"By consolidating these mines, selling Union and focusing on lower cost mechanised mines, that tells you immediately that the company is going to be less labour intensive. There are at last look over 5000 people who have lost their jobs at Amplats since this time last year. Union employs around 7263 people, meaning these employees will no doubt be somewhere else in due course. And fewer people working in labour intensive mines. This is a direct response to labour declaring victory, forget the social issues in South Africa, this is the response from business."
To market, to market to buy a fat pig. It sounds completely crass to say it, but earnings as far as the market is concerned trumped human conflict. Market participants themselves carry emotion, collectively it is less so, over time it is insignificant. The downed Malaysian Airliner, the civil war in the Ukraine, the conflict in Gaza and the associated loss of life is too dreadful to bear, but the harsh reality is that equity prices reflect the prospects of the business. In this case it was Google which soared over four percent on Friday after some very decent results at the end of the prior session.
On a price adjusted basis to reflect the 2 for 1 split in April 2014, the all time high of Google is 615.42 Dollars. The shares with the voting rights (more than the other that is), GOOGL is now 605.11 Dollars a share. Many a brokerage house upgraded their price targets, some beyond 700 Dollars a share for what it is worth.
A price target must be one of the hardest things to do, in analysing a business you can say whether or not once you have looked under the hood that the company is a "good one", translating their earnings to an expected securities price, that is very hard. No, that is exceptionally hard. Some well paid very smart and very hard working equity analysts have the unenviable task of doing that. To set a 12 month price target on a specific stock of a specific company tells me everything I need to know.
Locally we nearly managed to get back all the losses from earlier in the session, mostly as a result of US Futures and then markets pointing to a positive outcome. The Jozi all share closed down 0.18 percent on the day, the S&P 500 added over one percent, and now is an average session away from an all time high. In the end, it is not geopolitical tensions, banking crises, sovereign debt or political dispensations that impact on markets, it is earnings from the companies that set the levels. If country X has more appealing reasons to do business in, then that will happen, companies will drift in that direction. If country Z has the opposite and makes it harder to do business, the companies will do less business there. That is the way that it works.
Truworths was the latest in the line of all the retailers to report sales numbers on Friday, the market was clearly disappointed, the stock was sold off 3.6 percent. Retailers as a collective (their stock prices that is) peaked in January 2013, since then general retailers, the index, is down over 6 percent. It could have been worse, there has been a recovery of sorts! Truworths is comfortably off their 52 week highs, the stock traded as low as 72 Rand a share Friday, their 52 week high (mid October last year) is 99.28 Rands. Why? Having read that, you would have expected their sales update to end June to be awful, so what was it?
"Truworths ... announces that Group retail sales for the 52 weeks until 29 June 2014 ("the period") increased by 6.8% to R 10.8 billion, compared to a 10.7% increase in the corresponding prior period, with credit sales growth of 5% and cash sales growth of 11%."
That sounds OK, this less so:
Like-for-like store retail sales reflected an increase of 0.6%, product inflation averaged 9%, and trading space increased by 10.3% relative to the prior corresponding period-end. Credit sales comprised 71% of retail sales (2013: 72%) during the period.
Basically sales are flat, with a larger mix of cash sales. The loan book increased by 11.8 percent to 4.7 billion Rand, one however gets the sense however that Joe Consumer is being less gung-ho with regards to credit. The sales update says: "As a result of strategic credit-related decisions taken during the prevailing tough market conditions, growth in trade receivable costs slowed in the second half of the period. The period saw continued movement from the 6 month interest free payment plan to longer term interest bearing payment plans."
We do not own the company, but are interested that over the last three odd years two things have happened that have had the same outcome. Firstly sales growth has slowed and has not kept pace as a result of a worsening credit cycle, ironic in a time of the lowest interest rates in decades. Secondly and most importantly for equity holders, the market would easily pay a twenty multiple for the forward earnings when they were trading at R100, nowadays the market will only pay in the low teens. Earnings are the same, more or less, the market is only prepared to pay a far lower multiple for the same businesses. Make sense?
Impala Platinum with a clarification announcement on Friday: Bimha Mine underground collapse. Wow, that sounds awful. It is just another reminder that underground mining is very dangerous (this fault was identified in 2011) and that this can scupper the best production intentions. When this happens however, the company has to recalibrate and report that. To restore production to full capacity, that will take 15 months, the 270 thousand per annum production is only expected to be achieved in 2016. The share price is last seen at levels in September last year.
Staying with platinum, Amplats have reported For the six months to end June 30 2014. What I find quite interesting is that the first picture has a heavy dragline that has both a Chinese and South African flag. I have no idea why, perhaps someone can enlighten me.
Tonnes milled, down 34 percent. Ore grades, 13 percent lower. Equivalent refined Pt ounces? 39 percent lower when measured against the first half of 2013, mostly as a result of the industrial action, but as the company also points out, as a result of consolidation of Union and Rustenburg mines. Refined production, platinum lower by 16 percent, palladium lower by 5 percent.
There is some interesting commentary in the segment titled Strategy overview - repositioning of the portfolio. Here is the skinny. The Rustenburg mines, the oldest ones in the portfolio have been consolidated from five mines to three which will result in 250 to 350 thousand ounces of unprofitable ounces removed from total production. Step one done. Step two is where Union mine will be consolidated into one mine, from two and the company have indicated before that this is for sale. They plan to exit it, in its entirety. This we know.
Then there are some pretty obvious ones, prioritising spend and focus on Mogalakwena, Unki, Twickenham, Amandelbult and the JV assets – Mototolo, Modikwa, Kroondal and BRPM. When you read about the specific mines in question, that are going to attract more of the companies capital, it is immediately clear what the companies response to the protracted strike has been.
Mogalakwena consists of four open pits, life of mine extends beyond 2060. Unki is a mechanised, trackless board-and-pillar underground operation, as per their page on the Amplats website. Twickenham is also out there on the Eastern Limb, currently heavy spend has seen the mine heavily mechanised. On the JV's, many of the mines are not operated by Amplats and are smaller and more nimble, they are happy to contribute their share. Again, you do not have to be a genius to figure out that Union is loss making, the Rustenburg mines are old and tired and equally unprofitable.
By consolidating these mines, selling Union and focusing on lower cost mechanised mines, that tells you immediately that the company is going to be less labour intensive. There are at last look over 5000 people who have lost their jobs at Amplats since this time last year. Union employs around 7263 people, meaning these employees will no doubt be somewhere else in due course. And fewer people working in labour intensive mines. This is a direct response to labour declaring victory, forget the social issues in South Africa, this is the response from business.
So is this business investable? I am not too sure. Production is going to be in the region of 2.1 to 2.2 million ounces, that basically has not budged for as long as I have been watching this business. The demand side looks fine, jewellery demand from China is picking up, investment demand locally (in price trackers) is good and of course European automobile sales are starting to pick up. So the demand side looks good, obviously the recycled product will be more and more in time, you would expect vehicle sales in emerging markets to continue to make traction.
How will this restructuring go down? Single commodity basket, volatile place and combative government and workforce to the company, all rather tricky at best the operating environment. There are better assets to own, better sectors to be in, like healthcare, technology and retail. We continue to avoid all these companies is this sector.
Michael's musings
When you look up the term "Blue Chip" in the dictionary you get the GE share code as the definition. GE is a company that has been around since the late 1800s, and has none other than Thomas Edison as one of its founders. This is what Wikipedia had to say about the formation, "General Electric was formed by the 1892 merger of Edison General Electric Company of Schenectady, New York, and Thomson-Houston Electric Company of Lynn, Massachusetts..."
Having a look on Google I found a very long list (to my surprise) of listed companies that are over 100 years old. There were 18 pages of around 23 companies, based on the list the only company bigger than GE that has been around over 100 years is Exxon Mobil. So GE is old, big and well diversified.
Currently the company has what they call their "Next list" which covers their R&D focus for the coming years. The list has six core research areas, Extreme Machines, Super Materials, Industrial Internet (where machines will be able to communicate with each other and us), Mapped Minds (unlocking how our minds work), Brilliant Factories (Factories that can adjust by themselves to have the efficient use of resources) and Energy Everywhere. GE spend 5% of revenue on R&D, which is low compared to JnJ (12%) and Google (14%) but when you consider the speed of change happening in the other two companies sectors, 5% seems fair.
On to the second quarter figures, there was a 13% rise in profit on a 3% increase in revenue, where strong earnings came from its jet engine division. This is an example of where the R&D spend has paid off, where their new "Leap" engine has an order backlog of $78 billion. The engine has components that are produced through 3D printing and have ceramic parts instead of a metal. Ceramics are light, strong and heat resistant, allowing more power and efficiencies out of the engine.
Currently 40% of GE profits come from the GE Capital division, which is less than ideal due to the volatility of financial assets earnings. GE is shifting towards being more industrial, by slimming down or selling their GE Capital divisions, where the 40% of profits is expected to be 25% by 2016. In the last quarter industrial earnings were up 9% and GE Capital were down 5%, highlighting the move away from Capital.
Part of the restricting of the company can be seen through the purchase of French company Alstom and through the upcoming IPO of one of GE Capital's company's, Synchrony. GE is not going to shoot the lights out, but if I had to bet on a company being around for another 100 years my money would be on it. This is a solid stock for a long term portfolio.
Home again, home again, jiggety-jog. Markets are lower, the Rand is not helping equities, but surely helping fight inflation. More please, not less. No doubt another interesting week of results lined up in the US. To leave you, check out this picture (and tweet) that Paul took of us the other day: Office life at Vestact. Here it is below:
Sasha Naryshkine, Byron Lotter and Michael Treherne
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