Cheerio Allegro

“Not bad for a company that Mr. Market only owns principally for the TenCent business. Still, according to the estimates, the stock trades on around 40 times forward earnings, with a rather sharp unwind in the coming years. The analyst community is expecting the company to earn somewhere in the region of 105 Rand a share in earnings by March 2019, if the share price stays at these levels, the stock would trade on less than a 22 multiple.”


To market to market to buy a fat pig On paper it would show that stocks Friday in New York, New York closed better. By a fraction really, the start was a whole lot better than the finish. Sounds like my average run. Talking of which, Paul was agonisingly close to dipping under 90 minutes for a half marathon over the weekend, any of you who run know that is a fairly great achievement. Talking running, I am reading (on Byron’s recommendation) the Phil Knight book, the fellow who founded Nike. A must read for those who like business and business formation, as well as a good story.

Markets Friday reacted to a speech by Fed chair Janet Yellen, short in stature, the most powerful woman in all of the world. In my opinion, not the short part, you can’t change that. Nor where you were born, nor your parents and mostly not your name either. If you are looking for the speech, here it is, a must for all macro minded nerds: Macroeconomic Research After the Crisis. That is pretty awesome and easy enough to understand, all the armchair Fed critics may as well go away and write a speech of this nature. In the same way that a sports fan may want to get out and do a bit of exercise.

I suspect that in my limited knowledge and readings of such speeches, like most folks, the Fed is keeping their options open. We have always suggested that rates may take longer to go up and may settle at historically lower levels. Inflation is contained, we live in a slightly different world. History is fun and gives you good grounding, it tells you nothing about the future. Humans are so hard wired to the idea that things return to what they once were, they are able to recognise patterns and suggest that is what is going to happen next, and we all get sucked into recency bias. In a sense pattern recognition is what keeps our species so successful, relative that is. So the expectations for inflation and growth may have to be wound in, in a modern world where efficiencies are finding new levels, thanks to machine learning in the internet and the robotics age.

After the bell, the scoreboard read: S&P 500 up 0.02 percent, same-same for the nerds of NASDAQ, and the Dow Jones Industrial Average up 0.22 percent. Salesforce climbed sharply after it emerged that Twitter was going to have to go it alone, i.e. no buyers! Twitter stock fell 5 percent and some change. Twitter stock is now below the level that the “interest” first took place, the next stop will be results ten days time. Apple stock on the other hand reached another YTD high, results are post market next week Tuesday. I read a report that suggested Apple should look at content differently than what they have been, the ability to launch a subscription model that included all content. And charge a handsome fee, include all of the content and get hefty sports deals. The stock is still cheap and trades on just over 12 times forward, it certainly is a monster business, with a market cap of 637 billion Dollars.


Back home, where local has been less than lekker, stocks enjoyed a solid day of gains, up nearly one and one third of a percent by the time the week closed out. The last 12-18 months have been more than a little tricky, except of course if you bought resources and precious metal stocks at the beginning of the year. Who would have known, right? Naspers rallied sharply on Friday, the stock had sold off heavily in the session prior it must be noted. Over the last 12 months the stock is up nearly 18 percent. Friday it was 4.7 percent. News filtered through in the second half of the session that the company had sold a business in Poland called Allegro.

Check out the release from the horse’s mouth: Naspers to sell Allegro Group to Cinven, Permira and Mid Europa. 3.253 billion Dollars is the price tag, or 46.61 billion Rand. Or at the closing price, and by extension market capitalisation on Friday, 4.59 percent. Which is not mind blowing, it is however pretty big in quantum. If that deal size (46.61 billion Rand) was a single business here, listed on the JSE, it would currently fall into 44th place, just smaller than GoldFields and PSG. And is bigger than Kumba and Sappi, by their market capitalisation. The same size as Massmart and EOH put together. Really.

So why did Naspers sell this business? CEO Bob van Dijk says in the release that “Our decision to sell Allegro is consistent with our strategy to find and realise value for our shareholders.” I can only guess that Poland is maturing as a market, transitioning towards a fully fledged member of the Eurozone (it is a member of the European Union), growth is not expected to be “huge” in the coming years. Having gone through a tough patch, Poland was about to enter, they stepped back a little. My best guess is inside of the next 5-10 years, let us say by 2023. The country is closer to “convergence”, whether the citizens want it or not, that is another question entirely.

I guess the strategy is simple, if growth exists at the pace that you expect it to, then hold or invest in it. If not, then the strategy will be to sell it. Either way, it is a *nice* sum of money. They do still keep businesses in Poland, including OLX and PayU. PayU in fact continues to provide a payment platform to Allegro, in a multi-year agreement, according to the SENS agreement. So they (Naspers) will concentrate on those businesses in that territory. Again, the release explains that with the purchase of Allegro, they were able to leverage that platform to make progress: “Leveraging the Allegro platform, Naspers was able to build fast-growing businesses like and, which are valuable and contributing to enhanced returns.” The time frames are long here, the deal is only expected to close in around a year.

Not bad for a company that Mr. Market only owns principally for the TenCent business. Still, according to the estimates, the stock trades on around 40 times forward earnings, with a rather sharp unwind in the coming years. The analyst community is expecting the company to earn somewhere in the region of 105 Rand a share in earnings by March 2019, if the share price stays at these levels, the stock would trade on less than a 22 multiple. You would have to say that the market “has this right”, not so?

Another stock of ours making an announcement on Friday was Steinhoff. Sorry, Steinhoff International, that is their “new” name. The stock has not been listed for a year yet on the Frankfurt stock exchange, in December it will be a year. Since all the various deals have been announced, the stock really has come under pressure, down nearly one-quarter of their market cap in Euros. They are paying a heavy price for the Mattress Firm (2.4 billion Dollars) and gobbled up Poundland. The strategy is simple, the company will continue to do deals at the value end of the market (for the consumers) and create a global retail titan. Marcus Jooste will continue to be aggressive, with the backing of their biggest shareholder and chairman, Christo Wiese.

This time the deal was Down Under, Bloomberg reports: Steinhoff Agrees to Buy Australia’s Fantastic for $275 Million. Fantastic? What an original name. Relative to their market cap, again, this is not big nor is it small. 1.23 percent of the market cap of the entire business. Basically, this business that Steinhoff is buying is bigger than the market cap of Spur, or Clover. Expect more of the same from Steinhoff.


Company corner

Three major banking stocks reported their results on Friday, Citi and JP Morgan first, and then the one that we are most interested in, Wells Fargo had numbers. Now Wells have had more than a tough time lately, the fall out from the ghosting accounts and very unsavoury practice of created unknown accounts (for the client) in order to earn commissions, has resulted in a large shedding of the workforce and more importantly, the eventual ejection of the CEO and chair, see Stumpf steps down.

One of the reasons for owning the stock was that their practices were not supposed to mirror those of the investment banks in the era leading up to the financial crisis. Since then, the banks have been fined large pots of money for their activities. The most recent of which is the Deutsche Bank fine. As of June 2016, banks had paid out around 160 billion Dollars. Some would say that is a lot of money, some would suggest that the regulators haven’t been tough enough, it depends which end of the spectrum you sit.

The fall out of the recent crisis is as of yet unknown, the bank is likely to lose quite a few state banking relationships, and very many regional ones too. They are being punished by the public for their behaviour and that is right, if the bonus pool shrinks as a result of the behaviour, and the shareholders were not on top of this, then all must suffer. Banking is however an ancient business, it has always been around and likely will always be around. Retail and business customers need a safe custodian of their funds and need access to finance. A definite must. Retail customers in order to grow their own personal balance sheets (that has a time horizon), businesses to continue to grow their assets, that is open ended of course.

Here are the results: Diluted EPS of $1.03; Revenue Up 2 Percent from Prior Year. The bank really is a beast. Revenues of 22.3 billion Dollars per quarter, 5.64 billion Dollars net income, net interest margin is where all banks have been struggling, that is 2.82 percent. Down from the two prior quarters. Average loans are approaching one trillion Dollars, 957.5 billion as at the end of the their third quarter, average deposits (notwithstanding the low interest rate) is 1.261 trillion Dollars, total deposits clocked 1.275 trillion Dollars. With a capital T. Trillion. The loan books is split roughly half and half, with commercial loans at 496 billion Dollars and retail customers (they call it consumers) at 464 billion Dollars. Total assets number 1.942 trillion Dollars. Book value is 6 percent higher year on year, at 35.81 Dollars, the stock trades at 1.25 times book.

In their retail brokerage business, they have client assets of 1.5 trillion Dollars, of that 458 billion Dollars are advisory assets. And employees that service this lot? 268800 people at the end of the reporting period, one percent higher than the prior year. Notwithstanding the fact that a few thousand people have been let go, they still continue to add.

All that matters is the performance of the share price, for 95 percent of retail investors. Year-to-date the stock is down 17.75 percent. One year it is “less bad”, down nearly 15 and a half percent. Over that time, the broader market S&P 500 is up nearly five percent. So the underperformance has been ugly, in part the reason why financials and banks have underperformed is that they rallied hard ahead of what was supposed to be a higher trajectory on the interest rate cycle. As of now, we haven’t got a hike this year. Until then, expect the stock to trade sideways. Hold the stock!


Linkfest, lap it up

Thanks to Hollywood and financial TV, most retail investors think investing is about timing the market. Trying to time markets is a fools errand – The odds of day trading yourself to a profit are lower than you expect. If timing the market was possible all the time, then being a day trader would be much easier.

“A 2010 study from the University of California at Davis indicated a mere 1.6% of traders were profitable net of fees.”


Wow, you need to sell a lot of high margin goods to make rent of this amount worth it. Roughly speaking that 5th avenue rent per square meter is around R545 000 a year, the W&A water front is in the R16 600 range – The World’s Most Expensive Retail Locations

Infographic: The World's Most Expensive Retail Locations | Statista

You will find more statistics at Statista

As society gets richer, the focus shifts from eating and shelter (survival) to more global issues. Cows are one of the biggest contributors to greenhouse gases, going forward consumers will demand beef that is produced in a more environmentally friendly way – Could Less Gassy Livestock Be a Cash Cow?


Home again, home again, jiggety-jog. Dischem have announced the intention to list. Big business that, not the same size as Clicks, in terms of turnover. Clicks trades on a rather aggressive multiple, we will have to see how the market receives this one!

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

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