This Stein is a vintage

“It seems that Europe is not finished for furniture, just “finished”. Pfff. The company owns a fair amount of real estate too, 41.4 billion Rand worth, possibly a lot more in recent weeks, seeing as the Rand has weakened significantly to the Euro, around 9 percent in the last 3 months.”


To market to market to buy a fat pig. Pfff …. After US market participants took a break for the long weekend, Labor Day was Monday, the buyers came back with a vengeance. In many ways it is unsettling with so many up and down days of the order of magnitude of this, at the end of the day you must remember that there are too many different theories on the same subject, many different time horizons too. I recall a book I read over a decade ago, it was called Stock Market Wizards, written by Jack D. Schwager, it came up in the office here yesterday when we were discussing “market related books”. If I remember right there was a trader who bought and sold index futures, their time frame was seconds. Not months, years, decades, seconds only.

The S&P 500 is up over 100 points from August the 25th, two and a half weeks ago, yet in the last month is still down over five percent. In the index futures traders lifetime, 20 odd trading days is a lifetime. Of course, they do it over and over again and it is a strategy that obviously works for them to get featured in this book, I searched high and low and I couldn’t find it, perhaps it is time to freshen up, I don’t really feel like I have the gumption to read the book again.

Markets on Wall Street closed all higher, around two and a half percent on all the indices, what one would call a broad based rally. In the losers column were some noticeable big names, Alibaba continues to plumb new post IPO lows (they have halved since November 10 last year), obviously on “China concerns”, Netflix sells off, probably in response to Apple looking to push heavily into their domain, and Twitter who is yet to find another CEO continues to slip back. In the winners column (albeit just for the day), Apple was stronger ahead of the worst kept secret in town, the possible unveiling of the iPhone 6s. It is expected to have a better camera, a faster processor, better battery life, better durability (remember bendgate?) and generally a must have. Of course the price tag will be higher. Tune in much later today, reminder of the event across the US -> “Hey Siri, give us a hint.”

Locally stocks bounced higher, the Jozi, Jozi all share index bounced 1.5 percent by the end of the day, resources were up more than that, industrials the same amount. Only Mr. Price was the noticeable down stock in amongst the ALSI 40, the trading update from them a little while back has led to some pretty aggressive selling. It is another reminder that when you are primed for greatness, you must continue to deliver said greatness. The analyst community have turned a little against this one recently, the stock still trades on a forward multiple of around 19 times (not cheap like their clothes), the dividend yield is a little more impressive 3.5 percent. For the expected mid teen growth rates, I do not think that this company is too stretched currently, looks like the market have got it about right.

Another “thing” worth pointing out is several commentators on the box (you can’t call it a box, it is more shaped like a screen, you know what I mean though) said that the volumes in the last hour of trade on the Shanghai Stock exchange (and the prices ramping up heavily) indicated that there was “heavy money” pushing the market higher. Government intervention, natural buyers maybe? Japanese markets are up over five percent this morning, Shanghai up a percent and a half, Hong Kong up nearly 3 percent. Aussie up one and two-thirds, it is all happening. Rather quickly really.

Sigh. Again, what do you do in a time like this? Nothing, you don’t use this as an opportunity to get out now ahead of the Fed meeting next week. Too much fixating on a single event, there may be another serious market knee jerk reaction ahead of the Fed, during the release or later during the Questions and Answers session post the release. As Alfred E. Neuman of Mad Magazine fame (a misspent youth) used to say, “What, me worry?”

I guess worrying is what keeps us all from making mistakes in the future, unfortunately the collective participation in equity markets means that volatility is always going to be part of investing. There is absolutely no way to smooth your returns, to ensure a steady 0.04 percent every day. As the greatest investor of our generation (and the two before that), Warren Buffett said something along these lines: You must be prepared to own a company on the basis that the market closes for 5 years. Meaning that if you had no mechanism to transact in that specific company, you must still do it. He also said that you must be prepared to see your investment halve, something that has happened to the Berkshire Hathaway share price twice in 50 years. Alibaba and Jack Ma can say that it happened once already, and the stock has only been listed for a year next Saturday. Those were the days my friends. Keep calm and stay long.


Company corner

Steinhoff reported numbers for their first full year that includes all the huge transactions that they have managed to close in the same time that Alibaba have been listed, not all full years of course, some of the transactions are recent. Marcus Jooste and his team are highly regarded, they now have one of the most iconic South African businessman as a large shareholder. You will recall in the message that we wrote last year in November: Steinhoff buying Pepcor, that Dr. Christo Wiese would own around 20 percent of the business. He has been potentially diluted a bit with the issue of convertible bonds, we wrote about that at the end of July -> Steinhoff convertible bonds.

We made a few points about shares in issue at the end of July, as well as the hard charging management at Steinhoff: “There are now 3.667 billion shares in issue, there was half that in 2013. Such has been the pace of deal making, acquiring JD Group (second time lucky) and Pepkor. Pursuing a strategy that has certainly worked well for them, the number of shares in issue in June 2005 was less than one-third of what it is now. That is not for the purists, this company is certainly run by some hard charging and very hungry individuals, Markus Jooste (53), Danie van der Merwe (56), Frikkie Nel (55) and Piet Ferreira (59) are up for it. After all, 50 is the new 30, right?”

And of course, if you missed it, just two days ago the company announced that they had got the necessary votes to proceed with the offshore listing in Frankfurt. Logistically speaking, what happens next is that a business called Genesis N.V. will acquire all the shares of Steinhoff, in exchange for each Steinhoff listed share on the Frankfurt stock exchange, there will no doubt be a version change. You will basically be an investor, owning a global depositary receipt of a business listed in Frankfurt and domiciled in the Netherlands. Got it? Easy, not so?

The founder of the group, Bruno Ewald Steinhoff, lives in Germany. His term as a director, as per the prospectus suggests not more than four years, in 2019 he will be 82 years old. Roughly the age of Warren Buffett now, a decade younger than Charlie Munger, there is a second generation on the board as an alternate non exec, Angela Kruger-Steinhoff. I am guessing she will in time represent the family interests. Christo Wiese, who turns 74 tomorrow (I can read ID numbers), has the same terms. His registered address is 98 The Ridge, Fourth Beach, Clifton. Familiar with that one? What is more interesting as per the prospectus, and I had heard this from a client who knows the team, three of the directors above, Marcus Jooste , Frikkie Nel and Danie van der Merwe all have the same registered address. True story, they all live together at Jonkersdrift Farm, Jonkershoek in Stellenbosch. Imagine seeing each other all day and then being able to continue that discussion during dinner? Quite amazing.

OK, let us have a look at the results now quickly. As we mentioned, the company had been really busy. With the rest of JD Group acquired, JD promptly turns around as a whole owned subsidiary and then acquires Iliad. They increased their investment in the PSG group to 27 percent. I guess that indirectly means that as a Steinhoff shareholder you own some Capitec and some Curro and some Zeder, as well as the rest of the PSG business. Scroll to page 8 of the investor presentation and you get a good idea of what and who the company is. The three separate divisions are household goods, general merchandise and lastly automotive, which consists of 87 dealerships and well as 46 rental locations.

Revenues grew 15 percent to nearly 135 million Rand, headline earnings increased an eye popping 36 percent with the all the transactions. Along with the transactions however and share issuances (average weighted number of shares in issue increased 38 percent) comes a dilution, headline earnings per share was 2 percent lower at 453.7 cents per share. The dividend increased 10 percent to 165 cents per share. Net asset value per share increased 22 percent. Pepkor is only in these numbers for three months, the 12 month revenues for Pepkor grew 18 percent. I am guessing some currency translations in there. In a tough European environment, the group managed to increase revenues in their household goods division by 7 percent. It seems that Europe is not finished for furniture, just “finished”. Pfff. The company owns a fair amount of real estate too, 41.4 billion Rand worth, possibly a lot more in recent weeks, seeing as the Rand has weakened significantly to the Euro, around 9 percent in the last 3 months.

We have been buying a lot of these, in anticipation of a lift ahead of the Frankfurt listing, plus more importantly a general global recovery. This is a strange business in terms of the global reach, the geographies do not really all tie up, what has Western European retail got to do with African retail? I suppose people all want the same thing, value for money on furniture and clothing. The empire is being built, the team are strong and hungry and have years of experience to draw down on. We continue to accumulate and maintain our buy rating.


Linkfest, lap it up

Josh Brown goes on a rant about why saying that assets are at their most expensive level in 200 years, is just plain wrong – and now, a brief rant about historic valuation. He helps to put things into perspective. The one point he doesn’t make is that as technology has improved, we are able to trade with the click of a button. Quicker trade times lowers the liquidity risk so people are willing to pay more.

One of the reasons given for buying Glencore was that their trading division will help stabilise earnings during a commodities downturn. This article chats about why that may not be the case – Regardless of What Happens to Glencore or Noble, The Commodities River Will Keep on Rolling.


Home again, home again, jiggety-jog. Stocks across Europe are expected to be higher, we should follow, the big news today is the announcement of the Sibanye Gold purchase of the Rustenburg assets of Anglo Platinum, the deal is rather complicated and contains an earn out period over six years. It could be worth 4.5 billion Rand, it could be worth 4 times that, depending on the free cash flow generated over that time. Sibanye have demonstrated their strengths in sweating the short term really well, I wonder how this is going to work. Sibanye is just going to be the operator, Michael thinks that this is a win for Anglo Platinum, we shall see the respective share prices today.


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

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