As you were!

‘”It’s hardly what you might call a “devaluation,” or a “collapse,” as some of the more breathless headlines read.”‘


To market to market to buy a fat pig. My spell checker does not like rude words on my phone, my texting is autocorrected to holy spitballs. Which in itself is borderline PG13 for language, perhaps the real word is another 3 years on that! That phrase, the real one, could be used to describe market movements yesterday. Personally I think that it is stupid that the market reacts negatively to a very modest move in currencies. It seems like the same old thing over and over, over-reacting to a market current topic de jour.

As Paul pointed out, last week it was Greece, a few months ago it was Ebola, there will always be something to worry about, currently it is Chinese currency moves. Know that the most successful investor of all time (if absolute money and wealth was a marker), Warren Buffett just closed the single biggest deal ever in the history of his company Berkshire Hathaway. Ever. In the 50 years that this business has been controlled by him, and for 50 years that he has leaned on his business partner Charlie Munger, they have never done a deal of this scale and magnitude. EVER! If two of the best investors of all time were doing a deal last weekend, depleting half of their cash reserves, you should probably know that they think it is OK to pay 22 times earnings for a company with growth prospects.

The blog posts that started going around showing everyone that this was not really a big deal included this classic from Scott Grannis: China’s currency move not a big deal. That sentence in the first paragraph sums it up: “It’s hardly what you might call a “devaluation,” or a “collapse,” as some of the more breathless headlines read.” EXACTLY! As you know however, stocks tend to move on emotion, a little trigger can cause a massive move. Markets are twitchy by nature, participants are glued to screens looking at price moves as if their lives depend on it. I suppose in many instances their livelihoods do actually depend on the price moves. As Benjamin Graham tried to explain at the beginning in his Intelligent Investor, there is a distinct difference between speculators and investors, they are all market participants, different time frames and same objective.

Our market was absolutely crushed. Mashed. Down a whopping 3.16 percent, banks and financials fell around four percent. Wow. Industrials took nearly as bad a caning. Resources however were nearly flat relatively speaking, down 0.22 percent by the close, spurred on by the gold miners, and wait for it, as a collective they were nearly up 11 percent on a day. If I got an 11 percent move per annum I would double my money every six and a half years. Platinum miners were up a less impressive 2 percent. Both sets of stocks as a collective are down a quarter for the year in the case of the gold companies and a little over one-third for the platinum producers. And whilst people may talk about gold as an inflation hedge, protection to use against pending armageddon (trading with cockroaches and ants a good idea?), the World Gold Council suggested that demand is at a 6 year low. Here goes the first two stories in my inbox this morning:

Seems like it is jewellery demand that drives the prices. As we have often said here at Vestact, we would rather be invested in the business that we have access to that will benefit from gold demand in the form of jewellery and watches, Richemont is that very business. Own that, rather than physical gold or gold producers, better margins, less problems.

To finish off, the US market had a heroic comeback, and whilst the scoreboard reveals very little, stocks flat to slightly higher. At the worst point after stocks had been trading for just half an hour, collectively down one and three quarters of a percent. Wow. The comeback kid, perhaps as a result of the JOLTS report. Job openings dropped more than expected. Yes, what does that mean (say it slowly). The annualised number still looks amazing, in terms of number of hires, the recent number points to a little slowing. So the whole debate on whether the Fed will or won’t raise rates in September starts again. File in the drawer of things to watch yet they are not important in terms of what you are trying to achieve, OK? Stay calm and sensible, share prices go up and down as a result of the current mood, nothing changes at the companies other than their respective share prices may get cheaper. Something that is cheaper is worth buying, right? Right!


Company corner

Tencent released numbers yesterday, after the market closed in Hong Kong. And that was during our market. First of all, why does this matter to us? Naspers owns 33.85 percent of Tencent, it is their principal asset in size and scale, and has been for a long time their share price driver. Time to whip out the maths to see how many Rands Tencent is relative to the Naspers market capitalisation.

Tencent market cap in Hong Kong, which right now is 1.38 trillion HKD. Naspers owns 33.85 percent of TenCent, that translates to 467 billion Hong Kong Dollars. One Hong Kong Dollar at the current exchange rate is around 1.64 Rand. So, quite simply, multiply 467 billion HKD by the prevailing rate and that equals 766.49 billion Rand. Naspers had a market capitalisation of 681 billion Rand at the close last evening. Huh? That doesn’t even make sense. Well, you must bear in mind that yesterdays close was awful, horrible and no good with the Naspers price sinking six and a quarter percent. Wow. The selling was aggressive yesterday.

The current gap between the value of the Tencent stake that Naspers holds and the entire market capitalisation of Naspers is minus 85 billion Rand. Or minus 6.68 billion Dollars. That is the size of a company like Discovery. Missing from the market valuation, in our infinite wisdom here in South Africa we somehow know the “real” value of Tencent, somehow our arrogance suggests that Tencent is completely overvalued. Yet, the PE unwind on Tencent is happening in front of our eyes. And the stock is up over five percent currently, which is how the market has perceived these results.

You can take a quick look at the numbers, I went through them yesterday and they all look pretty good to me: Tencent Q2 numbers. Revenues up 20 percent year on year, profits up 17 percent, Basic EPS clocked 1.528 Renminbi, that translates to 1.91 Hong Kong Dollars of basic earnings per share, that is for the first half. If you annualise that and apply a forward multiple to Tencent, you get to 36 times at the elevated shares price (up 5 percent this morning). So whilst growth of 20 percent might not be enough for locals here, the stock still trades at a premium. A growing business that attracts a higher multiple, we remain positive on Tencent and their prospects, equally we believe that Naspers has plenty more legs!


We had numbers from Curro this morning, interim results for the six months ended 30 June 2015.

Here are a quick overview of the numbers. Headline Earnings are up 82% to 51 million but due to the extra shares in issue the HEPS are only up 68% to 14.8c. Revenue is up 45% to R705 million and learners are up 26%. The number of schools has grown from 80 at the end of 2014 to 101 at the end of June. The advantage of a growing school network is that their overhead costs of running the group drop on a per learner basis. So the company gets relatively more profitable as they grow, the wonders of economies of scale. EBITDA margins improved from 20% to 23%.

The stock has been the market’s preferred entrant into the private education space in South Africa, where the view is for ‘blue sky’ growth opportunities. There is a graphic from our post a year and a half ago, Curro full year results 2013, which shows that if the number of learners triples from here they will occupy still less than 1% of the education market in South Africa. So there is definitely scope for huge growth and continued growth at current eye watering levels. With the nice boost in HEPS the P/E ration moves from around 190 to around 120, so not cheap by any means! Looking forward the stock probably wont double in 3 years again with earnings growing into the share price. When at some point in the distant future where there are no longer growth opportunities, the huge amounts of cash generated from the company will then result in a very rosy dividend yield. For those with an already diversified portfolio this is a buy in our books


Linkfest, lap it up

I can’t remember if we have posted this before even if we have it is worth reading again – How South Africa’s Discovery became one of Africa’s most innovative companies.

This is not new news and Dstv already does this through box office and catch up – Naspers to launch Netflix ‘competitor’. The key to a successful streaming service is having a reliable fast internet connection and then the content that is offered. Getting quality content is expensive which is why the likes of Netflix and Amazon have started making their own shows, I wonder if Naspers will do the same?

Being financially independent is the goal for just about everyone that I have met – Your salary shouldn’t be your only source of income. Some of the interesting finds in the article were that the majority of US woman feel adverse to discussing financial planning and investing but 3 out of 4 woman would like to learn more about investing.


Home again, home again, jiggety-jog. Stocks should bounce back hard today, most Asian markets are trading much higher after the global slam dunk yesterday. All markets across Europe traded three percent lower here yesterday. Oh, and the Greeks vote on their third bailout today. so much for no austerity and breaking those shackles, as we said, when the money moment arrived, we would see.


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

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