Money with a dash of Funny: Telkom

Showing posts with label Telkom. Show all posts

Monday, 24 July 2017

The Swipe Hype

"It seems pretty easy, at the end of the day it all boils down to trust. The cardholder and the merchant have to trust that Visa will be able to switch their transaction. And that is for all points, everywhere in the world. The network is capable of handling 65 thousand transaction messages a second. Quite simply, they make your life a whole lot easier, whether you are using your debit or credit card to complete the transaction, either at the physical location (the merchant) or online."

To market to market to buy a fat pig Our market had a strong start to Friday trading, taking momentum from the surprise drop in interest rates the day before. But with the opening of the US market and the initial drop there, our market followed suit. When all was said and done the all share was down 0.23% come the five o'clock closing bell. The big news for Friday was the rumour that Government will consider selling their stake in Telkom to cover the cost of the SAA bailout, Telkom closed down 2.7% but more interesting was that Vodacom closed up 4.2%.

The best explanation we could come up with (I don't think it is a very good one) on why Vodacom was up so much was the expectation that government will interfere less in the telecoms space. More spectrum with less strings attached is good news for the telecom providers. Less strings means less costs which filter down to the consumer as lower internet prices. Given how important access to internet is and how emotive data prices are, I don't see much changing on the regulation front.

Government currently owns 39.7% of Telkom which is worth around R13.7 billion at the close on Friday. So far government has written a cheque of R2.2 billion on behalf of SAA and the way I understand it, there will be another cheque of R13.5 billion in the next 12 months. Ouch! We have already covered SAA as an investment here (Keeping SAA aloft), so lets focus of Telkom.

The company went through a tough patch where they suspended the dividend in 2011 but thanks to new focus and streamlining the business (Telkom employee numbers: 1991 to 2015) the company re-instated the dividend in 2015 and the share price is up around 400% since the lows of 2013. A more important number though is the dividend that Telkom pays, last year that number came in at around R883 million for the Governments share. As a tax payer I would much rather own a profitable dividend paying organisation than a loss making one, cutting the roses and watering the weeds ends badly every time!

New York, New York The Nasdaq's 10 day streak of gains was broken, finishing the day down a smidgen at 0.04%. The S&P 500 was also down 0.04% and the Dow down a bit more at 0.15%, being driven lower by GE dropping 2.9% on worse than expected earnings. The focal point for the week is what the FED will do on Wednesday, the expectation is for them to do nothing. What will move markets this week though is a number of large players reporting numbers, we have Alphabet (Google) tonight, Apple tomorrow and Amazon on Thursday. Not to mention Amgen, Starbucks, Cerner and Stryker also reporting this week.

Company corner

Visa inc. reported their third quarter results for the period to end 30 June. It was a beat by most metrics, the business reported net income of 2.1 billion Dollars, or 86 US cents per share off revenues of 4.6 billion Dollars. Remember that Visa Europe is now fully integrated into group, payments volumes increased a whopping 38 percent to 1.9 trillion Dollars. 28.5 billion transactions in total. During the quarter, the group also returned 2.1 billion Dollars to their shareholders, by way of dividends and share buybacks (59.2 million shares bought back at an average of 86.82 for the last nine months). There is still 5.5 billion Dollars available for repurchases inside of the current program, or roughly two and a half percent of the current market capitalisation.

This is a pretty incredible business. Their model is simple, yet the technology is always evolving too. Every electronic payment needs to be processed, to make sure that the relationship between the cardholder, the issuing bank, the merchant and the acquiring bank (of the merchant) is honoured, all seamlessly. It seems pretty easy, at the end of the day it all boils down to trust. The cardholder and the merchant have to trust that Visa will be able to switch their transaction. And that is for all points, everywhere in the world. The network is capable of handling 65 thousand transaction messages a second. Quite simply, they make your life a whole lot easier, whether you are using your debit or credit card to complete the transaction, either at the physical location (the merchant) or online.

The stock always trades on a pretty lofty multiple, that is as a result of continually growing their revenues and earnings at a fearsome click, the company expects revenues to grow by 20 percent for the full year. Earnings per share are expected to be around 3.40 to 3.50 Dollars a share. At the record close on Friday evening (99.60 Dollars), the stock trades on 28 times expected 2017 earnings. Not cheap by any measure, a growth business with lofty expectations. I suspect that they will continue to meet and surpass expectations, there is likely to be less and less cash in circulation, businesses like Visa will take care of the elimination of physical notes and coins. There is still around 17 trillion Dollars in cash and checks that will in time convert to electronic payments. See the image below to reflect that this is a global phenomenon.

I suspect that the company has a very bright future. Governments want trails for transactions. Businesses and consumers want easier payment methods that eliminate physical cards (think of all the cell phone payment methods). The shift to digital (online) from physical (at the store) benefits Visa above their competitors, as a result of having built the wider net from a technology point of view. With the current share price of close to 100 Dollars, there may be little wriggle room for the next half a year or so, this really is a business that you can stick in your back pocket and hold on a "forever" basis.

Linkfest, lap it up

Making vaccines more user friendly will be huge for areas of the world where immunisation levels are low, especially if storage can be done at room temperature - Beyond The Nasty Needle: Trying To Make Vaccines More Comfy And Convenient.

This is great, Google now allows you to explore the International Space Station - Google Maps, International Space Station. I'm not sure I could spend months up there.

Having access to a bank goes along way to providing financial stability - Banking the Unbanked is a $380B Opportunity.

Home again, home again, jiggety-jog. Our market is in the green this morning along with Naspers which is trading at an all time high. The Rand is below the phycological $/R 13.00 level and Pound/R 17.00 level, steady as we go.

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

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Monday, 16 November 2015

Tiger mulls and mills Nigeria

"The stock ended the session up five and a half percent after they announced they have "decided not to provide further financial support with respect to its investment in Tiger Branded Consumer Goods plc of Nigeria. Tiger Brands is currently exploring various alternatives with respect to its shareholding in Tiger Branded Consumer Goods plc." In other words, the investment in Nigeria was a disaster, they have basically written it off, and now they are not funding it any more. More tomorrow I guess, the results are then."

To market to market to buy a fat pig. It was a sombre day to begin with, the terrorist attacks in Paris from Friday evening dominating the discussion. The G20 meeting in Turkey focused squarely on the events over the last few weeks, the Russian passenger jetliner being brought down by what is widely considered a bomb, the attack in Beirut and then of course Paris. As many folks point out, the activities of this radical group are not isolated to these events.

I often wonder what gives rise to such radicalism? Are people marginalised that much, that they need to finish themselves and others around them? I can't and won't understand it, it is best left for people with far better skill sets than myself, let me stick to my world. Which consists of companies, their prospects, their numbers, deal making activities ongoing, pending or potential. Companies doing different things, creating new products and new services, that is what we emerge ourselves in each and every day. We are lucky in that no two days are ever the same in our job, we don't have to churn out 20 widgets a day. Great job. Do what you love and you will never work a day in your life.

Yesterday was a wild crazy busy day, results from all quarters as well as some pretty interesting announcements. All stocks rallied during the course of the day, all major indices "doing better" after a bit of a tough time lately. After the dust had settled, stocks as a collective had risen just over two-thirds here in Jozi. Resource stocks added over a percent, Glencore on the wrong end of the scoreboard again, at the top was Tiger Brands.

Why? The stock ended the session up five and a half percent after they announced they have "decided not to provide further financial support with respect to its investment in Tiger Branded Consumer Goods plc of Nigeria. Tiger Brands is currently exploring various alternatives with respect to its shareholding in Tiger Branded Consumer Goods plc." In other words, the investment in Nigeria was a disaster, they have basically written it off, and now they are not funding it any more. More tomorrow I guess, the results are then.

There were results from Telkom, Mr. Market seemed to like it, revenues were flat, they are still losing headway in their old businesses, fixed lines and minutes spoken fallen. They are to a certain extent controlling costs, another 3100 odd folks let go during the period, salaries still up around 10 percent. ADSL makeup slowing, they have more than 1 million connections, apparently the excitement was around Telkom Mobile, our Telkom LTE router gets all of zero bars at the office.

And it gets about as much attention from Telkom, their technician was here for all of 20 odd minutes. My gripes are a separate issue, I recently have had more favourable dealings with Telkom. The fundamentals don't look that bad, I just see more competition and the company continually having to evolve. Plus there have been more once offs than most other listed businesses here locally, Benjamin Graham always said beware of the company with recurring once offs. As they are no longer once offs. We have been wrong on the share price, we will continue to avoid.

Barloworld had results too, again a tough environment for them. Siberian sales crushed in Dollar terms, Iberia is showing signs of life for the first time since 2008. Their second hand and rental car business was the only real bright spot, indicating that Joe Consumer must be looking long and hard at the more sensible option. Buying and financing a new car is one of the least smart things that you could ever do, talking investments. And I have read that the feel good factor disappears after a number of months. Whereas a life experience lingers for a year and a half, this is just what I have read. So, rather buy the shares. The stock may look cheap, it may struggle in a tough economy and as such we will still avoid it.

Tongaat and Astral both warned of the dire impact of the worst drought in Mzansi for a LONG time, obviously the feeds business of Astral will be impacted, as well as regulations around brining. You know, salt water injected into your birds, and then it is frozen. I met Chris Schutte, the Astral CEO, in passing at the CNBC studios at lunchtime yesterday. I had mentioned that by holding the company you were going to have to roll with volatility over a long period, he is a pretty big guy and shook my hand furiously and said, what volatility? Nice man, I have met him a few times, with a farmers suit he might actually look like the legendary Farmer Brown. Remember, they taste so good, 'cos they eat so good? That guy.

Tongaat Hulett warned of a lower sugar crop here in South Africa, I don't necessarily buy the long term story, once all the land is sold, you are owning a sugar company. With the WHO warning of the impact of sugar, surely that is not an industry that you want to be in long term. I have read loads of literature on sugar and it seems that although we are still early stages, the longer term impact will start to be felt with richer consumers. We will also continue to avoid.

Reuters is reporting that the regulators in Nigeria, the Nigerian Communications Commission (NCC) said that the 5.2 billion Dollar fine would stand, the appeals just impact on the payment deadline. We will wait for more news from the company, a client sent me a statement, it went like this: ".... telecommunication will serve as the new cashcow for the country and I'm going to pursue this....." - Adebayo Shittu, Newly appointed Nigerian communications minister. That sounds, well, not so clever. We will continue to monitor this and advise accordingly.

Lastly, Famous Brands have announced this morning that they have secured a 10 year licence to operate French bakeries brand PAUL. Heard of them before? Not our Paul, who sits next to me, rather a 120 year old family business, with tons of outlets. A lot more than you might imagine. It is nice to see that not all emerging markets are finished, the president of PAUL is quoted in the release as saying: "South Africa is one of the most sophisticated, diverse and promising emerging markets globally. In addition, Famous Brands, specifically, appealed to us as a partner because the Group is Africa's leading branded foodservice franchisor with an enviable track record and extensive experience of the industry and market." Great space, all the local listed quick service restaurant groups are doing just fine in this tough economy, Taste and Spur included. Seeing as I have stopped eating pastries, cookies and the like, I shall have to get Michael to taste their food when it arrives.

Over the seas and far away in New York, New York, stocks took off, all the broader indices rallied hard. The broader market S&P 500 ended nearly one and a half percent higher, the Dow Jones industrials added 1.38 percent and the nerds of NASDAQ lagged a little, up 1.15 percent. Marriott announced that they were buying Starwood for a whopping 12.2 billion Dollars, their presence (out of 1722 places to stay) here in South Africa is restricted to Ten Bompas (yes!), the Westin in Cape Town and the Sheraton in Pretoria. I once stayed at the Westin for a friends wedding, it was marvellous. That was a long, long time ago when I used to attend the wedding circuit. Mind you, Michael got married this year and Byron is getting married next year, it is all rather exciting!! Babies are still a way off, I am afraid, in case you ask.

Linkfest, lap it up

This is great news for the local economy, both in terms of jobs and the spill over effects from increased demand down the supply chain - BMW to spend R6bn on factory

I have heard rumours of robo advising coming to South Africa soon. Robo advising is where you replace your financial advisor with a computer, you tell it your risk tolerance, time frame and some other generic information. The robo advisor then spits out a portfolio for you, which maths says is the best suited to you over time. Sounds like a good way to keep costs dwn and emotions out of investing, I'm not convinced that humans have no future in the industry though. Here is the year to date performance - Checking In On The Robo Advisors

Yesterday a client told me they have a high risk tolerance and want to invest mainly in our 'out there' ideas. I think they were confusing high risk tolerance with profit incentive, which are two very different things. High risk would mean that your portfolio has the ability to drop 20 - 30 % in a very short space of time and that is not what the client has in mind. Remember everything in investing comes with some form of trade off and normally to do well you have to avoid the land mines instead of consistently hitting the home runs - Regret Minimization

Energy drinks are not great for your health and even worse when consumed in conjunction with alcohol - What slamming an energy drink really does to your body. I was not aware that they have such a big impact in elevating stress hormone levels.

Home again, home again, jiggety-jog. Stocks across Asia are really strong, Hong Kong is up over two percent, Shanghai just a little over a percent and Japanese stocks are up one and two-thirds. We continue with local results. Mitch Johnson will no longer strike fear into the hearts of batsmen on the international front, he is throwing the towel in at the age of 34. I am sure that Ryan McLaren is happy to hear this news.

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

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Tuesday, 18 August 2015

Interested in Interest Rates?

"Looking back there has not been hyper inflation, barely any inflation for that matter. When monetary policy is out of sink with the real economy, the normal effect is high inflation. The argument can be made that this lack of inflation points to the FED and interest rate being inline with the fundamental forces of Investment and Savings in the real economy."

To market to market to buy a fat pig. Yesterday our market ended in the red come closing time. Telkom ended down 6.4% after a deal with MTN was scrapped due to opposition from the competition commission, we cover the details in the company corner below. Despite opening lower both the Dow and the S&P 500 finished in the green, with the most interesting news coming from Morgan Stanley and their price target for Tesla. The 12 month price target was upgraded from $280 to $465. What! The current share price of just over $240 isn't even at their first price target of $280. (Morgan Stanley really, really loves Tesla) The reason for the huge upgrade is based on the hypothesis that Tesla will be a leader in the self driving car market, with the forecast being that the self driving market could triple the currently forecast 2029 revenues (forecasts 2 years out are sketchy, 14 years out will definitely be wrong). The market liked the upgrade, the shares popped 4.9%.

I was listening to this podcast, Scott Sumner on Interest Rates, yesterday while on a run. Running is not near the top of my list of enjoyable things to do, listening to economic talks, now that I enjoy (for most people it is the other way around).

Interest rates are a hot topic at the moment given that the FED is expected to raise rates soon and with rates already rising here in South Africa. The first question to answer is if interest rates are low because of the FED or are they a reaction to something else?

The answer seems to point to interest rate lows being as a reaction to increased savings. Higher savings means that interest rates need to drop for the market to clear. There are two reasons for higher savings rates, the one is due to a lack of confidence in the future. Given the huge drop in asset prices in 2008 and the uncertainty about what would happen in the economy, keeping your cash 'under the mattress' seemed like a good thing to do. The other reason for higher savings rates is due to a lack of places to invest your capital.

This is what the savings rate has looked like recently - Here's a $1.2 trillion pile of cash, and it's not on corporate or government balance sheets and then How Much Cash Are Corporations Really Hoarding?

Why would there be a lack of places to invest your cash? One hypothesis is due to the computer age. It is far easier now to create a company with just a computer and your know how. Where in days gone by there was a need for a larger capital out lay. The one fact that we do know is that the gross fixed capital formation in the US at the moment, as a percentage of GDP is still below the 2006 number.

Looking back there has not been hyper inflation, barely any inflation for that matter. When monetary policy is out of sink with the real economy, the normal effect is high inflation. The argument can be made that this lack of inflation points to the FED and interest rate being inline with the fundamental forces of Investment and Savings in the real economy. Also remember that low inflation leads to low nominal interest rates, if inflation was high you would demand a higher return on your cash to offset the inflation impact.

Here is my thought process.

Low inflation = low interest rate = lower nominal returns on safe assets = short period of abnormal returns on equities = higher equity prices (above average P/E multiples) = lower long term nominal returns on equities.

What happens when the FED raises rates? Well it depends how high and how quickly they raise those rates. Quick and sharp increases will result in a train wreck in the economy and the market. I think inflation will remain relatively low, meaning that interest rates will stay low compared to historical averages. Also I think the FED will raise rates as slowly as they can. Markets will probably remain at multiples higher than histories average and you won't see big double digit returns that we have seen over the last 5 years.

Remember if your time frame is that you will live until 90, flat markets going forward is great and a market that goes down is even better! Regular adding to a flat or declining market means that when you do need the money in a couple decades time, it will be a far larger amount than if you were adding in a rising market. Perspective and timeframes matter, as an investor don't lose sight either.

Company corner

Yesterday MTN and Telkom decided not to pursue a deal that would see MTN operate and control part of Telkoms radio frequency - Telkom, MTN walk away from deal. The Competition commission decided that the deal would be a bad idea for consumers. Here is part of their statement, "MTN would be able to gain a significant competitive and time advantage, offering network and services that cannot be significantly constrained by rivals, particularly given the market position of Cell C and Telkom Mobile". Surely faster, more reliable internet is better for the consumer? Especially since being competitive on the global stage requires an internet connection. To put things into perspective, MTN invested the equivalent of 18% of Telkom's current market cap in infrastructure upgrades last year alone and will spend billions more this year, to continue to add and upgrade towers. There is a reason that Telkom is struggling and that MTN and Vodacom dominate the telecommunications landscape. I'm not a fan of regulation, I'm of the school of thought "Let the consumer decide where they want to spend their money".

Another gold producer released results this morning. Harmony released their Results For The Fourth Quarter And Year Ended 30 June 2015. At first glance it seemed to be a contrast between the last quarter that looked on the up and the full year results which looked poor. The major concern would be their all-in sustaining cost of $/oz 1 233, which is currently higher than the global gold price of $/oz 1 118. The market seemed to like the numbers, the share is up 3.4%.

There were some ugly numbers out of the construction sector this morning, from Aveng - Annual Financial Statements For The Year Ended 30 June 2015. It is tough out there given their exposure to mining and construction. The stock is down around 8% this morning.

Linkfest, lap it up

This sounds great in concept except it means that all the other roads will have more cars on them, it will take us twice as long to get to the JSE for TV and I would imagine that you will have to pay for the park and ride services? Have officials considered the economic costs of closing the roads to our continents business hub? - October is car-free month for Sandton

Another major trend in society is healthy eating and what is good and what isn't. In our office we try avoid sugar as best we can, none of us have sugar in our coffee anymore and Sasha gave up sugar for lent and then just continued with it as best he can. Have you noticed how many things have sugar in them? Trying to find something as simple as unsweetened yogurt can be a tough job. - This is what happens to your brain when you stop eating sugar

Home again, home again, jiggety-jog. We are down again today. Chinese jitters are still impacting global markets, the Shanghai closed down over 6%. The Rand has been volatile today, reaching a low of R/$ 12.94 and then making a bit of a come back to the R/$ 12.88 level. We are happy to hold the quality and ride the wave.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Monday, 3 August 2015

Oil Spoil

"Two of the big oil companies reported numbers on Friday. The lower oil price has been telling with Exxon Mobil's revenue dropping 33.4% YoY and their EPS dropping 51%! Chevron's revenue dropped to $40 billion from $57 billion the same time last year but their EPS was down a staggering 89.9%!"

To market to market to buy a fat pig. The news all over the financial channels this morning is the reopening of the Athens stock exchange, it has been closed for 5 weeks due to all the uncertainty that surrounded Greece getting and accepting a bailout. Unlike the Lisbon stock exchange that only has a handful of companies (78 to be exact), the Athens exchange has 258 listed companies. As you would imagine there has been a very big sell off, it is currently down 23%! The market pays a premium on listed stocks due to liquidity, the ease of getting your cash out. There are many factors that determine the value of a company but consider that private companies normally trade around 3 - 6 times their earnings, where public companies normally trade around 10 - 20 times their earnings. It makes sense that the market gives a premium to liquidity, how long does it take to get your cash out of a property? In my experience it is between 2 - 3 months and you pay an estate agent around 5%!

This is the sage of Omaha's (Buffett) view on stock markets, "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.". With TV, Twitter and news agencies always bombarding us with what the stock market is doing and the ease at which we can see what our portfolio did over the last 30mins, it is very difficult for investors to ignore the short term noise of the market and only focus on the company and its long term prospects. I remember it being a difficult mental shift from short term fixation to being okay with not worrying about the share price fluctuations over the short run. Here is another quote I found, "Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.". Here are a whole bunch more, they make for very interesting reading - 101 "Hand-picked" Warren Buffett Quotes On Investing.

What did all the uncertainty and cash restrictions do to the Greek economy last month? Here is the production report - Markit Greece Manufacturing PMI. The graph below tells the whole story. When people are uncertain about what the future holds, you don't want funds sitting in stock that is not easily converted to cash. Lets hope that this is a blip on the radar and Augusts numbers increase enough to compensate for the poor July figure.

Company corner

Two of the big oil companies reported numbers on Friday. The lower oil price has been telling with Exxon Mobil's revenue dropping 33.4% YoY and their EPS dropping 51%! Chevron's revenue dropped to $40 billion from $57 billion the same time last year but their EPS was down a staggering 89.9%! Their prospects going forward don't look too rosy with oil staying rooted to the $50 a barrel region. The production numbers from OPEC showing record production numbers, with the goal of OPEC being to maintain market share as opposed to maintaining a price. OPEC currently supplies around 32 million barrels of oil a day, where analysts estimate an over supply of 3 million barrels per day. Going forward, with the Iran sanctions being lifted, they are expected to increase their production by a further 1 million barrels of oil a day. I saw a stat this morning that said due to productivity and technology increases in the shale industry, the production costs for many oil fields has dropped 40% over the last 2 years. Thanks to human innovation it would seem that oil (and commodities in general) will not see a sharp increase in their prices any time soon.

On the local front Telkom released their Trading And Operational Update For The Three Months Ended 30 June 2015. The market must have really liked the numbers as the stock ended up over 7%. The number that I think the market was focussing on was the growth in their Mobile net revenue which was up 68.5% to R350 million. The main profit driver is still their fixed line operations which is seeing steady decline in the business, voice revenues were down 13.7% with a drop of 5% in voice lines. There was growth in the ADSL side of the business, with a 4.8% increase in the number of customers there. Going forward the key drivers for them is their mobile offering and fixed line access to the web, coupled with their ICT drive which will be boosted by the Business Connexion purchase which should go through in the coming quarter.

Big news out from one of the smaller JSE players, Ascendis Health - Acquisition Of Initial 49% Of Farmalider S.a A Spanish Pharmaceutical Group. They are paying R210 million for a 49% stake in the Spanish Pharmaceutical Group and have the option to buy the remaining stake in a year to come. The stock is only up 0.4%.

Linkfest, lap it up

Germany is intentionally moving towards greener energy - Germany met 78% of its daily energy needs with renewables. The biggest problem with renewable energy is how the power generated fluctuates.

Here is another casualty from the drop in commodity prices. In the long run the unprofitable companies will go out of business and leave only the most efficient players, it would seem that size and scale are where all the efficiencies are to be found - Three Years Ago This Coal Mine Was Worth $624 Million. Now It Sold for $1

Home again, home again, jiggety-jog. I am seeing more red than green on my screen today, with commodity companies leading the charge lower. Anglo is down 4.4% along with Goldfields and BHP Billiton which is down 1.4%. The Rand has shot over the R/$ 12.70, not great considering that a year ago it was around the R/$10.50 mark. The week ahead is all about jobs, the market will hold its breath to see if strong jobs numbers will result in an interest rate increase in September.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Tuesday, 1 October 2013

All quiet on the hill

"8 shutdowns since 1976, that is roughly one every two years. 3 in 1977. Phew, 28 days in total. No money to fund the day to day operations basically for the short term, which means that non essential government workers (I know what you are thinking, don't be like that!) stay at home, without pay. So you get to learn a new term, furloughed. Temporary unpaid leave, which sucks for the 700 thousand to 1 million people that it impacts on their daily lives."

To market, to market to buy a fat pig. Oh dear, it happened. The shutdown, meaning that the estimated cost to the US economy (and Bloomberg have done the math here) is around 300 million Dollars a day. US GDP in 2012 was (according to Google data supplied to them by the World Bank) was 15.68 trillion Dollars. Or 0.019 percent of the US 2012 economy a day. Or 1.095 trillion Dollars, if it went for a full year. But. The longest shutdown was actually the last one, where Bill Clinton went head to head against the Republicans back then in December 1995 and January 1996. I remember the sun coming up then, and it no doubt will rise today. 18 shutdowns since 1976, that is roughly one every two years. 3 in 1977. Phew, 28 days in total. No money to fund the day to day operations basically for the short term, which means that non essential government workers (I know what you are thinking, don't be like that!) stay at home, without pay. So you get to learn a new term, furloughed. Temporary unpaid leave, which sucks for the 700 thousand to 1 million people that it impacts on their daily lives. No, it stinks for them, because there is a large degree of uncertainty and of course we all still have bills to pay.

So some jobs are essential and some are not. The Labor Department and their statistics department is NOT essential and as such by the time that Friday afternoon rolls around, we wont get to see non farm payrolls. I can imagine that the only people that are thrilled with that are the people from ADP. Because remember that tomorrow, they will be putting out their monthly reports on private payrolls. No shut downs there. Imagine if the government were the shareholders of a business who did not agree on anything at the AGM, which obviously included the annual budget and as such all the employees of the business were told not to come to work, because the finance committee could not agree on something. They were puffing their chests out and disagreeing on specific policies, which included your medical aid. How would you feel? Angry? Not too sure, some folks on our screens have suggested that the Chinese are laughing at the US, I am not too sure how or why......

I suspect that this will only be a few more days, Paul suggested that the GOP could start to see some cracks and that would mean the end as we know it, for this impasse. I suspect that the republicans might have the debt ceiling debate front and centre, wanting to extract a little leverage out of their core support base for more fiscal discipline. But this is a little nuts if you think about it, you send people to do a job, and seemingly they are not. The fact that Republicans are stonewalling, well, I am not too sure that is going to count for them, come the next mid term elections, where 33 Senate seats, 36 governor seats and all 435 seats in the House will be up for grabs. Sadly for us, these elections will be in early November 2014, the 4th to be exact. The democrats need 17 seats to control the House, but the record for presidents in their second term (historically) is not good.

Why should we care about any of this really? Someone dredged up the statistics for the last two shutdowns and the market does not really budge. Or has not, during the two shutdowns in the Clinton era. So I guess it must be a case of biting off their own noses to spite those people who are less fortunate than themselves (the politicians wealth I am referring to here). The average wealth, as per this piece, Average Wealth of Members of Congress from the Center for Responsive Politics is 11 million Dollars for a senator and 7 million Dollars for a representative. I am pretty sure that is skewed, but the current salary for rank and file senators and representatives is 174 thousand Dollars a year. Perhaps DC is an expensive place. I suspect that Mr. Market's anxiety will be short lived with this, provided it does not go on for too long. Next stop, debt ceiling raising time!

I think that Reuters broke the story Friday, but there was a confirmation yesterday that Vodacom were looking to buy Neotel yesterday. Or let me rephrase that, they are looking to buy. Because there are some issues with regards to the competitions authorities and those would need to be addressed, but I can see how the Vodacom hook up with Neotel would work. According to this article in MyBroadband: Vodacom-Neotel deal discussions confirmed, 15 thousand km's of fibre optic network, more than half of that in the Jozi, Cape Town and Durban areas. This would not be anti competitive, but rather could be seen as a direct challenge towards the fellows over at Telkom. Who seemingly are steering the ship in the right direction for now.

590 million Dollars is what Reuters is suggesting the price tag (nearly 6 billion Rand), that is just a little over three percent of the current Vodacom market capitalization, so this is hardly a massive deal for THEM. Why would the Neotel shareholders sell, if according to this Reuters piece, South Africa's Vodacom looks to boost data with Neotel purchase, that Tata have been upping their stake AND they have invested a whopping 7 billion Rand locally in infrastructure. Why? Have they been unable to gain the traction that they desperately were looking for? It is not the worst service in the world, nor is it the best service in the world, Neotel that is. We have personal experience, with our fixed lines (Telkom for bandwidth) being wireless essentially. The signals are good enough, and the service works. Plus if there is a problem, you phone a responsive human on the other side.

But why would the shareholders, the main ones, Tata (67 percent and a bit) sell at this point? Does the parent company need the money? Maybe.

Who are their other shareholders? Neotel that is? CommuniTel (who has MKhonto We Sizwe Military Veterans Association as a shareholder, as well as Telecom Namibia, the national operator in Namibia) at 12.5 percent and the balance, a little over 20 percent is owned by Nexus, which represents a whole host of members. And if you read the Reuters article, you will see that MTN was chatting to Neotel, but those talks had broken down.

Neotel's quarterly revenues are 80.6 million Dollars, multiply that by 4 and you get around 320 million Dollars. So the price of roughly 1.85 times annual revenue, is that expensive, especially if you can see that the revenue growth has been high teens. America Movil has a market cap to annual sales of 0.83 times. And that last purchase by Tata (valuing the company at 590 million Dollars) does not include a premium. I think that it would be a great deal for Vodacom, even at a 20 to 25 percent premium to the price now. Competitions authorities and how quickly can they pump their clients full of data, they certainly have the networks and the customers.

Michael's musings! Running with the Bulls

Why be bullish on where equities are going? To answer that question, another question needs to be answered, "what causes equity prices to go up?". Equity prices go up due to growth in the world's economies that stems from technological improvements (part of the industrial revolution that I spoke about yesterday) and more people moving into the middle class.

The GDP per capita in China was $950 in 2000, that figure has grown to $6091 for the year of 2012 and is growing at a whopping 7.8%. What that means is that last year China's economy grew by the same as two 1982 inflation adjusted China's added together (mind blown). Have a look at this interactive graph courtesy of Google (china gdp), where you can see the impressive growth that China has sustained since the mid-sixties.

China is growing at a staggering rate, off a not so small base, meaning that even if China's growth does start to slow (as has been speculated) we are not too worried because if their growth rate had halved, they would still have grown by a 1982 China. The increase in wealth for the average person in China means that many new customers are "born" on a daily basis for Chinese companies, which translates into higher profits and share prices.

China plays a significant role in global growth as they consume large amounts of resources and produce high quantities at lower prices than many other people can. Lower prices mean that consumers then have more money to spend on other things (other companies' goods), meaning that the broader economy benefits.

At home our GDP per capita is higher than China's (was a surprise to me) at $7507, growing at pedestrian 2.8%. Even though our growth rate is dismal compared to China's, we are still growing with the potential to keep growing at this rate or hopefully faster for decades. Growth is good for companies and with the absolute number in the shifting demographics in South African middle classes for the first time, things are still looking good for our local companies.

We will be bullish on equities for as long as there is room for technological growth and room for more people in the middle class, which will be the case until we all turn into zombies due to a deadly virus.

Home again, home again, jiggety-jog. Markets are flat here after a poor showing on Wall Street overnight. But quite quickly the expectations are for the market participants to ignore. Which means that the #fail does or does not work? Gosh, I don't know.

Sasha Naryshkine and Michael Treherne

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Tuesday, 19 June 2012

Did it even scratch the Surface?

"The best performing stock is the unlikely Bank of America, up an astonishing 39.5 percent YTD. But, over 10 years, Bank of America is down an astonishing 78 percent. Most of that was over the last five years. HP on the other hand is up only 12.6 percent over the last ten years. IBM over the same time frame is up 153 percent, crushing the dogs of the Dow."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Wow, I did not really expect such an astonishing rally at the end, although there was great Grelief, there was anxiety about Spanish bond yields again spiking to Euro era highs. Spanxiety? Urban dictionary suggests that the word is way too rude, I had no intention of being rude, so perhaps we should call it what it is, Spailout. And who knows, Italy might be looking for cheaper credit sooner rather than later. All of this going on in the midst of the most important football tournament in Europe, which is exciting, and at the end of the week possibly the most anticipated match in an absolute age. The irony of it all, Germany against Greece on Friday evening. As we speak (write?) the new not yet formed government of Greece are asking Germany for more time for implementing the austerity measures. Which must leave the Queen of Europe shaking her head, in a match that we must term, the mother of all sovereign debt struggles.

Back to markets here locally, the Jozi all share index added a whopping 478 points, or 1.41 percent to close up shop at 34438 points, with gains across the board for all of the major indices, the banks roared over two percent, the retailers a more muted 0.29 percent better, the all important resource stocks added over a percent and a half, whilst the only noticeable losers were the construction stocks, down just shy of a third of a percent and the gold miners which sank just shy of a tenth of a percent. General industrials added nearly 1.2 percent on a generally good day for all and sundry. We closed on the ALSI a mere 43 points away from the early May all time highs. Tough going? Seems like it, but hey, the numbers tell a different story.

Naspers released a trading statement yesterday, it is complicated, because there are three different measures. That is often not a good sign, but be that as it may, the company considers what they term "core headline earnings" to be the true measure. And by that measure, on a per share basis, the company expects to increase core earnings per share by between 10 to 20 percent from the last years 1612 cents. So, in the middle of that range, 1853 cents per share. So, at the current share price of 46760, the price looks completely stretched. But. But. Not so fast, the valuation is in part earnings, and in part an NAV type valuation. We have covered this before in results, check it out: Naspers valuations, that was from last year, almost a year ago, that coincided with the results there. Results are in 8 days time, that would be the true test again of what the company should actually trade at, or be worth. Because often, and I hear this, folks suggest that the Multichoice business and the just less than 35 percent stake in TenCent make up the rest of the entire market cap. So, basically, you get the rest. But that is a simple and easy way of valuing what is a complex business.

Telkom, still trying to touch tomorrow, but at yesterdays share price. The BusinessDay has a story that suggests that the state are going to discuss this one in their policy pow-wow as to whether or not the asset is strategic. And whether or not it should be re-nationalised. Phew, that is why the share price is up a lot today, around four percent better. But what would they have to pay? Well, there are 520,783,898 shares in issue and government own a 39.76 percent stake which translates to 207,063,678 shares. So, if that were the case, government would have to buy the other 313,720,220 shares that they do not own in order to take the whole thing off the market. Let us suggest for a second that government pays 23 Rand a share, and I am not too sure that minorities would accept that, then the price tag for the rest would be 7.21 billion Rand. That would come from where? Total GDP at market prices in 2011 for South Africa was 1.895668 trillion Rands. So, this is not big, but our total budget is one trillion Rand, why would you blow around .75 percent of the total budget on buying this? And the way that we see it here in the office, the mobile entrants, of which two are dominant here in South Africa, are rolling out their infrastructure faster and with less red tape. Fewer meetings about how to do it, just plain old doing it. Execution and not talk, we are pretty good at that in South Africa.

Byron's beats is again focussed on the construction sector. I must be sure to buy him some Lego for Christmas.

Here it is

So what does the report tell us? This is the 3rd consecutive quarter where the index has risen and is the highest it has been since the end of 2009. "The 2Q2012 results suggest that the recovery is gaining momentum with construction activity in particular picking up noticeably. Despite this, there is still reason to believe that this recovery remains fragile."

That is good news. We saw signs of this near the end of last year where we saw a turn in cement sales. The construction index is up over 12.5% for the year so far which means the market believes in this recovery to. It is off a low base however. Just as a reminder the sector was down 43% in 2008, up 8.2% in 2009, flat in 2010 and down 25.6% last year. Let's carry on with this report.

"Capital expenditure (capex) from provincial governments remains robust. During the 2011/12 financial year (ended on 31 March 2012) provincial capex was 21.7% higher year-on year. This momentum likely continued with a number of projects focused on the healthcare sector and water and water waste management being initiated.

In contrast, municipalities continue to struggle. Only 41% of the total municipal capex budget had been spent during the first 9 months of the financial year (until March 2012). However, some work could have flowed from municipalities as they push to spend more in the last quarter.

Public corporations saw an increase in civil construction activity with new projects from the TCTA and ACSA in particular coming on line.

However, construction activity from the private sector likely contributed less with mining production slowing and some mining firms holding back on expansion plans."

Unfortunately the sector is still very dependent on the public sector. With rumours of bankruptcy amongst municipalities and story's like the Sanyati one who are insolvent because they have not been paid by government, you can see why they say this recovery is fragile. We have to see a pick up in the private sector. PPC did mention in their results presentation that private housing, which is responsible for 50% of cement sales, was starting to pick. With interest rates at historic lows and a growing middle class I tend to agree. There are still many headwinds for this very cyclical sector but having read this report I remain confident that we have seen the bottom of the cycle.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. After opening much lower, stocks proceeded to pare losses and then mostly hang onto some slim gains. The S&P 500 managed to just eke out a gain, up nearly 2 points or 0.14 percent on the day to close at 1344 points. The nerds of NASDAQ had an even bigger gain, adding nearly four fifths of a percent, driven by a strong move from Apple, the stock was up over nearly two percent. The Dow Jones Industrial average bucked the trend, losing 25 points on the day to 12741, banks and energy lagging there. Plus also some technology giants, HP sank nearly three percent, the stock is now down all of 18.3 percent year to date and is the worst performing stock in the Dow this year. The best performing stock is the unlikely Bank of America, up an astonishing 39.5 percent YTD. But, over 10 years, Bank of America is down an astonishing 78 percent. Most of that was over the last five years. HP on the other hand is up only 12.6 percent over the last ten years. IBM over the same time frame is up 153 percent, crushing the dogs of the Dow.

Strangely, the Dogs of the Dow is an investment strategy that suggests that at the end of the year, you must take the top ten best yielding stocks in the Dow Jones, and buy those. The idea is that blue chip companies included in the index will pay higher dividends over time and you therefore are getting a bargain, over the longer term. Check it out, somebody actually maintains a daily table and spreadsheet to help folks make these very easy decisions: Dividend Yield for Stocks in the Dow Jones Industrial Average. All 30 stocks in the index pay a dividend, which was not always the case. IBM I am guessing are going to have to think about a stock split soon, their price is nearly double that of the next most important stock, because the Dow Jones is a price weighted index.

Do we even want to talk about the Microsoft Surface tablet? I guess we should and we must, the "Surface" was unveiled by CEO Steve Ballmer. The device weighs slightly more than the current iPad (the new iPad) but has a bigger screen, 10.6 inches compared to the iPad 9.7 inch screen. The pricing will be similar to that of other options out there, and by that I suspect that Ballmer means the Samsung Galaxy and the Apple iPad. What is quite cool is that there is a magnetic cover that doubles up as a fold down keyboard. And it can connect with printers, and it has a USB port. But, the expensive part will be that it runs a version of Microsoft 8 and office, so that licence part will have to be paid for by the user, which could mean that it might be more expensive that an iPad. As the WSJ points out though, if this is meant to replace the PC at home, then how do the manufacturers of PC's feel about this hardware muscling by Microsoft? Not too sure how they feel, but my thinking is that they do not feel altogether excited by this, HP, Dell and the like. I guess the good news for Intel is that their chips will be used in these products.

Microsoft is still a beast, with a market cap of 250 billion Dollars, over five years the stock is flat, but has paid a regular dividend, the current quarterly dividend is 20 cents per share, up from 10 cents five years ago. You would have got 182 cents if you had owned them over the same period. I swear to you that I ran a simple one year valuation model assuming that a growth rate of 8 percent was acceptable and got to about the current share price, in fact just below at 28.37 Dollars. The stock currently is at 30 Dollars in the pre market, indicating that whilst there might be haters for the device, Mr. Market thinks this is about neutral. Check out the presentation, which was live blogged by the fellows over at the Business Insider: Microsoft Announces Its Own Tablet, The Surface. Am I sold? No. But the stock still looks cheap man.

Currencies and commodities corner. Dr. Copper last traded at 340 US cents per pound. The gold price is last at 1631 Dollars per fine ounce, the platinum price has crept up to 1485 Dollars per fine ounce. The oil price is last at 83.03 Dollars per barrel. The Rand is last at 8.25 to the US Dollar, 12.93 to the Pound Sterling and 10.46 to the Euro. Stocks in general are being sold off today, after having touched an all time high earlier in the session.

Parting shot. Check it out, as Randy Jackson would say, he might add dog to that, but it is an endearing dog. The Jozi all share index touched an all time high, 34561.99. It would have been better if it was at 34567. But there you go, in the face of what is still poor news, we continue to see the indices head higher. Because Europe will solve their problems, they are not insurmountable, they are dire at present, but so were many moments in history. In five years time we will look back at the European sovereign debt crisis in the same way that we look at the subprime mortgage mess in the US, that period there. And Europe will be a more united place, not less so. Question: Is Greece still in the Euro zone? Answer: Yes.

Sasha Naryshkine and Byron Lotter

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