“The light brown is David Jones. That segment (David Jones) had a strong second half, sales up 10.7 percent (H2) in a weakish Australian consumer market. Inside of this period will be the deterioration of the Aussie Dollar (like the South African Rand, “commodity currencies” globally have been negatively impacted) and more importantly, the dilution by way of the rights issue done last year, when the company turned to their shareholders for 10 billion Rand. Remember that rights issue was done at 59.5 Rand a share, the stock closed last evening at 98.89 Rand. It was a good idea to follow your rights.”
To market to market to buy a fat pig. I guess you must file that in the same drawer of dumbness. Stocks made an epic comeback last evening in the US session, enjoying the single best day for equity markets since 2011. Dumb. What changed? Did Starbucks sell more coffee to Stockbrokers (chief Howard Schultz told baristas in an email to be sensitive to Wall Streeters) or less, who knows?
I am not too sure that a market should go up 4 percent on any given day, bearing in mind that is around half a years worth of longer dated returns (sans dividends). Some reasons are attributed to a speech by a Fed member, Bill Dudley who suggested that a hike in September was “less compelling”. Paul told me of a bunch of market nerds who have started a hashtag suggesting that the Fed just gets the first rate hike out of the way. In other words, to borrow the Nike line, just do it.
Much of the recent turmoil in global markets is attributed to the “weakness” seen in China, let us rather say that the rate of growth at which they are growing is slowing off a base that is now many, many times bigger. We spoke about the shift to consumption. Some reassuring comments from Andrew McKenzie, the BHP chief and Martin Sorrell, the WPP (largest advertising company by revenue globally) chief on China and the long term future.
Anyhow, we always find it amusing in the office that people speak of a country as one, “what is China going to do?” is a dumb question in itself. If we all needed reminding, the global population is around 7.36 billion, the population of China is 1.4 billion. Out of a room of 100 people, if represented by all the people of the world, 19 people would be Chinese. How is it possible to talk about so many different people as a collective? China this and that. In the same way that you and I get mad about people talking about “Africa”, China is a country of many different individuals all looking to improve their lot in life after the disastrous impact of collective communism. There is a centralised and planned economy that everyone works in and around. Humans are great at generalising, it is far easier that way, less work required.
And whilst we are on the story of “Africa” my favourite question by financial commentators and financial journalists alike here in Johannesburg is to ask “What is your Africa strategy?” Last I checked, South Africa has an Africa in it, I woke up on this continent, I will go to sleep on it and eat the food it produces, the roads it built. Got it? Johannesburg, Cape Town, Durban might not feel like part of the continent that one associates with elsewhere, by the same token Detroit is not New York.
Locally the market fared less well with the sell off on Wall Street in the session prior starting us off badly. Everything was sold off, mostly banks and financials across the big caps. South32’s average results catching up with them. They had made some interesting comments around certainty in South Africa in mining legislation, suggesting that they want to invest in coal here. Remember the fuel consumption graph that Michael had yesterday, in the US coal seemed to be waning quickly as a fuel source. Renewables, natural gas, those are the growth areas for energy globally I think.
After all was said and done on the local market, when the gong rang, the markets had shed over one and one quarter of a percent. The local market is trading at levels last seen in mid January, levels that were first breached in May 2014. So, if you had bought an index tracker back then, in May 2014, you would have wondered what this is all about. The trick and key is to continue to add over time, more importantly it is what you buy. We should start with a very decent lift today, Asian markets on balance up smartly.
There are stories starting to circulate that Chinese Premier Li Keqiang’s job is on the line as he has failed to deal with “market volatility”. So whilst I may sit here and poo-poo it, there are real implications for other people. High powered and high ranking officials. I think that again it falls into the dumb category, how is it possible that a politician can be more powerful than capital markets? Many a politician has found out the hard way. We have also seen news stories of half of the margin debt that existed in the Chinese equity markets have been unravelled. Wow, using borrowed money to buy shares, unless you are really sophisticated (and even then) is never a good idea.
The BusinessInsider reports that the Chinese market regulator is investigating top brokerage houses for share price manipulations, wait for it, as the BusinessInsider see it “suggesting the ruling Communist Party might be trying to deflect blame for the collapse, which angered small investors.” I recall Pakistani retail investors beating the outside of the Karachi Stock Exchange with their sandals (in certain cultures shoes are seen as very dirty, associated with insults), the Chinese communist party is all big brother and looking out for stability in this grand long transition, the only good news is that the 20 odd percent sell off in five days (yes, really) has stabilised.
You and I cannot understand investing psyche in a country like China, with very few options. The state is not going to look after you. Your children and grandchildren are not going to look after you, the pyramid gets smaller, it is inverted for many urban families. Capital markets are immature and weak and very new. Whilst Chinese investors and traders alike are all working out how this “all works”, the volatility as Larry Fink of Blackrock pointed out a number of weeks ago, is as a result of these factors. Ignore all this noise and remember that quality counts for everything.
Woolworths have released results for the 52 weeks to end June, remembering that these numbers include 11 months of David Jones. Total revenue of 58 billion Rands is an increase of 45.4 percent on last year, including concession sales revenues grew by 54.9 percent (excluding David Jones it is 12 percent). Adjusted profit before tax grew 20.5 percent. The food business was the great standout, total sales there were up 13.5 percent with the supermarket model working well.
In the slide presentation to analysts (slide 8) the company says that food sales “Growth ahead of the market every month since September 2011”. 4 years of solid outperformance, and as both you and I know, the consumer does not generally lie. Ever. This next chart is important for seeing where the profit and sales mix comes from:
The light brown is David Jones. That segment (David Jones) had a strong second half, sales up 10.7 percent (H2) in a weakish Australian consumer market. Inside of this period will be the deterioration of the Aussie Dollar (like the South African Rand, “commodity currencies” globally have been negatively impacted) and more importantly, the dilution by way of the rights issue done last year, when the company turned to their shareholders for 10 billion Rand. Remember that rights issue was done at 59.5 Rand a share, the stock closed last evening at 98.89 Rand. It was a good idea to follow your rights.
This is a big business, with a market cap close to 103 billion Rand, 1.04 billion shares in issue, it is always going to be pretty easy to work out! 167.8 million shares were issued in the rights process done last year. The dividend cover remains at a very handsome 1.4 times (invert it to get the dividend payout ratio), that has increased a little to 247 cents for the full year. Diluted headline earnings per share clocked 367.1 cents, the stock looks pricey at 27 times. We will get to that in a second.
The outlook is neither completely muted or tearaway: “We believe that economic conditions in South Africa & Australia will remain constrained, especially in the lower and middle-income segments of the market. The upper-income segments in which we operate continue to show some resilience. Trading for the first eight weeks of the new financial year has been positive. The transformation and integration of David Jones is progressing ahead of expectations.”
OK, so as I said, the stock is pricey. In part the dilutionary impact of more shares in issue. I do know one thing however, this is a really good business with a really sharp management team. They are not aiming to be the biggest in size or the cheapest. They are however the best of the quality, you get what you pay for in life. As a consumer of all the major retailers in South Africa, I am very mindful that Woolworths are certainly not the cheapest, they are however the best quality, in my opinion. And you always get what you pay for. As with a company that is likely to grow their earnings in the mid teens for the next couple of years, we continue to be happy to pay up for the quality of the business, a strong dividend policy too, we continue to rate Woolworths shares as a buy.
Linkfest, lap it up
China has been sighted as one of the main reasons the market has been crushed. Here is a bit more perspective of why it is probably a weak reason for a sell off – What Investors Must Know About China. Like anything, context matters.
This is a great way of visualising our impact on the planet. As the saying goes, ‘out of sight, out of mind’ – This Danish power plant will poetically inform residents of how much carbon they’re using
An interesting way of making custom metals – This startup can grow metal like a tree, and it’s about to hit the big time
The US is busy shutting down its’ Coal power plants. Less global demand for coal won’t be good for the coal price or local mines that produce coal. The upside is that Eskom won’t have to shell out as much for coal – As natural gas replaces coal, U.S. utilities invest big in the future. Can’t help but feel that we are missing something, the rest of the world are closing down their coal and nuclear power stations. Surely given our access to natural gas, using it as a power source is the best long term play?
Home again, home again, jiggety-jog. Chinese stocks have had the wildest ride ever in their afternoon session. Down a bit and then ending the session up over four and a half percent. That is simply dumb, hey, who am I to suggest anything, what do I know? Our markets should start off on a rip roaring note, capturing the gains from the US session prior. US futures are looking modestly higher, which makes for a bit of a change from the wild swings too and fro.
Oh, and lest we forget, Wayde van Niekerk’s (Grey Bloem’s finest) performance yesterday, the 4th fastest of all time for the 400 meters and beating a real quality field. To think that LaShawn Merritt (Olympic champ in 2008 in the same stadium) ran the 5th fastest 400 metre time of all time and came second tells you something about Wayde’s run. Epic, we should be talking about that one a little more. And he beat the 2012 Olympic champ, Kirani James. Silver Medalist in 2012 at the Olympics was Luguelin Santos, who set a National record (Dominican Republic) in this race yesterday (his best of all time), that was only good enough for 4th place. When 4th place is both your best and not good enough.
Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.
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