

Last week Woolies released their 20-week trading statement, which as expected showed that they are under pressure. Their most important division from a profit margin perspective is what used to be called 'clothing and General Merchandise' and now is called 'Woolworths Fashion, Beauty and Home'. The division declined on a like for basis by 2.4% for the period.

Their food division, which I am a huge fan of, had a positive period with like for like sales increasing 5.3%. Unfortunately for the group, the operating profit margin in the food division is around 7%, and the operating margin for clothes is around 17%.

David Jones had a tough time as they transition to their new business model, like for like sales were down 5.3%. A key contributor to the drop in sales is the revamp of the David Jones flagship store. The pictures I have seen look amazing; the goal is to make shopping there an experience.

The second most profitable division, Country Road, had mixed results. They saw like for like sales down 0.4% but they gained market share and overall sales were up 8%. I will be interested to see if they have given up margin to gain market share. In their full-year results, Country Road had an operating margin of 10% with management pegging their medium-term target at 12%.

All in all, David Jones contributes 28% of Woolies profits, it's their biggest division. The newly named 'Woolworths Fashion, Beauty and Home' coming in second with around 24% of the profit. Because David Jones is struggling to turn around, the market is feeling down on Woolies, only giving it a P/E of 13. Compare that to Shoprite on a P/E of 21 and Pick'n Pay on a P/E of 25. There is no doubt that the Woolies share price going forward is very much tied to the fate of David Jones. If management gets the turnaround right you will see Woolies re-rate to a P/E around 20, which would mean the share price going up 50% without any increase in the underlying profit number. For now, the share price probably won't do much in the short term.

Linkfest, lap it up

One thing, from Paul

Vestact is an asset manager, so we don't actually offer advice about setting financial goals, taxes, retirement or estates. We just try to protect and grow the surplus capital that our clients bring to us.

Having said that, conversations about money often stray into those related topics. I enjoyed this Humble Dollar blog post by Jonathan Clements. He makes the point that the most important determinant of the quality of our financial lives is containing our fixed living costs (those are our regularly recurring expenses such as bond, rent or car payments, rates and taxes, insurance premiums and groceries). The lower those are, the easier it is to save. Living within one's means is the key to a stress free life.

Read the whole thing here: Number One Number

Byron's Beats

The theory of investing can get very complicated and philosophical. That is why Warren Buffett is so great to read, he manages to keep things simple in his explanations.

At the moment we are going through a very interesting period. Tech stocks are soaring, making everything else look bad. Many people feel it is necessary to sell out of other sectors and follow the momentum. The FOMO is real.

Others feel the opposite, they want to sell the high fliers and buy into shares that have done badly. These people have a more contrarian nature.

We feel it is important to stick with quality companies but diversify the sectors you have exposure to. Sectors go through cycles. Tech is doing well and justifiably so. We are heavily exposed here and are very pleased with the way things have gone. But we are maintaining exposure to other areas where we feel growth is imminent like healthcare and retail. Their time will come. Remember the Buffett quote which we repeat so often. "The stock market is a device for transferring money from the impatient to the patient."

Bright's Banter

Since Amazon bought Whole Foods, they have slashed most of their prices on 'cool kid' grocery staples such as apples, bananas, eggs, avos, kale, almond butter etc. The company is now offering up to 20% off on turkeys for Thanksgiving - but there's a catch! You see, if you're not an Amazon Prime member you'll have to sign up for the 12 month $99 membership to enjoy this Thanksgiving deal.

Current Amazon Prime members have a lot to be thankful for this Thanksgiving! However, we wonder how Amazon is going to integrate Prime successfully into Whole Foods without leaving non-Prime members feeling excluded in the process - Amazon is ruining the Thanksgiving spirit.

Vestact in the Media

Here is Michael talking about Naspers being A Whisker Away From R4000, on CNBC Power Lunch.

Bright gets a mention in this IOL piece on the Vodacom numbers last week - Vodacom pushes government for allocation of high demand spectrum.

Home again, home again, jiggety-jog. Tencent is up around 3% this morning, which means Naspers will probably open with a '4' at the front of its share price! Asian markets are well in the green which means our All-share will be aiming to break 61 000 points for the first time.

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Monday, 20 November 2017

Naspers 4000

To market to market to buy a fat pig. Friday was Naspers day. Thanks in part to Tencent rising 3% on Friday, Naspers was up over 4% at a stage and closed up 3.6%. What is amazing is that we still have 6-weeks left of the year and the stock is up 90%; it only needs another two days like Friday and it will have doubled for the year. Stocks that double in a year are normally your smaller caps, it is wild to think that a one trillion Rand company can double. The current market cap is R 1.7 trillion.

After the market closed on Friday, Naspers released a trading statement for their last 6-months:

"We expect core headline earnings per share to be between 62% (132 US cents) and 67% (142 US cents) higher than the comparable period's 212 US cents."

Based on the above Naspers will sit on a P/E around 40, which is still high but with all the underlying growth it seems reasonable. We prefer to value Naspers as an internet investment holding company, where their NAV is a more important determinant of what the share price should be. We roll this number out regularly, it has been a while since we quoted it though. Naspers' shareholding in Tencent is currently worth R2.3 trillion, which means Naspers market cap of R1.7 trillion is R600 billion lower. That is before we take into account their other listed investments of Mail.Ru worth R14 billion, Make My trip also worth R14bn and Delivery Hero worth R25 billion. We will see their detailed 6-month numbers next week Wednesday.

Market Scorecard. It was a divergent day for markets globally on Friday, US markets opened in the red and stayed there for the day where our market opened well in the green and just pushed higher. The Dow was down 0.43%, the S&P 500 was down 0.26%, the Nasdaq was down 0.15% and the All-share was up 0.97%. Discovery had a good day out breaking R160 a share for the first time and Woolies was up 3% recovering some of their recent loses.

Company corner

Byron's Beats

Last week Thursday we received interim results from Mediclinic. It was a very busy 6 months for the business as they tried to turn around the Middle Eastern division whilst dealing with tough conditions in South Africa and Switzerland. Here are the financial highlights for the 6 month period.

As you can see, it certainly isn't easy but if you strip out a few once offs as well as the write down from the Spire asset, things are slowly improving.

Unfortunately the share price has taken more heat. The market had high expectations for Mediclinic following an incredible growth patch and then the London listing. What we have seen here is a rerating for the company as these expectations have not been met.

The underlying fundamentals are still strong and the company is reinvesting a lot of capital into their hospitals to keep them world class.

There is also the pending Spire transaction which, as of this morning has been taken off the table. Maybe this is not such a bad thing. Running hospitals is an expensive business. It seems Mediclinic already have their hands full. The share had popped 6% on the news but has since pulled back.

We are monitoring this one closely, we are still happy to be patient and see what they can achieve over the next 6 months. Stay tuned.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: Da Vinci for $450m sure, but Twombly for $50m?; Wors outfit gets eaten; Japanese apologise profusely for train that leaves 20 seconds early; and tough times for cops on the American rust belt - Blunders - Episode 79.

Michael's Musings

Africa's rising population will either be a huge opportunity or a burden. People represent potential customers and are a production input, generally speaking more people means more GDP in that particular area - Visualizing a Rapidly Changing Global Diet.

Home again, home again, jiggety-jog. Asian markets are a mixed bag this morning, Tencent is up around 2% though, which means a green Naspers and probably a green All-share. It is a big week for interest rates locally, tomorrow the MPC sits down for three days to decide what they are going to do with Repo and then on Friday evening we will find out what happens to our debt rating globally. I suspect the MPC will leave things as they are, we are still well within our inflation band and they will want to monitor the movement of the Rand over the next few months.

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Wednesday, 11 October 2017

Robotaxi, Write That Down

To market to market to buy a fat pig. Yesterday the IMF released their World Economic Outlook report, which gives an update on their forecasts of growth for this year and for next year. For the globe as a whole, the report was positive. Last year global growth came in at 3.2%, the IMF forecasts that for 2017 it will be 3.6% and for 2018 it will be 3.7%. Added to that, 2017 is on track to be the first time in a decade that every region grows. Growth solves a multitude of global problems, it is good to see the engine is ticking over smoothly.

Unfortunately, the South African growth forecast was lowered from 1% to 0.7% for 2017 and for 2018 it was lowered to 1.1% from 1.2%. With global growth on the up, blaming the rest of the world and financial crisis of 2008 for our lack of growth isn't remotely a valid excuse anymore. Our lack of growth is a home grown problem and until we accept that fact, things can't change. When you think that 17.2 million South Africans go to bed hungry every night, I feel a mixture of anger and sadness around all the own goals that we score. If history has taught us anything though, it is that us South Africans are a resilient and resourceful bunch.

Market scorecard. After the blip of red on Monday, US markets were back to their green ways on Tuesday. The Dow was up 0.31%, the S&P 500 was up 0.23%, the Nasdaq was up 0.11% and the All-share was up 0.17%. Reading a report on Naspers this morning, generated by a major US investment bank, their estimate is that the Naspers share price will rise between 20% and 120% over the next 12-months. The focus of the report was that Naspers is currently trading at a 42% discount to their NAV. The price target is an educated guess at best and these guys are wrong all the time, so don't take it to heart. What is not a guess is the current discount to NAV though.

Mark Mobius of Franklin Templeton was saying, forget about selling/unbundling the Tencent stake, rather the company should just buy back shares to take advantage of the massive NAV discount. If Naspers went down that route, the NAV gap should close over time, and not to mention that the return on their own shares could be better than many of the other companies they are looking at investing in.

Company corner

Byron's Beats

Nvidia, the graphics chip maker, is soaring to all time highs. Yesterday it closed at $188.93 a share, up 77% year to date. Over 5 years it is up 1320%. The reason for this? Gaming, Artificial intelligence, self driving vehicles, data centres and cryptocurrencies all require graphic processing chips. Nvidia is one of the leaders in a sector that is booming. Yesterday Nvidia released a statement titled Nvidia Announces World's First AI Computer to Make Robotaxis a reality. Robotaxis, is that even a word? I am sure it will be soon! Here is an extract from the release.

"NVIDIA DRIVE PX Pegasus will help make possible a new class of vehicles that can operate without a driver -- fully autonomous vehicles without steering wheels, pedals or mirrors, and interiors that feel like a living room or office. They will arrive on demand to safely whisk passengers to their destinations, bringing mobility to everyone, including the elderly and disabled."

Linkfest, lap it up

One thing, from Paul

What really makes older people happy? Is having a lot of money the most important thing? Or is being healthy and having good relationships with those around you more important?

To find out, researchers at the University of Michigan ran a survey of over 26,000 Americans over the age of 50, interviewing them every two years, starting from 1992. The results suggest that having good spousal and friend relationships have the greatest impact on creating life satisfaction during retirement. However, being physically and mentally healthy comes before everything else (those in poor health can't concentrate on much else). As for money, having enough to indulge in leisure spending leads to higher satisfaction, but other types of spending are less significant. Also interesting was that relationships with grown-up children are not really that indicative of happiness amongst older people.

You can read the summary paper here - Spending, Relationship Quality, and Life Satisfaction in Retirement

Michael's Musings

With regards to the market and statistics in general, the point where you draw a line in the sand has a very big impact on the results that you generate - Reference Points.

With the surge in the price of bitcoin, it is becoming more profitable for hackers to gain access to computers for their computing power instead of the potential data they can steal - Forget stealing data - these hackers hijacked Amazon cloud accounts to mine bitcoin.

A brand signifies a quality standard, a set of values or a lifestyle association. With the number of brands increasing and competition heating up, companies are having to work harder to get their brand to stand out from the pack; good news for the consumer, not so good news for company's bottom line - Is Brand Loyalty Dead?

Home again, home again, jiggety-jog. Asian markets are flat to green this morning, with the Nikkei reaching a 21-year high. Data out of the US today includes, FOMC minutes and JOLTs (Job Opening and Labor Turnover) numbers. Dischem was up over 8% yesterday after a favourable trading statement, lets see how they go today.

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Thursday, 24 August 2017

The Gaming Blizzard

To market to market to buy a fat pig. How does 'Naspers R3 000' sound? Well depending on if you own them or not, it will either be sweet, sweet music or the sound of a cat 'singing' in the night. Yesterday afternoon Naspers was briefly above R3 000 a share and then settled at R2 993 at the close, meaning that it is now up 48% year to date and up 500% over 5 years. You have heard us talk frequently about how much more Naspers has in the tank, so we won't go down that road again. Bravo Naspers, bravo. Next stop R 4 000 a share.

To go with the new record highs from Naspers, the All Share finished up 0.23% at 56 130 points, a whisker away from its own all time highs. In the movers and shakers column for yesterday is Long4Life, who have just locked down their third purchase since listing in April - Share Purchase Agreement to acquire Inhle Beverages. From the outside, it looks like the synergies they are going for are that the current management will stay in place doing what they do best, managing the operations. Long4Life will bring a big balance sheet to help the business expand as well as the skills of Brian Joffe and Kevin Hedderwick, to further streamline operations.

In New York, New York things were less rosy, the Dow closed down 0.4%, the S&P 500 was down 0.35% and the Nasdaq was down 0.3%. The market pundits are attributing the lower markets to White House uncertainty and lower new home sale's numbers. Good news for US consumers is that the Amazon's purchase of Whole Foods is one step closer, Amazon deal for Whole Foods wins U.S. regulatory and shareholder approvals. As an Amazon shareholder, I am interested to see what they have in store for this business.

Company corner

Michael's Musings

A company that we haven't spoken about before is Activision Blizzard, who own brands like Call of Duty, Star Craft, World of Warcraft and Candy Crush. Depending on your age and how you spend your evenings, those are all very big names. The significance of this company though is that Tencent owns 12% of it.

A quick history of the company, Activision was founded in 1979 to produce games for Atari. Blizzard Entertainment was founded in 1991 by three friends fresh out of university. Fast-forward to 2007, Activision merged with Vivendi Games who already owned Blizzard Entertainment and renamed the merged entity, Activision Blizzard. Then in 2013, due to Vivendi having a huge debt burden, they (Vivendi) sold the bulk of their shares to a consortium, which included the founders of Activision and Tencent. Then the last major division of the company is King Digital Entertainment, the maker of Candy Crush, who Activision Blizzard bought for $5.9 billion at the end of 2015.

Here is a look at the company breakdown:

The first thing to note is those very healthy operating margins, company wide they average out to 35%. To put things into perspective, in the last quarter they had revenues of $1.6 billion (around R21 billion) and operating income of $576 million, not bad for a company that sells games. Currently, all the money is made from owning some of the biggest gaming brands ever, where they continuously launch new versions of those brands. Given that being in the entertainment industry is all about being relevant to the tastes of the consumer at that moment, it is important to have many different games on the market at the same time to try buffer the ebbs and flows of the consumer's feet.

Continuously coming up with new content can be challenging and results in lumpy profits, a hit game this quarter and none the next. I think the future of the company is in the e-sport sector, where creating leagues, having teams and a solid fan base means more stable profits. For comparison, the NFL has 240 million fans watching 7 billion hours of content creating $12 billion in revenues. The NBA has 176 million fans watching 2.1 billion hours generating $5.2 billion in revenues. In last financial year Activision Blizzard had 450 million monthly active users, playing 40 billion hours and watching a further 3 billion hours to generate $3.6 billion in revenues. E-sport still has huge potential as a form of entertainment that fans will pay to watch, remember that it is being considered for the 2022 Olympics.

Until e-sport becomes a significant part of their revenues and earnings, here is how the company plans to stay relevant. Their "moat" so to speak.

Like any good tech firm the market has high expectations, currently giving them a market cap of slightly more than $48 billion and a P/E ratio of 43. What is impressive is that even with such a high multiple, they are still able to have a dividend yield of 1.2%. Back to the P/E, which looks rather high considering that in the last quarter two of their three divisions had shrinking revenues and the last one was flat, so no growth currently and management aren't forecasting any either.

For Tencent, I think it is a great investment, not only because Tencent has about tripled their investment value over four years but because of their ability to team up on projects. Tencent and Activision Blizzard have already collaborated to make Call of Duty for the Chinese market and I wouldn't be surprised to see more collaborations in the future. An investment for your personal portfolio? I am less convinced. Personally, I own a few mostly because of my personal nostalgia attached to their brand portfolio but also because I think e-sport is going to be huge in the future, when I can't be sure though.

Linkfest, lap it up

The reason that monopoly is still around today, even though it is the cause of families not talking to each for weeks is because of the nostalgia factor. Monopoly is associated with our childhoods where we have fond memories so then buy it to introduce it to the next generation. The same is happening with remakes of old movies and with video games - Nintendo's SNES Classic Edition will come with three of the four most popular games made for the original version

Google and Walmart are teaming up to make ordering online even easier - Google and Walmart are joining forces to take on Amazon. This is a step in the right direction but their offering still seems miles behind that of Amazon.

Here is a good take on the current debate of what Naspers executives should earn - Allan Gray is dead wrong - Naspers CEO earns his salary, and then some

One thing, from Paul

There are rumours swirling around that the cash-strapped SA government is thinking of selling its remaining stake in Telkom to fund a further bailout of SAA. In investment terminology, that would be what we call "pruning your roses and watering your weeds". Ridiculous! - SAA R10bn rescue from sale of stake in Telkom

Mind you, perhaps this kind of muddled thinking and operational uselessness is just a function of large, government controlled bureaucracies with soft budget constraints? The US Navy has a budget of $117 billion, and they keep crashing their ships? - Spate of mishaps, deadly accidents prompts Navy to examine training, leadership

Byron's Beats

This morning I had a client asking about the Steinhoff/Shoprite/STAR deal that will take place next month. This article titled Steinhoff to list Star unit on JSE as Shoprite deal is back on explains the logistics of the deal.

Here is what I had to say about it.

"There has always been complicated deal making activity when it comes to Steinhoff.

They probably feel the company trades at a discount in Europe because of their big Africa exposure. The listing of STAR will be the beginning of the offloading process.

Because STAR will own a controlling stake in Shoprite, there will certainly be lots of collaboration between STAR brands and Shoprite. Shoprite have a well established infrastructure network in many big African countries. STAR will certainly leverage off of that.

They are all well managed retail businesses targeting all sorts of geographies and demographics. In general, all growing.

I still think the best way to benefit from all of this is to own Steinhoff who will own most of STAR which in turn will own 23% of Shoprite (but has over 50% control). That is where the bulk of Christo Wiese's assets sit. Generally these deals are spearheaded by him and suit Steinhoff's long term strategy."

Bright's Banter

Most breakthroughs in science and business come when an insane idea makes its way to the commercial world. On that note, here's a story about a microbiologist who is collecting athlete poop for his research - Scientists Are Collecting Poop From Elite Athletes To Try Put Their Endurance Into A Pill

If you want motivation to reach your personal goals, a healthy dose of public shaming and FOMO can help - That Annoying Runner On Your Social Media Feed Is Deeply Influential

Home again, home again, jiggety-jog. There were FY numbers from both Woolworths and Bidcorp this morning. The Woolies numbers were underwhelming, the stock is down 5% off the bat. The Bidcorp numbers are inline with market expectations, so the stock is trading slightly higher. Steinhoff are being investigated again for irregular tax practices, they dropped 9%. We will follow that closely. Good news for consumers and retailers is that the CPI read came in lower than expected, at 4.6% meaning that an interest rate cut at the next MPC meeting is firmly on the table.

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Friday, 30 June 2017

Nike Spikey Likey

"For the full year the company managed to grow revenues by 6 percent to 34.4 billion Dollars, that is up 8 percent on a currency neutral basis. There are now (as at the year end) 985 Nike stores globally. Some of the iconic ones stand out, in New York and London, the experience is always "good" and the variety and quality is always excellent."

To market to market to buy a fat pig Stocks in New York, New York, were all lower across the board, tech stocks taking a pasting again. It seems like the volatility has certainly opened up, there have been bouts of selling and buying of the NASDAQ, which is all of 3 percent from the all time highs. That hardly sounds like a massive sell off? By the end of the session the Dow Jones had fallen four-fifths of a percent, the broader market S&P a little more than that, whilst the nerds of NASDAQ had sunk nearly a percent and a half by the close.

Alphabet sold off again, down nearly two and a half percent by the close. Apple down a percent and a half, Microsoft down 1.88 percent by the close. Tech stocks selling off on matters such as the inability of the current US administration likely to get through their tax reforms without significant compromise. And of course the travel ban, which may impact on the ability of the technology firms to attract quality employees.

Locally stocks sold off around half a percent as a collective, industrials were down nine-tenths of a percent by the close. At the top of the pops on a sliding US Dollar were the likes of Glencore and Anglo American, as well as BHP Billiton and Capitec. Sasol and Richemont were at the bottom, as well as British American Tobacco. Resources by the close were around three-tenths of a percent better on the day.

More politics is likely to dominate the landscape as the ANC policy conference takes place over the coming days. It is always unfortunate that politics should trump the business of business, most especially when politicians around the world have very little real life business experience. Yet they dictate to the very people who produce the revenues as if everything is "so easy". We are in the interest of talking about businesses that succeed, despite any political meddling. And it is a busy day, herewith some company insights below.

Company corner

We promised another take on the Naspers results from last Friday. This is about the most muted price reaction that I have seen in a while to the Naspers results. First things first, Naspers trades at a significant discount to the value of the stake that they have in Tencent. I can see why in some investors minds, this is more than a little irritating. For starters, as of the close of business in Hong Kong, the price of Tencent was 284 Hong Kong Dollars a share. That puts the market capitalisation at 2.69 trillion Hong Kong Dollars. 33.85 percent of Tencent (what Naspers owns) is 910 billion Hong Kong Dollars. Which equals more or less 1.513 trillion Rand! The Naspers market capitalisation was 1.13 trillion Rand, a gap of almost 400 billion Rand. i.e. minus 400 billion Rand for all the other businesses.

How is that possible? Is it that Tencent holders are valuing the company at too high a multiple and are the local investors being more "realistic"? Even if Naspers were ONLY holding Tencent, applying such a deep discount on a fast growing asset would seem a little bizarre. The fact of the matter is that there are businesses deep in Naspers, not all of which are profitable and some are also legacy businesses. I suspect that a lot of it has to do with the very heavy weighting in the South African index, where foreigners have been net sellers of the stock. Added to that, the local investment community has always thought that the stock is overvalued, so you are stuck with the company trading at this big discount.

Plus of course, there is internal debt that belongs to Naspers itself, not Tencent. As an investment holding company, it is not uncommon to discount share price relative to the NAV. It happens often. Tencent is not cheap, it trades on a historical multiple of 50 odd times, growing earnings in the mid twenties (percentage wise). As such the PEG ratio is still pretty high, the market is expecting BIG things from Tencent and thus far it has delivered.

This is an incredible article from Bloomberg about how they ended up here, and profiles Martin Lau, the Tencent president -> Tencent Dominates in China. Next Challenge Is Rest of the World. Read it, from beginning to end. You will learn many things about the corporate culture at Tencent and how they are far from done, only starting out. Again, it is an entertainment business, widely misunderstood by the investment community. Let us face it, many investment analysts are unlikely to engage in the new game releases on their handsets. The president of Tencent (as per the article) did some deep research into the business they were buying, becoming so good at the game (that they were buying), he clocked a top 100 all time score.

Naspers holds a whole bunch of investments, other than Tencent. Delivery Hero lists today (Delivery Hero Prices $1.1 Billion IPO at Top End of Range) and Naspers owns around ten percent (less post the dilution of the share issuance). It is another reminder of their global investment reach and aggressive nature to stay current.

Unlike the noise making fellows who are looking for quick returns, we remain very patient on the prospects of the company having multiple businesses inside of their stable. Tencent itself continues to evolve, with multiple business avenues. And if you can continue to accumulate the stock at a discount. It is a great opportunity, we continue to recommend this company as a buy.

Nike reported results last evening, they are a little out of sync with the rest of the businesses that we own. These numbers are for their fourth quarter to end 31 May, a strange financial year end in any place. There certainly are no governments that run their fiscal year to end May. It must have been something about starting the financial year at the beginning of the North American summer, when athletes and enthusiasts get back on the road. Perhaps I will email them and ask them why this is the case.

Immediately one is struck with the fact that the direct business (website and own stores) and the international business, as we thought and conveyed, is doing better than the North American business, driving sales at a faster pace than the market anticipated. Revenues for the quarter were up 7 percent on a currency neutral basis (5 percent up in Dollars), the company saw double digit growth in the likes of Western Europe, Mainland China and other emerging markets.

Diluted EPS rose 22 percent over the corresponding quarter, to 60 US cents, for the full year up 16 percent to 2.51 Dollars. Helped by lower tax rates, outside of the US and fewer shares. 3 percent less shares, as a result of course of company buybacks. During this year the company bought back 14.9 million shares for 820 million Dollars, as part of the extended 12 billion Dollar buyback program. That is around 55.03 Dollars a share, which is higher than the closing price last evening, which was 53.17 Dollars. The 52 week trading range has been 49.01 to 60.33 Dollars a share. We will get to the market and the price reaction in a bit.

For the full year the company managed to grow revenues by 6 percent to 34.4 billion Dollars, that is up 8 percent on a currency neutral basis. There are now (as at the year end) 985 Nike stores globally. Some of the iconic ones stand out, in New York and London, the experience is always "good" and the variety and quality is always excellent. This sales matrix below tells you a lot about the business. It is still predominantly a shoes business, with 61 percent of sales coming from footwear (see right at the bottom of the table). It is still predominantly a developed market business, with 60 percent of the sales of shoes and clothing coming from North America and Western Europe.

China, although growing quickly, is only 12 odd percent of the total sales. Ditto emerging markets. These are the fast growing businesses and present big opportunities. In the unofficial transcript, the point is clearly made by Andy Campion (The CFO and executive vice president): "current per capita spend on Nike in those markets is still less than 1/10th of the per capita spend on Nike in more developed markets. Over time, macroeconomic drivers and consumers' expanding passion for sport will create even greater capacity for the Nike Brand to grow in those markets."

The market agrees wholeheartedly that the company is once again poised for growth and is through the worst of the North American "retail malaise". The stock, pre-market, is up 7.81 percent to 57.32 Dollars. I suspect that in the coming days and weeks, the analyst community will now be "excited" about the prospects and I think that they are likely to be upgraded. We continue to accumulate what we think is a positive multi-decade investment theme, thanks to growing health awareness and higher emerging market incomes. Likey, likey, Buy Nike.

Home again, home again, jiggety-jog. Stocks have started better here today. It is a short week in the US next week, a half day Monday and a day off Tuesday (4th of July). The start of summer in the Northern hemisphere, is that still a thing, with regards to the volumes?

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Monday, 26 June 2017

Naspers Streaming Ahead

" Recently there has been a more accelerated investment in internet enabled businesses and divestments of less core businesses in key geographies. Notwithstanding streaming technology taking hold, our continent is a little behind the curve, and the company managed to add nearly 600 thousand households to their satellite TV business over the last year."

To market to market to buy a fat pig Stocks in Jozi caught a bid Friday, in particular some local industrial stocks, Remgro and Naspers were top of the pile, Mediclinic and AB InBev were on the opposite end of "matters". The all share index added over four-fifths of a percent on the day, at 51 and a half thousand points now, a "lost" three years. We keep mentioning that those buying the index or SA Inc. stocks, with a high road scenario panning out, they have captured the same prices for 36 months now.

Of course, your guess on the high road scenario is as good as mine, low economic growth and flopping around a lot hardly makes for confidence currently. We do have a deep savings culture amongst employed people in South Africa and we do have to rely on fewer folks for debt issuances than many other countries, Russia, Turkey and the like. Spare a thought for our neighbours Mozambique, they are trying to locate hundreds of thousands of Dollars, which relative to their economy is a lot. Mozambique total GDP is less than 15 billion Dollars, we are talking about a number of 3-5 percent in loans unaccounted for. That is like us missing 200 billion Rand. Mind you ....

The trouble with our neighbours to the right (I have a soft spot for them, I lived there for a little less than a decade) is that a distinct lack of capital markets means that they are beholden to external funding. It is easier to lend money than it is to get it back, at least in this case. Just how, pray tell, is this possible: Mozambique debt audit says $500 million in loans unaccounted for.

Wow. Sounds unfortunately like the same old story, over and over again. Greece and those countries that are serial defaulters are hardly doing themselves a favour. No wonder trillions of dollars of developed government bonds are trading with negative yields. In fact, according to Fitch, at March 1 Global negative-yielding sovereign debt jumps to $9.5 trln. On the one hand there is the return of capital, on the other hand, even at the riskier and higher yield, there is no money coming back. I can't say that I find either attractive.

Across the seas from here, stocks were mixed Friday, the Dow Jones Industrial Average lost a fraction of a point, whilst the broader market S&P 500 added 0.16 percent and the nerds of NASDAQ closed the session out nearly half a percent to the good. Microsoft, Alphabet (Google), Facebook and Visa all spurred the tech heavy index higher. Visa had earlier seen some positive commentary from the analyst community post their investor day. It is a bit of a strange one, often when all are in agreement that Visa has decades of growth ahead, that may seem worrisome at some level. Yet, I have to agree with the commentary about the shift away from brick and mortar to ecommerce, the likes of Amazon are leading that charge. Pay with a tap or a fingerprint, Visa and their market peers still process the payments.

I read in this article, Visa Inc (V) Investor Day Takeaways, research from Barclays, that 17 trillion Dollars of consumer spending in 2016 was still in cash and checks. What is quite interesting is that the margins for Visa on the digital transactions, where most of the growth is coming, is higher than physical transactions. I suppose that not having to "see" your card (and perhaps only know the three digit code at the back) is the future for all of us.

The card details are stored in the cloud, either the phone is prompted for a fingerprint or you insert the CVV code, and no more physical card. With all the new payment options, all you need to have is your phone, or extension thereof, your watch. Keep your phone in your pocket and pay with your wrist. Next level skills, right? One earnings stumble from Visa and the market will no doubt punish the stock, up until now there has been next to nothing to fault in their relatively short period of being listed.

Company corner

On Friday we saw the release of one of the most widely held stocks here for our investors, and in fact a company that has attracted a lot of attention on both sides of the investment aisle for the better part of the last decade. Naspers. For one, a company founded in physical printing of newspapers over a century ago has managed to stay relevant with investments at the right time in the likes of satellite TV and of course the biggest home run of them all, a very early investment in Tencent. Recently there has been a more accelerated investment in internet enabled businesses and divestments of less core businesses in key geographies. Notwithstanding streaming technology taking hold, our continent is a little behind the curve, and the company managed to add nearly 600 thousand households to their satellite TV business over the last year.

The results are able to be downloaded from Naspers website: Summarised consolidated financial results for the year ended 31 March 2017.

Naspers have had a busy year, as usual. They have disposed of assets in Eastern Europe, have seen their investment in food delivery company Delivery Hero about to go public (this week), as well as Mail.ru purchasing a food delivery business in Russia. Tencent still forms the bulk of the business, more than three quarters. The e-commerce business has more profitable business segments now than ever, it will continue to suck a lot of cash! So much so that Naspers will continue to raise funds at what are historically low rates. See above, if you are reliable, you will attract debt investors.

There are many moving parts to Naspers, which makes the business difficult to value at any given time. It is of course a proxy for Tencent, that share price in Hong Kong Dollars is trading near the all time highs. Today it is 80 Hong Kong cents away. Not only does Naspers trade as a proxy for Tencent, the market discounts the rest of their businesses and in fact values them at next to nothing. We will do another detailed analysis of the results tomorrow.

Linkfest! Lap it up

Forecasting interest rates should be easier than forecasting stock prices, interest rates are driven by fundamentals unlike the equity market that is emotion driven over the short run - Wall Street has been brutally wrong when it comes to making one of its most important predictions. The graph shows how trying to predict the future is a fools errand.

As the world becomes more automated the concept of a Universal Basic Income (UBI) has increasingly been talked about. Have the robots do all the work, leaving us with more time to travel and create. One journalist says that Apple should use around 0.2% of their cash pile to do a large scale experiment on the viability of UBI -Why Apple's next big investment should be reshaping capitalism.

Generation Y are fast becoming the generation that will have the bulk of the wealth in the economy, that means that they are a key demographic for companies to focus on. As spending habits change and the sharing economy becomes more central, the smart phone is central to modern day life (good news for Apple) - The Cheapest Generation.

Home again, home again, jiggety-jog. Markets have started mixed here this morning. Some up and some down. US futures are up and away, Nestle and associated European stocks are getting a lift from Dan Loeb's 1 percent stake in the Swiss food giant. Perhaps they need some sort of shakeup.

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