Sashole

“Whilst results themselves are not expected until August, the market chose to sell first and then ask questions later. An increased project cost in Dollars (to 11 billion Dollars now) coupled with the weakening Rand means that gearing will have to rise more than anticipated, and more importantly for shareholders, there will be a delay, the first product will be delivered in the second half of 2018 as far as I understand it. The plant will be at full operational capacity in early 2019.”


 

To market to market to buy a fat pig A relief sale? That only happens when a store doesn’t go out of business, as we all know however, the world is moving increasingly online. More stuff is being bought online, which is shaking up the traditional methodology of mall surfing. Internet surfing, that was the old word, surely it is now just simply broking? The internet is part of our lives, in one way or another.

Talking of which, I noticed that Cell C was advertising call with Wifi from anywhere in the world, now I am no expert on the matter, surely that is the same as calling via the WhatsApp call option? If that is a selling point, I am not too sure that it has been thought through. Wifi connection, I can keep my phone in Airplane mode and make a WhatsApp call. Yes? Staying with online shopping, I did notice that Walmart was testing delivery services with both Uber and Lyft, the drop offs in just Phoenix and Denver. Uber responsible for the Denver drop offs, Lyft for Phoenix. Drop offs to your front door are going to cost around 7 to 10 Dollars. I suppose if Walmart don’t want to reinvent the wheel, this sounds like a good stopgap method to deal with the rise of Amazon.

Back to the markets! Locally stocks sold off, perhaps the stronger Rand was part of the problem! 14.91 this morning! Although there shouldn’t be too much celebrating, 5 years ago we were around 6.70 to the US Dollar. Who would have thought! The Dollar has strengthened by 122 percent to the Rand over the last five years. So a little perspective is needed. Effectively what that means is that the Rands that you earn today are worth on a global scale less than half of what they were worth half a decade ago. To make you feel a little better, over ten years the Dollar is up by 123 percent to the Rand, essentially the Randelas are as weak over five years to the greenback as they were/are over half a decade.

The all share index dropped half a percent by the close, bouncing off the worst levels of the day and catching an updraft of an improving US market. Financials tried their hardest to pull us ahead, after having sold off earlier in the day. Resources were lower, although on the whole it was a single company that was stinking up the joint, Sasol. The company gave guidance for the full year that ends at the end of this month, the stock by the time the day had ended was nearly 11 percent lower. Holy you know what. Why? The guidance in earnings included another write down of their British Columbia shale gas asset in the Montney shale basin.

It was a 50 percent stake that they had bought from Talisman energy back in 2011 for 2 billion Dollars, Talisman’s stake itself was bought by Malaysian company Petronas in 2014 for 1.5 billion Dollars. Already less than Sasol paid. Since Sasol bought the asset, the natural gas price has about halved in that time, they have impaired the asset to the tune of 11 billion Rand. Eish, this often happens when you own these big project assets. The market didn’t so much react to the earnings being volatile, rather the project overrun and escalating cost of the ethane cracker being built at Lake Charles in Louisiana was front and centre of the sellers minds.

Whilst results themselves are not expected until August, the market chose to sell first and then ask questions later. An increased project cost in Dollars (to 11 billion Dollars now) coupled with the weakening Rand means that gearing will have to rise more than anticipated, and more importantly for shareholders, there will be a delay, the first product will be delivered in the second half of 2018 as far as I understand it. The plant will be at full operational capacity in early 2019.

There was also a couple of lines in the project update (Preliminary findings of the Lake Charles Chemicals Project review) that may have left a bad taste in the mouth of investors, it follows as: “The expected returns for the project have reduced due to changes in long-term price assumptions and the higher capital estimates, and are now expected to be around Sasol’s weighted average cost of capital, compared to returns approximating hurdle rate at the time of Final Investment Decision in October 2014. The increase in the estimated LCCP capital cost and extended schedule will reduce the expected project returns by approximately the same amount as the Company’s lower long-term price assumptions.”

I think that whilst investors were expecting more (they always do now, don’t they?), the project on completion is still a company defining moment. There is a conference call today at 2 in the afternoon local time, in which longer dated investors will have time to reflect on the project specifically, as well as being able to ask further questions from management. Whilst we admire the company, we certainly think that they do a wonderful service for keeping inflation in check in South Africa (we import less petroleum as a result of all the consumed manufactured product here), we think that the talent that works there is world class, we do not own the company for clients. In fact around a year ago we advocated selling the business. Too difficult to call the oil market, very volatile.

Another company that reported numbers that the market thought were fabulous was Telkom. I will be the first to say that I didn’t think it was possible to do this well in a more competitive environment. Perhaps the legacy of having the installed network and too many costs have meant that there was (and perhaps still is) a lot of fat to cut off the bone. Telkom have become more efficient. The environment is likely to become a whole lot more competitive, with some exit plans of fibre installers looking to the likes of Vodacom to buy their installed network. Perhaps. For Joe consumer it seems to be moving too slowly. Lastly, if intrenched and installed competitor of over a decade, Cell C have struggled, why would Telkom Mobile (with limited resources) suddenly make a huge go of it? After all the costs are cut and the workforce has been reduced to an absolute minimum, how would profits look then? We continue to avoid the business.


 

Stocks across the ocean and far away, in New York, New York enjoyed a ripping session by the time the bell rang closing time. In fact, this is the best level for the S&P 500 this year, the Dow Jones is nearly back at 18 thousand points, the nerds of NASDAQ is again nearing 5000 points. They are of course all a little way away from their all time highs, most of this has come against the increasing gloominess for the US economy. All the job data looks OK to me, other than the recent blip on Friday. Perhaps the bearishness is being manifested in part by the lack of quality in the presidential candidates, in my opinion there is only one. The two old men are completely nuts and off the wall, appealing to the further ends of their respective constituencies. Crazy lefties and righties alike. Howard Marks, of which Bright is a big fan, presented a cool video yesterday – Economic reality.

Economic common sense is not so common is what he tries to get across. He seemingly rubbishes Trump there, if you further read the memo Latest memo from Howard Marks: Economic Reality, and also bashes the popularism approach of Bernie Sanders. I love that line there: “Governments and regulations can’t produce prosperity.” There is this strange human trait that somehow believes that government can make them rich. No, it ain’t going to happen, you are master of your own destiny.


 

Linkfest, lap it up

Learning from others is a great way to avoid making the same mistakes – Four Investing Lessons from Intel’s Andy Grove. Number 4. “The Future Favours the Optimist” is something that we embrace in this office.

Forget standing desks and treadmill desks, there is a new and larger desk you can go for – Hamster Wheel Standing Desk. I don’t see this idea taking off, can you imagine walking into an office with 30 of these things going?

Having a second home is not cheap by any measurement, is owning a second home in the same city that you currently live worth it then? The trend seems to be on the rise – The Ultimate Staycation? A Second Home in the Same City


 

Home again, home again, jiggety-jog. The Hong Kong market is up sharply, as is the Japanese market, of course as expected the Shanghai market is completely different, down a smidgen. European markets are being called a little higher, we should open on that basis too.


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

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