PPC Cracking

“It is a company with an illustrious one at that, having been listed for over 100 years, there are very few of those around. Pre the announcement yesterday morning, the market capitalisation was over 8 billion Rand, the company intends raising 3 to 4 billion Rand. A heavy debt burden coupled with a slowing infrastructure roll out has hit the company hard.”


 

To market to market to buy a fat pig Whilst the political shenanigans and machinations continue in the background, and whilst it may be just another day in our fine country, the companies that we follow so dearly continue to report numbers. And trading updates. There were two massive swings from what I guess are medium cap stocks, firstly PPC from just up the drag (Pretoria?) in Sandton, on Katherine Street, announced what is likely to be a big rights issue, the biggest in their history. And that is without knowing too much of their history.

It is a company with an illustrious one at that, having been listed for over 100 years, there are very few of those around. Pre the announcement yesterday morning, the market capitalisation was over 8 billion Rand, the company intends raising 3 to 4 billion Rand. A heavy debt burden coupled with a slowing infrastructure roll out has hit the company hard. Coupled with competitors providing cheaper products (cheaper is not always better quality, in fact in most instances not), the going has been tough. And the continental expansion and associated debt ramp up, in order to fund the projects, coincided with a general global commodity downturn.

In the long run the story of urban migration remains intact, the company will be right for having rolled out projects aggressively in East Africa, Ethiopia, the DRC and heck, even Zimbabwe to the north. For the time being the stock is under severe pressure, down 18 percent by the close of trade to 1125 ZA cents, having touched a 52 week low of 1073 earlier in the session. The company has had their fair share of high profile boardroom troubles, you get the sense that this may be their lowest moment. It will be interesting to see if the PIC will want to take a bigger slug of the company in the rights issue, their mandate might be longer dated than most, and there may be few better opportunities to do it, than now. They (the PIC) have proper ammo and a long dated time frame.

The other company to feel the wrath of the sellers was MPact. There was a trading statement that completely caught everyone off guard. The stock ended down nearly twenty percent on the day, the market cap after all the selling was 6.2 billion Rand, a lot less than the close Friday. Sigh. Reasons for the much lower (20 percent or more) than anticipated earnings were explained in a single paragraph: “The expected decline in profitability is attributable to lower sales of containerboard, higher finance costs, a slower than anticipated ramp-up of Mpact Polymers and a higher effective tax rate. The lower sales of containerboard are a consequence of certain Mpact customers acquiring their own paper mills as previously reported.”

They (Mpact) are essentially neighbours of ours here in Melrose Arch (not as close as the Bidvest stairwell) and like I said to the fellows in the office, we didn’t see anyone lying in the foetal position on the pavement. Notwithstanding the heavy sell off yesterday, the stock is still up 46 percent over the last two years. Perhaps there may be a little way to go for the sellers yet. A tale of two medium caps gone horribly wrong on the day.

There was also numbers from two food producers, Pioneer Foods and Rhodes Food, both very different companies lumped in the same sector of the economy. Rhodes produces a lot of “long life” stuff, whilst Pioneer is involved in the production and packaging of staples, bread, pasta, rice, flour and mealie-meal. Obviously both would be impacted by the drought, the exporting business of Rhodes was very profitable, it may be not so much on a comparable basis this time next year. We of course directly own Tiger Brands (reporting today) and indirectly own Premier foods (through Brait), so we pretty much have all these bases covered here. Rhodes Food Group slipped over two percent on the day, whilst Pioneer was up over four percent. Phil Roux has made some really hard yards over the last few years for the team over at Pioneer, it may well be that the comparable will be tough too.

Some folks are starting to suggest that the comparable input costs (and weaker Rand) this time next year may well leave the central bank locally with the option to ease rates a little later next year, I guess that is just best guessing, like the rest of us. After the bizarre Standard Bank announcement the stock finished up nearly a percent. It turns out that over one hundred non Japanese nationals withdrew around 300 million Rand (limits at ATMs are just over 100 thousand Yen) from convenience stores during a two and a half hour session two Sundays back. Sigh. Interpol and the Japanese authorities are apparently treating this case very seriously and I guess so they must. Who is to blame here? And does this make Standard Bank customers feel a little edgy? It could be worse and perhaps in the coming days the mainstream media will run with the story, there are currently bigger fish to fry.

After the bell rang ting-a-ling-along here in Jozi, stocks had settled a smidgen lower, down just over nine points (or 0.02 percent), resources were the laggards, financials and industrials were up a touch. The Rand settled a bit firmer, apparently the political decisions (or lack of meddling) had everything to do with it. Also making a 52 week low was Richemont, that stock we wrote about yesterday. They will come back, you can neither replicate or cheapen those brands. There are results from Tiger Brands this morning, at face value they seem just fine, and an NAV update from Brait, it looks quite good, so expect some action from those stocks, we will write about them in the coming days and report back. The stock, Brait, was up sharply, nearly five percent gain by the close. I suspect there may be more action again today.


 

Over the seas and far away from the city we call home, trade in New York, New York was mixed, a large fall at the close of trade saw all the major indices end lower after having been better during the course of most of the day. Energy stocks and utilities slid, earlier in the session stocks were higher, around two-fifths of a percent, the Dow closed down 0.05 percent, the broader market S&P 500 ended the day down one-fifth (and a little) percent, with the nerds of NASDAQ down a little, 0.08 percent lower on the session. Much of the earlier session, and indeed during the European session, news was dominated by the 62 odd billion Dollar cash bid by Bayer for Monsanto. The market did ramp the Monsanto price earlier in the US session, it did settle a whole lot lower during the course of the afternoon, just below 106 Dollars a share.

What the market is telling you is that the deal is likely to have to overcome quite a few regulatory hurdles in order to be complete and happen. And caution is the better part of valour at this point, even if the German company Bayer are confident, the CEO was on earlier in the morning and he sounded like he had not quite nailed how to pronounce Monsanto, leaving off the last N. It just seems like there are many sceptics out there on this one, we fit into that camp. Stranger things have happened. Both companies tick a lot of boxes, agricultural products no doubt will have continued importance as global populations continue to urbanise and as populations get wealthier and by extension demand higher quality foodstuffs.

It is an important investment theme, the vehicle is currently unchosen, at least from our perspective. Deere and Company looks like a good business, the recent performance has been very average. We have a certain client who thinks their products are really amazing, that is always a very good starting point. From a fundamentals basis, things look good too. It is certainly worth a look, and perhaps we should do a piece in the coming weeks.


 

Linkfest, lap it up

It is always interesting to read things written about famous people before they were famous. This is of the Obama’s from 1996 – A couple in Chicago

Wood can be stronger and a better insulator than glass so there is incentive to make wood transparent – Scientists have found a way to make wood transparent. The technology is still in its infancy stage and it requires a large amount of chemicals, so don’t expect this as an option on houses anytime soon.

Fun times when a TV show causes a stock to rise so much that it is suspends trading for 3 days in a row. This story shows that markets are not rational all of the time and that rumours can start anywhere and then take on a life of their own. Can you imagine the stock broker telling their clients a story as if it was fact and inside information – Why even a TV serial can cause a stock rally in China, and what it means for global investors


 

Home again, home again, jiggety-jog. Stocks across Asia are lower, obviously following a sloppy US close last night. Worries about a rate hike in June and a Brexit, buy stocks. You can’t do anything about interest rates, and with Brexit less likely to happen, there must be opportunities here and there.


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

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