Ross the Boss

“Here is something interesting about the CEO, Clifford Ross. Did you know that he will, this year in May be at the helm of City Lodge for 30 years. That is basically unheard of in corporate.”


To market to market to buy a fat pig Stocks in the biggest capital market on the continent (Sandton?) had a good day, in large part due to a deal that was called off, see below. The bridge too far perhaps, of course those of you who are familiar with history will know this as the battle to control a little bridge in Arnhem. Ironically, one of the businesses involved in the deal called off is incorporated in the Netherlands and listed in Germany, exactly where the small Dutch town of Arnhem is. There is your clue. It is about 10km away from the border, crossing over the bridge seems to be a lot more of a dramatic idea, doesn’t it?

US markets were closed yesterday, we only had the benefit of direction from European markets. It does get a little tiring when there is no US market, magazine programs on the box and repeats of old content, nonetheless, it does focus the mind towards the local business. There is the pending budget speech, of course we are stock guys, so whilst the budget concerns us, it does not necessarily mean that we can do anything about it. Like the weather currently in Jozi and much of the Eastern part of the country.

Session end the all share index had rallied nearly two-thirds of a percent to over 52 and a half thousand points, industrials up nearly 1.4 percent on the day. Naspers enjoyed another great day, up two and a half percent, there is a wind following the Chinese IT stocks after the Netease results from last week. TenCent has given a little back this morning, expect Naspers to start softer. It is crazy, right, that we can walk in every morning and have a fair idea of where our market is likely to start based on the performance of one stock. At the other end of the spectrum gold stocks took some heat, as did Mediclinic and Discovery (a six month trading update ahead of results).

The Discovery trading statement was a little mixed and as usual plenty of moving numbers in there, which is always a little disconcerting. Results themselves are for Thursday this week, so I for one am glad that we do not have to unpick these numbers with much expertise. Actually, I am exaggerating a little. As my aunt said once, the story does not sound as interesting if you do not exaggerate as much. Quite simply, there is a difference between the normalised HEPS and HEPS as a result of the rights issue back in 2015, and when the funds were actually deployed. As the company says in the trading statement: “The effect of this was higher interest income and lower finance charges in the prior period. It is expected that this difference in growth rate will narrow for the Group’s full financial year.” I like the spot that the company currently is in, sure, Brexit and the local economy are not quite up to scratch. Their product is really world class and if they can continue to white label it with big groups globally, they will be on a good track. Standby for Thursday.

You remember that hit song, Hit the Road Jack, by Ray Charles. Not that we need to worry ourselves with the song, someone else wrote the lyrics, Percy Mayfield. I didn’t know that until yesterday. Inside of the lyrics there was a line that said no more, no more, no more, no more ….. It is not quite hit the road Jack for the Steinhoff and Shoprite merging of their assets down South here to form Retail Africa, it is definitely no more, no more. The share prices reacted in a way that would tell you that both sets of shareholders thought it was a bad idea and perhaps in the short run it was. We can now talk about the deal in the past tense. By the time the closing bell had rung here in Jozi, Shoprite was up 8.64 percent and Steinhoff was up 4.96 percent. As per German law, chairman of Steinhoff, Christo Wiese could not say too much on why the deal ultimately “failed”.

I suspect that German shareholders perhaps didn’t want more emerging market exposure, more than they already have, and I suspect that Shoprite shareholders didn’t want dilution of a winning formula, unless the price was exactly right. Of course, the price having to be right for both parties, the swap ratio, would have been the sticking point. Remember the line from the original statement: “This Exchange Ratio will be negotiated taking into account the consideration price for Steinhoff Africa Retail on the basis that the Proposed Transaction will not be earnings dilutive to Steinhoff shareholders.” And I guess that was the sticking point, perhaps the Shoprite shareholders felt they were giving away too much, when it came time for the new shares in Shoprite to be issued.

As they say in the classics, nothing ventured, nothing gained. They (who exactly are they?) also say that when one door closes, another opens. And whilst in the long run I think that this deal would definitely have worked (it may have taken a number of years), it was not to be. I guess in our simplistic world we can be happy that the share prices have reacted in the manner that they have, even if that sounds a little crude. i.e. That all we cared about was that the share prices went up.


Company corner

City Lodge reported numbers for the half year to end December last week. This is the affordable segment of the market, it is not the “cheap” end of the market, in other words, a nice balance between quality and price. 900 Rand for the Tower Lodge on Special, per night, 1500 Rand a night for the Courtyard hotels, that is the going “Sandton” rate. Cape Town, the walk in rate for the V&A Waterfront is 1850 Rand per night, that is hardly “cheap”.

The inland properties cater for the business market, offering exactly what you need. Friendly staff, the same offering at the selected levels regardless of whether you are in Port Elizabeth or Cape Town, Durban or Potchefstroom, Polokwane or George. You book this hotel for a reason, you know exactly what you are going to get, there are to be very few surprises. The way that the business has evolved is very slowly, the company is selective with their sites (very) and take time to finance and own the hotels. They are not only an operator, they are an owner, they are both. The company operates (as at the end of the last financial year), 57 locations with over 7000 rooms.

The very first hotel is near St. Stithians, the Sandton Mediclinic and I think wedged between a Chicken Licken (I think), that was founded in 1985. Here is something interesting about the CEO, Clifford Ross. Did you know that he will, this year in May be at the helm of City Lodge for 30 years. That is basically unheard of in corporate. Perhaps as a result of the business not really being a corporate entity for a long, long time. Ross and Enderle (Hans) ran the show, Enderle has since retired since 2012, I think to Somerset West if I recall right.

This is a relatively small business, with half year revenues of 791 million Rand. They managed to generate profits after tax of 166 million Rand, minus a forex headwind of nearly 23 million Rand, total income for the period (6 months) was 143 million Rand. Or 783 thousand Rand per day in profits, roughly 112 Rand per room per day. It is certainly a tough business, not the worst. The replacement costs of all the hotels is 1.856 billion Rand, relative to a market capitalisation of 6.74 billion Rand, roughly 27.5 percent of the market capitalisation is represented by the buildings themselves. And because the company picks their spots carefully, you can bet these are mostly prime spots.

The company has always had a pretty generous dividend, the dividend cover is 1.7 times. The interim dividend is normally bigger than the final, due to including the “holiday period”. The total dividend will possibly be around 5.20 ZAR to 5.30 ZAR, with a share price of 155 Rand that is a dividend yield of three and one-third of a percent before tax. The stock trades on a multiple of just less than 18 times, which for a company that is not really growing, is tough to justify. It is what it is, the properties are worth more than the replacement cost.

Occupancies have fallen to 66 percent, it has been tough going out there in terms of business travel, their core market for the inland properties. They certainly do maintain good standards, their 2016 annual report points to 14 TripAdvisor excellence certificates. We did some deep dives across their properties and their respective ratings, across and TripAdvisor. The truth is that the customer likes their offering, they like value for money and what you get, from a service point of view. Check out their ratings online.

We however are not buying the stock for any of our new accounts, and prefer to hold, if you have them. We do think that disruptions will take hold, and prefer investments in the likes of, which has less exposure to physical properties. There certainly are country risks and lower growth scenarios, at least in the short term. I suspect with their slow and steady expansion plans across the east of our continent (as well as looking at Nigeria), the company is just OK for now.


Linkfest, lap it up

This is pretty awesome, you get a chance to see and hear Charlie Munger up close and personal, at the ripe age of 93 he is pretty amazing. As fit as a fiddle, sharp and humorous as ever. Here he is acting in his capacity as chairman of Daily Journal. Charlie Munger’s Talk at Daily Journal Annual Meeting 2017. Some of the pithy quotes are the stuff that Berkshire is made of. I hope that I am half as together when I get to that age. The similarities between Charlie and Warren are uncanny. No wonder they get on so well, they supposedly have never had an argument.

TransferWise, a peer to peer transfer company, is around 6 odd years old. The future of banks no doubt lies here, bulk stuff without the legacy staffing issues. With all the issues around charging people too much here in South Africa, and settlements with the banks and the competitions commissions ongoing, is TransferWise an option here? If you read on their Facebook page, it seems of course that customers getting away from the spot price happens almost everywhere – @Transferwise.

Of course you are not surprised to see this – Smartphones are revolutionising medicine. Smartphones and the associated wearables, as well as the high tech software (Apple and Android) is definitely going to help preventable diseases.


Home again, home again, jiggety-jog. Japanese and Chinese mainland stocks are up, Hong Kong stocks are down. US futures are marginally higher. Sweden is still OK. We are possibly going to start lower.

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

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