Money with a dash of Funny: Steinhoff

Showing posts with label Steinhoff. Show all posts

Thursday, 7 December 2017

No Mercy for The Hoff

To market to market to buy a fat pig. Yesterday was one of those days that you will always remember. I remember when African Bank went to zero, it probably spent more time that day in volatility auctions than trading freely. Other days that come to mind would be the day after Brexit and then the day after QE was announced (that was a good day).

It was carnage for Dr Christo Wiese in particular, where over and above the Steinhoff train wreck, all his other companies also sold off heavily too. Shoprite was down 5.9%, Brait was down 5.2%, Invicta was down 3.1%, Tradehold was down 3.2% and Pallinghurst was down 2%.

I suspect that over the coming days we will get SENS announcements from some or all those companies saying that Wiese has sold some of his shares. What the above graph doesn't capture is that Wiese owned some of his shares using debt, or the use of leverage to boast his returns with an appreciating share price. The problem with leverage is that it bites hard when a share drops, more so because as soon as the share drops the bank lending you money tells you to sell your shares to pay their debt.

In September 2016, Steinhoff issued a whole bunch of shares to help them pay for the US purchase of Mattress Firm. Wiese bought 314 million more shares at a price of EUR 5.055 per share, for a total value of EUR 1.587 billion. Wiese may be one of the richest men in the world but to come up with EUR 1.6 billion im cash is not easy. To raise the money for the new shares he had to borrow it. To do that he had to use existing shares as collateral.

"have pledged to Citigroup, Goldman Sachs, HSBC and Nomura International Plc (together the "Financing Banks"), 628 million ordinary shares. . . Rand Merchant Bank, a division of FirstRand Bank Limited, provided additional facilities to companies controlled by Dr Christo Wiese."

He bought his shares at EUR 5.055, last night the stock closed at EUR 1.14; his collateral went from being worth EUR 3.14 billion to now only being worth EUR 715 million. I don't know how much he borrowed from the investment banks but if it is more than those shares are worth, he might be a forced seller. Selling now means that he is locking in his losses. Ouch!

To add insult to injury, less than a month ago Wiese bought 2 000 000 more shares at R61.46. He bought them through a single stock future, meaning more leverage. I have seen a number of people saying after the fact, that it was clear Steinhoff was going to implode. Wiese, a seasoned business man and Steinhoff insider wouldn't have bought R 123 000 000 worth of stock (using debt), if he thought the company was on the brink of implosion. Having a dispute with a business partner is not uncommon. Going to court over tax structuring is not ideal but again not uncommon for a multinational company. When operating in just one country, tax codes are pretty black and white. When you start operating across the globe, things get very grey and loop holes appear.

It currently looks like the reason for Jooste's resignation relates to Steinhoff overstating the strength of their balance sheet, allowing them to get better financing rates.

Market Scorecard. US markets fluctuated between green and red the whole day. The Dow was down 0.16%, the S&P 500 was down 0.01%, the Nasdaq was up 0.21% and the All-share was down 1.64%.

Linkfest, lap it up

Byron's Beats

What did Steinhoff do wrong? Or more specifically (at this stage) Markus Jooste. It is still up in the air at the moment because nothing official has come out but there are many theories doing the rounds.

From what I can gather, one of the main dodgy tactics was to create off balance sheet entities to house non preforming assets or to purchase intangible assets from Steinhoff. This is a simple explanation, it is far more complicated than just that.

Another allegation suggested that the reporting on Conforama was incorrect. Throughout the period they owned that asset, they actually had a JV partner who was sharing all the profits yet they indicated to the market that they owned that asset outright.

We will have to wait for the external investigation to find out exactly what happened.

When you make investment decisions there is an element of trust you place in the management team. Christo Wiese, one of South Africa's smartest businessmen had put the majority of his wealth into this company. As Chairman you would expect (and trust) he knew exactly what was going on behind the scenes. Clearly this was not the case

Michael's Musings

It is amazing how quickly things have changed in the retail space. As a consumer, being able to order online and have it delivered to my desk is a huge win - There are 170,000 fewer retail jobs in 2017 - and 75,000 more Amazon robots.

Bright's Banter

Volkswagen executive Oliver Schmidt has been sentenced to seven years in prison after admitting guilt under a plea agreement in August. He's the eighth executive to be charged in the VW emissions scandal.

It get's worse, the German authorities are also launching their own fresh investigations on other VW vehicles potentially breaking environmental laws - VW Executives Gets Seven Years For US Emissions Fraud

Wal-mart or Wal-mart Stores has finally changed its name to Walmart. The company's name change is inspired by its move to push online shopping so it can compete with the likes of Amazon. Walmart's push online is so aggressive not even a hyphen can stand in its way - Wal-mart Changes Its Name To Walmart In Push Online

Home again, home again, jiggety-jog. Steinhoff is down again this morning, along with other Wiese companies. On the local data front we have mining production and gold production reads. Then internationally the EU publishes their GDP for the 3Q, growth of 2.5% is expected.

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Wednesday, 6 December 2017

Hamba Kahle Markus

To market to market to buy a fat pig. Yesterday we received abetter than expected GDP read for the 3Q. The seasonally adjusted, annualised 3Q number showed growth of 2%. I prefer the simpler and less processed number of a simple year on year growth, which came in 0.8% higher than last year this time.

The biggest contributors to the growth came from sectors that are big employers of unskilled labour, much needed in South Africa. Unfortunately 0.8% growth is well below the number that we need to help our debt levels and employment situation. We are in desperate need of an uptick in business confidence to help our economy get back to its potential of growing at 5% a year. The South African Chamber of Commerce & Industry is publishing the number at 11:30 today, which will give us a better idea where confidence is lacking.

Market Scorecard US markets have been in the red for three days in a row. I can't remember the last time that happened? The Dow was down 0.45%, the S&P 500 was down 0.37%, the Nasdaq was down 0.19% and the All-share was down 1.06%.

Company corner

Michael's Musings

Whoa! Last night Steinhoff announced that Markus Jooste has stepped down as CEO (Steinhoff announces investigation into accounting irregularities and resignation of CEO), with Dr Christo Wiese taking up the role of Executive Chairman on an interim basis.

The bigger problem though is the new accounting irregularities that have come to light and the possibility that they may need to restate prior years' financial statements. The result is that the audited financials have now been delayed indefinitely.

Jooste joined Steinhoff in 1988 and became the group's CEO in 2000. He is a Steinhoff lifer, and only 56 years old. So for him to be asked to step down, the new irregularities found are not around the subjective interpretation of tax laws, it will be something far more significant.

The saving grace for the company is that they have Wiese to take the reigns and the old Pepkor CEO, Pieter Erasmus will be assisting.

As the Buffett saying goes:

"In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives"

One of the reasons we owned Steinhoff was because of the management's ability in sweating their assets. That has now changed, management has turned out to be a liability. The stink of the current scandal will probably hang around the company for years to come. You need to ask yourself, what will the company look like when this finally blows over? Will their huge store base still be relevant in an age of online shopping? We have been wrong in owning Steinhoff, expect more details on the matter later today.

Linkfest, lap it up

One thing, from Paul

Vestact leads clients towards direct equity portfolios. We don't hold bonds, cash, property or other asset classes in your account, either here in South Africa or in the US.

Equities are partial ownership claims against the assets and future profits of living, breathing companies run by human beings who take decisions that sometimes work out well and sometime work out badly.

Owning shares is better than having cash in the bank or owning government bonds, as over time we earn higher returns, because we assume equity risk. In economics, the equity risk premium is defined as the "excess return that an individual stock or the overall stock market provides over a risk-free rate". This excess compensates investors for taking on the relatively higher risk of the equity market.

This works both ways. When companies thrive, their share prices go up. In 2017 we have enjoyed great gains in Naspers, Discovery and Richemont. However, we have had also had a number of disappointments, companies which have had setbacks related to poor acquisitions, soft demand for their products or investor fatigue. The stocks have gone backwards this year: Steinhoff, Mediclinic, Brait and Famous Brands. We have to take the rough with the smooth. Over time, we should come out on top.

Home again, home again, jiggety-jog. Anything Wiese related is being clobbered this morning, Brait is down 4%, Shoprite is down 4%, Star is down 15%, KAP is down 15%, PSG is down 2% and Steinhoff was down over 50% on the open. International data out today, we have non-farm payroll numbers from the US and then the US crude oil reserves.

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Tuesday, 5 December 2017

Shuffling the Cards

To market to market to buy a fat pig. When asked for advice on which stocks to buy by non-clients, my first piece of advice is to not follow blindly what you watch and read in the media. The first problem with following the media is that you have no idea around the time frame of the commentator. There have been times when I have been on TV with a short-term trader. Unless you know that my views are from someone with a time frame of longer than five years and the person sitting across the table from me only has a time frame of around a month, you are going to get very conflicting advice.

The second problem, and particularly with written media, is that the journalist is not always familiar with the company they are writing about. A perfect example of that can be seen in an article written this morning about Steinhoff Africa Retail, aka Star's results. The headline reads 'Dark days for Steinhoff Africa after 10% drop', the only problem is that the journalist has confused Steinhoff International Holdings with Steinhoff Africa. For your man on the street, this is an understandable mistake, it is not a mistake you want a person 'in the know' making though.

The key is to make your own mind up about any particular stock and investment strategy. There are many successful strategies out there and many companies that are worth investing in, just don't flip-flop based on what the media says.

Market Scorecard. After a closer reading of the 500 page Senate tax legislation, it looks like someone forgot to lower the alternative minimum tax rate. This means companies with a high R&D spend, like Tech firms, won't be getting much of a tax break based on the current proposal. This Bloomberg article gives a good breakdown of its implications, Senate's 'Unpleasant Surprise'Hurts Tax Breaks for Tech, Others. The Dow was up 0.24%, the S&P 500 was down 0.11%, the Nasdaq was down 1.05% and the All-share was up 0.27%.

Company corner

Michael's Musings

It was another bad day for Steinhoff. After their SENS announcement yesterday saying that tomorrows release won't be audited numbers, the share price proceeded to fall 10%. With the pending court case decision around Steinhoff's tax situation, it would seem that the auditors are reluctant to sign off on numbers that may need to be changed in the next couple of weeks.

Management says that there is no 'fire' behind the current 'smoke' surrounding the stock. With yesterdays announcement, some investors have decided to bail out, not waiting to see if there is in fact fire.

In tomorrow's unaudited numbers, one of the key things we will be looking at is how their Mattress Firm turnaround is going. During the last set of numbers, Mattress Firm was in the middle of their turnaround, having a negative impact on their profits.

Linkfest, lap it up

One thing, from Paul

According to Bloomberg, total global equity market capitalisation is closing in on $100 trillion. Here is how that looks in a graph:

The interesting thing to note is how significant the moves have been in the last decade. We've gone from the early boom on the back of the commodities "supercycle" in October 2007 ($62 trillion), to the very dark days of the global financial crisis in February 2009 ($27 trillion) and then the rally to the present highs. Of course, I remember all of those days well. The euphoria and the dismay. I've had a front row seat!

Byron's Beats

Starbucks has earmarked China as a massive growth driver for the business. You can see from the image below how big they are already versus other franchised competitors.

Former CEO and now chairman Howard Schultz has brought it upon himself to open up flagship stores around the world. This Bloomberg article talks about the world's biggest Starbucks which is set to open in Shanghai. The store is a whopping 30 000 square feet (half the size of a soccer pitch).

Starbucks is not just about the coffee, it is about the experience. I am very excited about this concept store initiative.

World's Biggest Starbucks to Open in Shanghai.

Bright's Banter

The series "House of Cards" season finale will continue without Kevin Spacey.

The final season of House of Cards will only have eight episodes as opposed to the usual 13 episodes in a normal season. A fellow by the name of Robin Wright will take Kevin Spacey's role, playing the husband of Claire Underwood.

The shooting was suspended in October after a number of sexual assault allegations surfaced against Spacey. Roughly 15 men have accused Spacey of wrongdoing, of whom five were teenagers when the incidents allegedly occurred.

I can't wait to see how they assassinate this character TF outta the show! The world is a better place without sex offenders!

'House of Cards' Sixth and Final Season Shooting to Resume in Early 2018, Without Kevin Spacey

Home again, home again, jiggety-jog. At 11:30 this morning Stats SA releases our 3Q GDP read, the forecast is for growth of 0.8%. The Rand is looking strong this morning breaking below the phycological $/R13.50 level.

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Tuesday, 24 October 2017

Is Yellow the new Black?

To market to market to buy a fat pig. Yesterday the S&P 500 hit another record. No not another record high but the most number of days without a 3% drawdown. The previous record was 241 days and was set in 1996. It is amazing how calm markets have been this year. In years gone by, the likes of the crisis in Spain and the Nuclear threat, would have had a much bigger impact on the market. Remember how volatile the market was when Greece was in the middle of their debt crisis?

The Business Insider has the following to say about markets in 2017.

"Here are three other stats that illustrate the market's lull, via LPL Financial:

1) As of Friday, the S&P 500 had gone 33 straight days without a 0.5% drop, the longest streak since 1995.
2) The S&P 500 has fallen by 1% or more in a single day only four times this year, the fewest for a full year since 1964.
3) Its average daily close on an absolute basis has been 0.3% this year, the lowest since 1965."

Market Scorecard It wasn't a record high close for a change, even though all three US indexes opened in the green and at record highs. The Dow closed down 0.23%, the S&P 500 was down 0.40%, the Nasdaq was down 0.64% and the All-share was up 0.09%. Our market opened on the front foot, ticked higher for most of the morning and then at 11:00 turned around and slowly slipped back down to its opening levels. Yesterday we spoke about GE, which opened down 6% on Friday, only to close the day higher by 1%. Yesterday it opened down 2% and then finished off the day down 6.4%; it seems the market is still deciding what to make of the results and restructuring plan.

Company corner

Michael's Musings

This morning, MTN released their Quarterly update for the period ended 30 September 2017. Off the bat, it looks like the things that they can control seem to be going well and the things beyond their control, like currency and regulation are hurting them.

On a constant currency basis, Group total revenue increased by 6,9%, with Group service revenue up 7,4%. Data revenue increased by 31,4% and digital revenue was up 19,6%. Probably most impressive was MTN Nigeria, who reported a 11,2% increase in total revenue driven by data revenue growth of 72,1%. Another key region for the group is Iran, which saw revenue up 16.8% and Data revenue up 64.8%!

Here is a quick look at their subscriber numbers, they had to disconnect 750 000 subscribers in Uganda due to regulatory sim registration (the equivalent of being discontinued here due to not being RICA'ed).

They also say their executive team is now fully assembled, expect their new direction and flavour to come through in reporting periods going forward. All in all, things looks to be back on track.

Another company that has had a tough 2017, Steinhoff reported that they repurchased 78 million shares. The repurchase represents around 1.8% of the company and is a sign from management that they think the shares are currently undervalued; at least in my book that is how I read it. We still have to wait a couple more months until we hear the outcome of the tax evasion case.

Linkfest, lap it up

Byron's Beats

It's lovely to see this making international news. This CNBC article titled You can get an Apple Watch for only $25.. with one small catch speaks about fitness schemes which reward health insurance clients with a free Apple watch. Does that sound familiar?

Of course it does! Discovery have a partnership with John Hancock to white label Vitality in order to get health insurance clients to look after themselves. After seeing a 20% increase in activity under the program John Hancock have extended the product to all U.S members. They are the first U.S insurers to do this.

I hope to see more of this. Discovery's Vitality program is truly unique and has the ability to become massive amongst insurers all over the globe.

Bright's Banter

Here's what I'm reading this morning:

I enjoyed this CNBC interview of Prince Alwaleed bin Talal talking about markets and of course Bitcoin! - Bitcoin 'Going To Implode' Like Enron

This guy is betting against Warren Buffett. In the past this has been a bad money making strategy. The question remains though, is this guy up to something here? - Warren Buffett's Mosquito

Bridgewater has a lot of haters and thats usually a sign of success. The latest person that Ray Dalio has to add to his haters list is Jim Grant. Without going into detail, Grant was wrong - Jim Grants Botched Bridgewater Takedown

I found this very interesting, short Ted Talk by Ray Dalio explaining the concept of radical transparency and idea meritocracy. I must say I learnt a lot about decision making here - Ted Talk On Bridgewater's Idea Meritocracy and Radical Transparency

Home again, home again, jiggety-jog. Our market is up this morning, along with most Asian markets. Investors seem happy with the MTN update, the stock is higher by 1.5%. Both the EU and Germany had positive manufactory reads out this morning; later today the US will report their manufacturing PMI number.

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Friday, 1 September 2017

Spring in Steinhoff

To market to market to buy a fat pig. Happy Spring Day! If you google, "when does spring start" though you find that it only starts at the end of September. The 22 September to be exact and it will run until the 21 December. Global seasons are determined by the dates that the equinoxes and solstices occur. Just based on the weather in Jo'burg though, and the blossoms on the tree outside of my window, spring arrived one week ago. Here is an interesting piece written by the South African Weather Service, looking at all the different methods that can be considered when looking at the changing of the seasons: How are the dates of the four seasons worked out? So happy, sort-of Spring.

"A further failing of the earlier astronomically defined seasons is that they simply did not describe the real seasons as actually experienced. As one of the contributors to this article expressed it, summer does not start four days before Christmas. A climatologically definition of the seasons would obviously be more realistic."

New York, New York has been on a roll this year. With a green close to the month of August, the S&P500 has now had 10 green months in a row. More reason to celebrate is that the Nasdaq closed at a record high last night. It is now up 23% over the last year. Here is the scorecard, the Dow was up 0.25%, the S&P 500 was up 0.57% and the Nasdaq was up 0.95%. Locally our All Share was up 0.63%, with just about every sector in the green. Discovery is now back over R150 a share, it was there in 2015 but fell to R110 shortly after. Stocks go in and out of favour, which is normal for the equity market, the key is to sit tight through the cycles.

Company corner

Thanks to their positive nine-month sales update, Steinhoff stock closed 2.6% higher. The company has been very busy in terms of purchases in the UK, US and Australia and many new store openings in all their regions. They have seen a 48% increase in sales to EUR 14.9 billion for the nine months, with 8% organic growth. Here is a breakdown of how that EUR 15 billion in sales is split:

Now that Steinhoff is listed in Germany, they have to report their numbers in Euros. It is not often that you hear the words, "the strong Rand had a significant positive impact on the numbers but the weaker Pound had a negative impact". The Africa division saw sales increase 10% in constant currency terms but a solid 26% increase when measured at current exchange rates.

Probably the division most people were looking at, was how is their recent purchase of Mattress Firm in the US going. They took over Mattress Firm in September last year and immediately set to work overhauling things. You will remember that they booted Tempur Sealy out as a supplier and signed more favourable terms with Serta Simmons. Other major changes are the overhauling stores and the rebranding many of them, currently around 40% of their stores have gone through the makeover. All this change has meant a 10% drop is sale values but a lower 6% drop in actual transaction numbers. Now that the initial shock of all the change has happened, management is reporting a tick up in sales and better margins, things bode well for the future.

Steinhoff looks well positioned for future growth. As Paul shared yesterday, consumer confidence is strong in Europe. Their Eastern European arm of the business had like for like sales growth of 20% over this reporting period. The Africa division is about to get a boost from the listing of STAR and then the effective purchase of Shoprite. Lastly, the US business is on track with its 'Steinhoff overhaul'. Hopefully, their issues with the German tax authorities can be resolved soon, so that they can focus on what they do best, making supply chains efficient so that they can bring the lowest price possible to the consumer.

Linkfest, lap it up

One thing, from Paul

Our friend Deon Gouws (CIO at London-based Credo) investigated what the CEOs of large South African corporates are paid, using data from Bloomberg. As you can imagine, the numbers vary considerably, with those at firms with large offshore operations dragging up the average. The final number: $3.2 million per annum. Nice work, if you can get it! - How well paid are South African CEOs really?

Michael's Musings

Ever wondered what information you are sharing with the web pages that you visit? You can now see - What every Browser knows about you. Sharing what my battery level is, seemed a bit random to me but seeing what printer was connected to our network was a bit more eye opening in terms of how much information we share without realizing it.

With world population on the rise and the urbanization trend continuing, architects and city planners have needed to get creative to keep cities functioning - 11 billion-dollar mega-projects that will transform the world's greatest cities by 2035.

For as long as there has been money, people have been lending it out. Farmers have needed debt to buy seed for this season's plant and emperors have need debt to conquer their neighbors, here is a specific look at the evolution of consumer credit - 1The History of Consumer Credit in One Giant Infographic.

Home again, home again, jiggety-jog. Big data out today are US job numbers and their unemployment rate, which will hit our screens at 14:30. Mr Price had a four month trading statement this morning that showed good growth, the stock is currently up 3%.

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Friday, 25 August 2017

Bidding for Food

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

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

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

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

Company corner

Byron's Beats

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

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

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

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

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

Linkfest, lap it up

Michael's Musings

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

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

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

Bright's Banter

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

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

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

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Monday, 7 August 2017

The Hoff goes Shopping

To market to market to buy a fat pig. Another record close for The Dow and our All Share, up 0.23% and 0.47% respectively. The S&P 500 and Nasdaq are one or two strong days away from their all time highs too. The big news for Friday was the US jobs data, which was well ahead of expectations. Economists had forecast 180 000 jobs created for the month of July, the number came in at 209 000 and then the June number was revised higher by 9 000 jobs (remember that the published number is revised 3 times over the following months as more data rolls in).

Another noteworthily number in the release is the unemployment figure which improved to 4.3% from 4.4%, at these levels there will be jobs in the economy that businesses struggle to fill. Meaning that if you are unhappy with your current job it is much easier to find another. More importantly though, when businesses need to restructure (to stay strong and relevant) and retrench some of their labour force those workers have a much easier time being reabsorbed into the economy. The labour force participation rate also climbed to 62.9%, with a significant increase from the key working age category 25 - 54 increasing to 78.7%, a post-recession high. Remember that you can't be considered unemployed if you haven't recently looked for a job. The number that is starting to matter the most in these jobs numbers is the wage growth number, wages grew 2.5% compared to last year, higher than the 2.4% forecast.

Minutes before the market closed on Friday Steinhoff released two SENS announcements, updating us on the listing of their African assets and telling us that they are in the process of getting enough votes to control Shoprite. The new entity is called STAR (Steinhoff Africa Retail) and should be listed by the end of September. Have a look at the comprehensive list of brands currently owned by Steinhoff, always nice to get a refresher:

"The African retail brands included in the Listing will comprise Pep in South Africa and the rest of Africa, Ackermans, Speciality division (comprising Dunns, John Craig, Refinery and Shoe City), JD Group (comprising Russells, Bradlows, Rochester, Sleepmasters, Incredible Connection and Hi-Fi Corporation), Steinbuild (comprising Buco, Timbercity, Hardware Warehouse and The Tile House), Poco South Africa and Tekkie Town (the "African Assets")"

The big news though was that Steinhoff have set up a call option structure between themselves, Dr Christo Wiese (autocorrect keeps changing his surname to 'wise') and the PIC where STAR (and in turn Steinhoff) will end up with an economic interest of 22.7% and voting rights of over 50% of Shoprite. How does owning 22.7% of Shoprite end up with more than 50% of the voting rights? Due to legacy control structures Dr Wiese has an extra 292 million Deferred Shares, which have no value but have voting rights. How many voting rights? Around 33.7% of the vote, plus his extra 15.9 % of ordinary shares (which thanks to the deferred shares 15.9% translates into only 10.5%of the vote). In total Dr Wiese has just over 44% when it comes to a vote in Shoprite.

Given that Dr Wiese and the PIC in total own 27.04% (15.9% and 11.05% respectively) it would seem that the PIC have only committed part of their shareholding to the structure. The logic from the PIC seems to be that STAR is going to be a big player on the JSE (Steinhoff management forecast, given it's size that Star will be in the Top 40), so it makes sense to sell some of Shoperite to get a chunky stake in the parent. When the dust settles I estimate that the PIC will have around 4% of Shoprite and 10% of Star. Shoprite is down 2% this morning on the news and Steinhoff are up just under 1%, not major moves.

Assuming that management can stay on top of all the moving parts, I think these companies joining forces is a good thing for shareholders in the long run. After two failed attempts to delist Shoprite are these the first steps in a third attempt?

Linkfest, lap it up

One thing, from Paul

The UK has some crazy TV programmes, Bitcoin is like "digital gold" in your sock drawer, the Dutch swapped Manhattan for some sh***y islands in Indonesia, and problems for a gold miner in Tanzania - Blunders - Episode 67

Michael's Musings

Great to see MTN being part of this initiative to bring power to more rural parts of Africa - US solar start-up, MTN target off-grid Africans. This partnership points to MTN's new focus area of 'digital', where it looks like MTN want to be a big player in the fin-tech space on the African continent.

As we have come to understand more and more about our genome scientists have been able to identify faults that lead to diseases. Work has begun to try edit those errors so that in the future we will have less inherited diseases - A highly successful attempt at genetic editing of human embryos has opened the door to eradicating inherited diseases. Exciting times but at some point this will open the door to creating 'super' children.

Apple's cash reserves are so big that we are now comparing it to countries instead of other companies - Apple owns $52.6 billion in US Treasurys - more than many major countries

Bright's Banter

Adidas have found that models and bloggers, not athletes, are the key to selling sportswear to women. This explains why the Adidas brand was up 33% in North America in the second quarter, and the groups revenues were also up 30% for the second quarter year-on-year - Adidas Finds The Magic Formula

Home again, home again, jiggety-jog. Our market is flying again this morning, up 0.7%. Big gains from Naspers, up 2.6%, being driven by a 2.9% increase in the Tencent share price. Amazing to see that Tencent is up 70% this year! Naspers only up 45% though. Apart from holding a public holiday the week ahead also has numbers out from two very exciting companies Priceline and Nvidia. Good to see the price of platinum on the up, a couple weeks ago we were in the $800's now the price just crested $960, much needed for our miners that have very marginal production in the $800's.

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Thursday, 15 June 2017

Value my Drug

"Whilst I believe that regulators are trying to do their best to protect consumers, sometimes they discount the huge shareholder funds that are spent on looking for the next blockbusters. Statista has the number, total global spend is around 150 odd billion Dollars a year, from the pharma industry. Each business, amongst the majors that is, spends around 12-14 percent of their revenues looking for life saving therapies, that obviously comes at a cost."

To market to market to buy a fat pig I remember when the Fed moving interest rates was going to be the most telling event of them all. I remember when the Fed were going to stop their asset purchase programs and how that was going to be the most telling of all. I recall when the Fed were going to unwind their balance sheet and how that was going to be the most telling of all, it was going to finish us all, you remember?

Well, the Fed raised rates over half a decade later than most people anticipated (in 2010 it was the topic du jour), and the trajectory has been lower than anticipated. And the end point, where interest rates in the US finally level off (the so called dot-plot, we will get to that in a second), is at a lower level than historically. That said, so is inflation, as a result of productivity gains and efficiencies. And the manufacturing at the global level, globalisation is where everyone wins with cheaper goods and cheaper skills to transfer. If only all and sundry would see that!

So the Fed raised interest rates last evening, and it was widely anticipated this would happen. So there was a blink and a slight stare, and then "as you were". Some saw this as a slightly "easier" rate hike, possibly the Fed would not stick to their more aggressive approach, and perhaps skip a hike later. The Fed release, here is the FOMC statement. All members except Kashkari voted in favour of hiking rates at this point. There was also the announcement of Fed balance sheet shrinking, winding their necks in - Normalization Principles and Plans.

The WSJ has an amazing graph, from a story titled Fed Raises Rates, Sets Out Plan to Shrink Asset Holdings Beginning This Year. Courtesy of the WSJ and the Fed.

And then the dot-plot, where the voting members see their long term projections end up, at around three percent:

According to the St. Louis Fed website, this is their Effective Federal Funds Rate from 1954. As you can see, even a three percent projection "long term" is very far away from the long term averages:

So there it is. The long term projections are three percent, at least for now. The most important question, should you change your investments or your investments style to accommodate or try and pre-empt the Fed's next move? No. Don't do it. Stay the course and own real businesses through when rates go up and down. There is of course, nothing you can do about interest rates. Session end in the US trading session, the Dow Industrials added nearly one-quarter of a percent to end at an all time high. Energy and materials had a horrible no good day, the oil price barrelled to a "near" six month low. My go to person on all of this is Javier Blas, who suggested that this wasn't going as planned for Moscow and Riyadh:

The broader market S&P 500 fell off the worst levels and into the red, down one-tenth of a percent. The nerds of NASDAQ also gave up some ground, comfortably off the worst levels for the session though.

Locally here in Jozi, stocks fell around one-quarter of a percent as a collective, industrials sank one-fifth, it was resources that were the biggest losers though, down around a percent and one-third. Financials were the stocks that were holding the market from further losses, at the top of the leaderboard were SA inc. and financials. In the down column were the commodity stocks, sensitive to the ebbs and flows of commodity prices and the currency. Anglo, BHP Billiton and MTN, as well as Richemont were the losers.

There was a trading statement from Naspers pretty late, there are three metrics for Naspers, the one that they think counts the most is "core" headline earnings per share. On that metric, Naspers expect to be 33 to 39 percent higher, at the top end of the range, somewhere around 414 US cents, or 52 Rand a share at current levels. The stock is marginally lower this morning, along with the rest of the market. Results expected on the 23rd of June.

Company corner

The competitions authority are investigating Aspen and their peers with specific reference to their oncology drugs here in South Africa. It made headline news on the various wireless stations that I listen to. Price gouging and the like, another head-shake from the pundits. How can this be? Paul initially when he heard the news suggested that prices were regulated in South Africa, how could this possibly be?

"To provide context to shareholders it is confirmed that, while Aspen fully acknowledges the vital nature of the four oncology products listed in the Commission's announcement, these products have a collective turnover of about R3 million in the South African private market"

Oh? I am against unethical behaviour of all sorts, pharma companies have a "history". Yet, they are well regulated. In fact, over regulated, another announcement from Aspen is that they have been fined 5.2 million Euros by an Italian court. Listen to this though, the generic drug (of the one that Aspen sells) was approved in Italy for double the price that Aspen sold their drug. Yes. How can that be possible? Italian bureaucracy my friends, it is a sight to behold! Some of the prices in Italy for the drugs that Aspen raised, had not been raised for between 40 to 60 years. Ughhhh. No wonder the company will try and avoid some of the regulatory minefields. Aspen may, or may not appeal this ruling.

Whilst I believe that regulators are trying to do their best to protect consumers, sometimes they discount the huge shareholder funds that are spent on looking for the next blockbusters. Statista has the number, total global spend is around 150 odd billion Dollars a year, from the pharma industry. Each business, amongst the majors that is, spends around 12-14 percent of their revenues looking for life saving therapies, that obviously comes at a cost. And unfortunately that needs to be paid for by someone, the drugs cannot be free. See here below, courtesy Statista - Total global pharmaceutical research and development (R&D) spending from 2008 to 2022 (in billion U.S. dollars):

Last week we had 6 month numbers out of Steinhoff, who are the world's third-largest integrated household goods retailer by turnover (Half year numbers). Given how active management are, it is difficult to get comparative numbers, but based on managements calculations normalized revenues are up 7% and normalized EPS is up 4%. Here is a look at breakdown of the group sales:

The big change up there is the new US segment, thanks to their purchase of Mattress Firm in September last year. At the time the "analysts" view was that on the surface it looked like they overpaid for the asset, time will tell who are right, management or the analysts. Since then management have been very busy! One of their major suppliers was Tempur Sealy, who resisted attempts by Steinhoff to renegotiate their partnership with the end result being Sealy pulling out of the partnership (and the Sealy share price dropping by 23%).

To fill in the Sealy gap Mattress firm increased their partnership with the other major mattress maker Simmons, where they have agreed to spend over $100 million on marketing and then collaborate to come up with new products over the next 5 years. Have a look at their new advertising campaign - Mattress Firm Launches New Campaign And Announces Strategic Partnership In Pursuit Of Sleep Innovation

Next up management have also bought a majority stake in bedding maker Sherwood bedding, to roll out more in-house merchandise, improving profit margins. Then lastly they have a trial partnership with an online bed retailer, Purple beds, who started in 2016. The idea is to sell Purple beds in the Mattress Firm stores, hoping to increase foot traffic to the stores and then sell the extra customers bed 'add-ons' like bedding and pillows. Then lastly Mattress Firm applied for a trade mark in the UK last year, does that mean Steinhoff are thinking of rolling out that brand in the UK too?

The next phase for Steinhoff is getting the African assets listed which is expected to happen towards the end of this year. I think listing the African assets is in part a play to try court Shoprite again in a few years. Remember last time the sticking point in the deal was "what is the value of the Steinhoff African assets".

My one concern about Steinhoff is that tax dispute that has been ongoing with Germany. The company says that talks are still in progress and they should reach a settlement agreement soon. Remember that the dispute is around where the company records their profits and by extension pay the taxes on those profits. This fine could be expensive.

Steinhoff management have shown their skill in taking tired businesses, shaking them up by improving their backend and logistics, resulting in better margins and happy shareholders. Given how active management are both in terms new businesses and financial restructuring there is always the increased risk that they make a misstep. The risk reward matrix looks worth it though.

Linkfest, lap it up

Exciting times as a Jo'burger and Facebook shareholder - Inside Facebook's new Jo'burg office. It looks like a great space to spend your "9 to 5" in.

As retail moves online shopping malls are increasingly under pressure, the result adapt or die - The Mall of the Future Will Have No Stores. The Mall of the future will have more experience offerings, still food outlets and then have companies base offices in them. Good news for our Starbucks investment.

Home again, home again, jiggety-jog. Stocks are lower across the globe, this special investigation into the relationship between the Trump campaign, people close to him and the Russians is just starting to "get real", or more real. The US futures market has taken a bit of a swoon.

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

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Wednesday, 1 March 2017

Bigger than Naspers

"The stock price is around 1700 Dollars a share. Not surprisingly, the stock is up nearly 3000 percent in ten years. What? Yes, the company now has a market capitalisation in excess of 80 billion Dollars. It may well be the biggest holding company that you have never heard of. In fact, the market cap is bigger than Naspers, quite a lot bigger in fact. The company has delivered compounded gross profit growth rates over the last five years of 35 percent."

To market to market to buy a fat pig Stocks in Jozi were lower by the close, down over two-thirds as a collective, resource stocks and specifically gold miners were looking a little worse for wear. Down over three and on-quarter of a percent as a collective they were, gold stocks. There were spits and spots of green, some of the Rand hedges benefitting from a weakening Rand environment. Hammerson, BATS and Mediclinic at the top of the leaderboard, at the opposite end of the spectrum was Redefine, AngloGold Ashanti and Amplats. There were results from the JSE themselves, they certainly looked decent enough to me. Over ten years that stock is up 190 percent. Amazing, not so? Still, the market capitalisation is "only" 14 billion Rand, Famous Brands by comparison is 15 and a half billion Rand. Chips and burgers trump derivatives and options. Not really, you know what I mean.

Bidvest slid another five percent, since their (and Bidcorp) results there has certainly been a pretty big divergence between the two. The lower growth environment here in South Africa is not really "helpful" for Bidvest. They are more than a good company, whether or not they are correctly priced at 23 odd times earnings, I am not convinced. I wouldn't go so far as to say that it is a screaming sell, there are better options out there for my mind. Talking of which, Steinhoff had a quarterly trading update that "looked good" at face value. See below in the company segment.

It wasn't to be, the Dow Jones industrial average did not make it 13 in a row, which would have tied the record for most days up in a row. Stocks slipped marginally in New York, New York, the broader market S&P 500 fell one-quarter of a percent. The nerds of NASDAQ slipped nearly two-thirds of a percent. Target was flamed, the stock was down over 12 percent after weak numbers and weak guidance. The stock looks cheaper, it may well get cheaper. Other retailers sank in sympathy. Hey, Amazon Web Services were out last evening, that caused a few flutters and reminded us that even the best doesn't work all of the time.

Company corner

Steinhoff numbers yesterday morning (and afternoon), this was for the quarter ending December 2016. This is a 300 billion Rand market cap business, sizeable indeed. Of course the business is now listed in the Frankfurt, this is the secondary listing down here. I think that access to cheaper capital and growth in emerging market (as well as looking for opportunities in developed markets) is more important.

Their listing there, with the backing of big German institutional money makes for favourable reading, from a funding point of view. That is what I think when they made the comment that shares in issue had been stable, I suspect that it will stay that way. There is a *nice* colourful slide for us to use here:

That pretty much sums up the business right there. What Steinhoff have done well over the last half a decade is realise that in the space that they operate in, there were cheap assets that nobody else wanted at the time. They recognised that after the financial crisis there were opportunities that may have only presented themselves once in a decade, or generation for that matter. Through the bumbling of the European sovereign issues, the company found a foothold in Europe and will continue to build on their huge base.

Be patient here, I know that the share price has not rewarded you over the last year (down 20 percent). It looks cheap at these levels and is showing signs of "bedding down" (no pun intended) their recent acquisitions. The risk of course is that they enter "a deal too far" territory. Beds and sofas, kettles and white goods are certainly not the most appealing and dynamic products, that is for sure. We continue to add to the stock of a company that we think has a dynamic and quality management team, searching for perfection.

Priceline presented numbers for their fourth quarter and full year to end December, close of business Monday. For the full year, the group had gross travel bookings (total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by its customers, net of cancellations) of 68.1 billion Dollars, 23.1 percent better than the prior year. Gross profit was 10.3 billion Dollars, 20 percent better than the year prior. Non-GAAP income grew 23 percent to 3.3 billion Dollars, per diluted share, non-GAAP net income was 65.63 Dollars. Yes, per share, there are only 49 million odd shares (13 million too in treasury, what!!) in issue.

Net income per diluted share was 14 percent lower to 42.65 Dollars. Reason being that Priceline took a non-cash charge in the 3rd quarter related to OpenTable, a business they bought for 2.6 billion Dollars in 2014. 941 million Dollars, gulp. Shouldn't have paid that premium!

The stock price is around 1700 Dollars a share. Not surprisingly, the stock is up nearly 3000 percent in ten years. What? Yes, the company now has a market capitalisation in excess of 80 billion Dollars. It may well be the biggest holding company that you have never heard of. In fact, the market cap is bigger than Naspers, quite a lot bigger in fact. The company has delivered compounded gross profit growth rates over the last five years of 35 percent. Incredible.

In case you were wondering who and what this massive business is, you know their Booking.com platform (Michael said he wasn't too familiar with it until he bought the share, I almost fell off my chair), they have multiple others, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable. You may have used some, I have. I couldn't find a rental once, I used priceline.com directly, it worked perfectly. Except I forgot my drivers licence at home, that is another story! This business is very valuable for all the stakeholders in the tourism industry, they have the ability to connect the dots better than ever. Ever old traditional insiders (travel agents) have their own platforms, enabling them to have a wider scope than before.

As per the annual report: "As of December 31, 2016, Booking.com offered accommodation reservation services for over 1,115,000 properties in over 220 countries and territories on its various websites and in over 40 languages, which includes over 568,000 vacation rental properties ... Vacation rentals generally consist of, among others, properties categorized as single-unit and multi-unit villas, apartments, "aparthotels" (which are apartments with a front desk and cleaning service) and chalets which are generally self-catered (i.e., include a kitchen), directly bookable properties."

In other words, people would be willing to advertise on both AirBNB and Booking.com, as far as I understand it, there is no exclusivity. Interestingly, the company lists their competitors as Google, Apple, Alibaba, Tencent, Amazon and Facebook, and then a whole lot more, from TripAdvisor to Marriott International, Hilton and Hyatt Hotels. They also list Lyft, Uber and Didi Chuxing, in the cars space. So there is a lot of seasonality to their business, and there are multiple competitors too. They do own some great brands and try and keep at the forefront of technological advances in travel.

There is another sentence that makes you wonder if humanity is ever going to advance, these are broad based risks that could impact on any business: "In addition, other unforeseen events beyond our control, such as worldwide recession, oil prices, terrorist attacks, unusual or extreme weather or natural disasters such as earthquakes, hurricanes, tsunamis, floods, droughts and volcanic eruptions, travel-related health concerns including pandemics and epidemics such as Ebola, Zika, Influenza H1N1, avian bird flu, SARS and MERS, political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, changes in trade or immigration policies or travel-related accidents, can disrupt travel or otherwise result in declines in travel demand."

Wow. Reach for the pills.

The company stuck out a guidance that seems to have been below the market expectations, remembering that this is the 1st quarter. In other words, not the holiday season, that comes in the second half of the year, July through to December:

The stock rallied hard, up over five percent to another all time high of 1725 Dollars a share. The stock trades on 40 times earnings, it is hardly cheap. What the company has going for them is the shift to experiences over things. i.e. People want to spend their money to see the Taj Mahal, the Eiffel Tower, the Statue of Liberty and all of the other amazing places around the world, over "things". Although, I get that they must still have the latest technology in order to take the pics and selfies. There is plenty of growth left here in order to justify even accumulating the stock at these levels, remembering that they may display volatile price action on such a high rating (November 2015 Paris attacks, the stock got hammered).

Notwithstanding what are always headwinds that humanity faces (mostly made by themselves), there are more people with more resources that want to see the rest of the world, experience different cultures and eat different authentic food. I suspect that we may only be scratching the surface globally with this travel trend. We stay the course here.

Home again, home again, jiggety-jog. Stocks across Asia are better than yesterday, US stock futures are better than before the Trump speech, which look short on substance. Mind you, give me a speech that contains all that and we would probably fall asleep having to listen to it.

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

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