Some Green on the Screen


“Over the seas and far away (from here), stocks rose sharply in New York, New York. The S&P tacked on 1.62 percent, the nerds of NASDAQ flew sharply higher, adding nearly one and four-fifths of a percent. Yowsers, that is a monster day. The Dow Jones lagged a little, that index was up “only” 1.42 percent.”


To market to market to buy a fat pig. A down day locally here, most of it was catch up to a worse end on Wall Street in the prior session. The gold price was plumbing five year lows, I guess with inflationary pressures not forthcoming and with the rate hike cycle set to begin in December in the US, these is very little to be excited about for bullion. For me at the end of the day, the fundamentals for the metal price must be driven by a function of supply and demand. With a global population becoming richer as we go on, I would say that the outlook for global jewellery markets and by extension gold and platinum, are positive on a multi decade basis. We would however rather own Richemont, who manufacture and create beautiful watches and jewellery. And their margins are much higher.

Most of the big diversified resource stocks enjoyed a good day, South32 was an anomaly. Woolies had a great time of it, that stock was up 3.36 percent after a strong 20 week trading update. Right at the bottom (or top, which ever way you look at it) of the list of losers was Mr. Price, down five and a half percent on the day. They released results mid afternoon which were, as you can no doubt tell from the share price having swooned, poorly received. This comes hot on the heels of the trading statement five days ago, on Friday. That was well received, the share price popped to 222 Rand, the results themselves saw the price flop by the close yesterday to 202 Rand. See below in company corner for a short review of the results.

PPC released results yesterday, this was for their full year to end September. This is one of the oldest listed companies in South Africa, and the business itself has been around for nearly 125 years (in 2017 it will!). Cement is a vital part of any economy, you need enough of it, cheaply supplied to the building industry in order to make progress on local infrastructure. The company have committed themselves to becoming a continental powerhouse, building plants in Rwanda, the DRC and Ethiopia, as well as Zimbabwe. As such the old PPC you knew, hugely cash generative and a big dividend payer, is changing into a growth business. Even after the five percent gain yesterday the stock is still down 40 percent over a year, over five years the stock is down 51 percent.

Whilst the company is changing and morphing into something that obviously has a higher risk and by extension reward profile, it does not fit our investment profile. If you must own something in the construction space, and you can afford to ride through what are deep cycles, then PPC is definitely for you. The metrics are definitely improving after the management ructions over the last year or so. This is as a result of focussing heavily on cost reduction, those are starting to pay off. The DRC (55 percent complete on 1 million tons per annum plant) is potentially a huge win for them, that country desperately needs all sorts of infrastructure. Cement production across the continent, perhaps the best early investment into the continent.

Over the seas and far away (from here), stocks rose sharply in New York, New York. The S&P tacked on 1.62 percent, the nerds of NASDAQ flew sharply higher, adding nearly one and four-fifths of a percent. Yowsers, that is a monster day. The Dow Jones lagged a little, that index was up “only” 1.42 percent. There were a few noticeable losers, Target slid over four percent after recording sales growth lower than anticipated, one of the bigger stories however was equipment and chip maker Qualcomm, falling nearly ten percent during the session to a five year low. There is a fight going on in South Korea around the licensing practices of the business in that territory and whether they are anticompetitive or not, and more importantly whether they violate law in that country. Tough out there.

There was also the not so small matter of the release of the Fed minutes from the prior meeting. These are part of the clues of the anxious many as to when the Fed will raise interest rates. If only the same people spent their energy trying to figure out the creditworthiness of the companies whose bonds they invest in, or the prospects of that said company, that would be more useful than getting anxious about something beyond our control. Which is actually why people are a lot more anxious about flying than driving, even though they know that flying is a whole deal safer statistically than driving. The control thing, sitting in a car seat I am in control. Sitting at the back of an airplane in coach, you are not in control. Anyhow, most of the committee members are in agreement, barring for an external shock, that December is the right time to raise rates in the US. I recall that the talk in 2010 and 2011 was similar in nature, the rate hikes never materialised then, we are this close.

Less Fed anxiety over the global economy, not an unanimous decision, those are reasons given for the sharp rally in stocks overnight. That has also flowed through to Asian markets, Japanese stocks up nearly one and a third percent as we write this, stocks in Hong Kong are also up sharply, nearly a percent and one-fifth. Aussie up over two percent, thanks in part to commentary from the AGM over in Perth, I saw chairman Jac Nasser taking questions earlier. Very stylish and distinguished chap that Jac.

Andrew MacKenzie the CEO was again very apologetic about the recent Samarco Dam burst, the fine from the Brazilian government could be as much as 2.5 billion Dollars. In Nigeria, the events of yesterday and the day before are simply shocking, dealing and fighting terrorism is a global issue. Not much by way of cameras there, hence the lower coverage, the same suffering for humanity. I feel for all of the people impacted by global terrorism, be they in Beirut, Paris, Kano or Yola.


Company corner

Mr. Price stock as discussed earlier fell sharply on their 6 month results release. Obviously with the half year results there is more information, basic EPS rose 15 percent to 426.2 cents per share, the dividend increased 17.3 percent to 248 cents. There is a pretty hefty 58 percent dividend payout policy. Mr Price revenues grew 9.2 percent to 9 billion Rand, cash sales growing faster than credit sales. Remembering that cash sales represent 81.4 percent of their total sales. If it means cash, it means that the customer pays for it, not necessarily cash, remember. i.e. You can use your bank credit card, that counts as a cash sale for Mr. Price, they get the money in the till.

Loads of regulatory activity in Nigeria impacting on many businesses and no doubt consumers too, Mr Price: “Trading in Nigeria was initially strong, but slowed appreciably in the last two months due to recently imposed restrictions on imported merchandise. Although these are expected to be temporary, the Company’s interactions with regulators are focused on urgently re-enabling supply.” How NOT to fix your economy, place restrictions on the only people investing in it, SMH.

CEO of Mr. Price, Stuart Bird, had rather more sobering news about the local lay of the land: “The economy is not in good shape and consumer confidence is understandably low, but our resilient fashion value model is built to withstand these conditions”. Whilst Mr. Market was obviously looking for an Oliver Twist print (we want more), the results looked good to me. However, when your stock trades on a 25 multiple, the market expects more.

Expectations are for the company to deliver in excess of 10 Rand in earnings for the full year to March, and growth rates in revenues are expected to be in the 12-14 percent range. Earnings are expected to grow by the high teens, percentage wise. As such the current rating looks a little cheap. Whilst we like the company, and the prospects look good (the share price equally looks good at current levels), the truth is with Woolworths and Brait in our portfolios, you cannot own everything. If you are looking for extra retail exposure, this is more than a “decent” company, which we are comfortable to own as supplementary exposure.


Linkfest, lap it up

Being happy at work goes a long way to giving better customer service and increased productivity. Starbucks lands at the top of the retailer list this year and Apple stores, lands at number 4 – The 10 Happiest Retailers To Work For This Year. Great to see two of our core holdings making the list!

This link has a 2 minute video on the history of Tesla. Give it a watch, it is very interesting. I did not know that Musk was not the founder but a very early on investor – Tesla in Talks With Germany Over Possible Battery Factory.

The consumer is always looking for value for money, with the result being that more people are shopping at discount stores. The trend going forward will be small niche stores where you pay a premium for the service and quality of clothes and then large discount warehouses. The companies stuck in the middle are going to struggle as new ways of doing things and increased competition for customers spend, drives prices down – Americans have been developing a new shopping habit for years – and now it’s hurting Nordstrom, Macy’s, and JC Penney


Home again, home again, jiggety-jog. Inflation numbers were lower here yesterday, which is good news. We should start a whole lot better as a result of the strong rally last evening on Wall Street, some green on the screen!


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

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