Tim is Cooking


Market Scorecard

The days that StatsSA releases South African employment data are always a bit bleak. It is never nice being reminded about how many South Africans can’t find a job. Yesterday was worse than normal. Our unemployment rate jumped 1.4 percentage points, to now sit at 29%. Roughly speaking, for every two people who have a job, there is one person who can’t find employment. In the second quarter of 2019, the number of employed people increased by 21 000, but the number of unemployed people increased by 455 000! How long will that be sustainable?

The above graph shows the breakdown of our labour market. You will notice the 2.7 million who are classified as discouraged work seekers and not classified as unemployed. By definition, you need to be actively seeking employment to be considered unemployed. If you include those people into the mix, there are 9.4 million South Africans looking for a job. Some argue that the informal sector is bigger than StatsSA assumes, which by extension means our unemployment rate is lower. Part of their reasoning is that if 1/3 of the country were jobless, there would be an uprising. Something that cannot be debated is the serious need for economic growth.

Yesterday the JSE All-share closed down 1.37%, the S&P 500 closed down 0.26%, and the Nasdaq closed down 0.24%.

Company Corner


One thing, from Paul

Apple released its quarterly profit date update last night, after the market close. This was the one that I had been waiting for, as I explained earlier this month. I was eager to see how Apple’s lower number of shares in issue (as a result of aggressive share buybacks) would affect earnings per share and the company rating. I was not disappointed!

For the quarter ended in June, Apple reported a 1% rise in revenue to $53.8 billion and a 7% drop in earnings per share to $2.18, compared with expectations of $53.4 billion and $2.10 per share. That may not sound all that great, but the stock price rallied by 4.5% after hours to over $218 per share.

Here is the important take away. Revenue of $53 billion per quarter is about the same as it was in the same quarter back in 2015. However, Apple’s earnings per share is about 20% higher, because they bought back 20% of the shares in issue since 2015, around 1 billion shares.

It is clear that Apple is going through a soft patch in iPhone sales. That is not expected to change until 2020 or even 2021 when new iPhone11s with extra cameras and 5G functionality are launched. In fact, iPhone sales currently contribute less than half of quarterly group revenue. Mind you, iPhone sales were still worth $26 billion for the quarter, which is an enormous number!

Macs and iPads sold well. Wearables and other accessories revenue also rose nearly 50% to $5.53 billion, compared with analyst estimates of $4.81 billion. This segment includes devices like the Apple Watch and AirPods.

Services revenue rose 12.6% to $11.46 billion, setting a new absolute record. Apple has about 1.45 billion active devices in use, of which about 920 million are iPhones. Of that “installed base” they have 420 million paid subscribers to its own services like iCloud and Apple Music. The company has set a goal of 500 million subscribers by 2020.

A quarterly dividend of 77 cents per share was declared, payable on 15 August to shareholders of record on the close of business on 12 August. Despite all those buybacks in recent times, the company still has $200 billion in cash. Incredible!

That healthy dividend will go some way to “refunding” me for my family Apple purchases in the quarter, which were two iPhoneXs, a new Apple Watch series 4 and a pair of AirPods. Oh, and another AirPod charging case for my wife, because her dog chewed up the old one.

This goes without saying, but I’m going to say it anyway: Buy more Apple shares for your portfolio. Today. Then hold them for a long, long time.


Bright’s Banter

Gene sequencing giant Illumina reported its not so good second-quarter numbers. As we already new from a recent update, revenues fell short of management expectations as the company missed timelines for certain population genomic initiatives due to logistical issues. Leading to lower-than-expected direct-to-consumer sales.

The San Diego, California based company said revenues came in at $838 million, up a pedestrian 0.96% year-on-year. This number fell short of managements forecast of 7%. While Product revenues increased 4.6% year-on-year to $704 million, Service and Other revenues declined 14.2% year-on-year to $134 million. The latter is a little concerning as it led to operating margin contraction of 2.78% year-on-year.

This revenue miss naturally led to management lowering future revenue guidance from 13%-14% for the year to only 6%. The new CEO Francis deSouza said that he is confident in the potential growth in the oncology testing market. He expects oncology testing to be the key driver of its systems and consumable revenues in the 2019 financial year.

Customers have started their transition from HiSeq to the NovaSeq and the company saw record placements for the NextSeq 550Dx Systems (pictured below) during the quarter. The company makes money from selling these sequencing machines, but the repeat business comes from selling consumables that are used daily by these machines.

The $1.2 billion Pacific Bioscience deal is being held up by the regulators in the UK as they believe that based on the current information the merger results in a substantial lessening of competition within the UK market. We should have more information on the deal before the 11th of December.

The company is not cheap at a forward PE of 41, even for a market leader with over 70% market share. Our investment thesis is that once the logistical problems are sorted and gene sequencing becomes the norm, this business stands to benefit the most as they’ve heavily invested in world class patented technology. This is a great addition to your portfolio if you’re looking for a moonshot idea.

Our 10c Worth


Byron’s Beats

Shoprite showed signs of green shoots, Massmart stomped all over them. Not quite but sort of. Both of these companies had updates yesterday and it is important to cover them so that we know where the SA consumer sits.

Shoprite indicated turnover growth of 3.2% for the year. More importantly, their second half showed 7.4% growth from their SA operations. Far better than the first half of 2.6%. In fact the last quarter saw SA sales up 9.4%. That sent the stock rocketing up over 10%. Sounds like good news.

A few hours later Massmart released an update for their 6 month period. SA sales grew 4.9% for the 6 months. Which is not actually that bad. Unfortunately due to higher costs and various “once offs” the business will be posting a sizeable loss for the period. That sent the stock down nearly 16%.

I would say overall this is a net positive sign for the SA consumer. Shoprite looked very promising and Massmart’s sales growth was not bad. They just had some other gremlins under the hood which the market did not like.


Michael’s Musings

A big part of the Facebook stable is WhatsApp, where the company has yet to unlock the applications full potential. Getting the user base was the first challenge, now they need to figure out a way to monetise without reducing user experience. The huge potential for growth from WhatsApp is one of the reasons why we own Facebook shares.

Exciting news is that they have reached 400 million users in India, making it their biggest market. In this interview with their global head, he speaks about privacy concerns and about rolling out WhatsApp pay as a way to monetise the platform – We view India as our future, says WhatsApp global head.

Linkfest, Lap it up

In Delhi, cooling can use up to 60% of electricity produced during summer. Wow! India is now hunting for a way of cooling that is more environmentally friendly – India is the epicenter of rethinking air conditioning.

Millennials tastes have changed, where diamonds are no longer considered as desirable as before – The Elite Club That Rules the Diamond World Is Starting to Crack.

Vestact Out and About

Byron gets a mention, talking about this massive opportunity for MTN – Nigeria enters mobile banking era with MTN’s payments licence.

Signing off

It is Fed Day! The market seems absolutely sure that there will be a rate cut this evening. The only question seems to be, will it be 25 basis points or 50 basis points? More than likely it will only be 25 basis points, although some market participants would like to see a 50 point cut. The main focus tonight will be on what the Fed hints about future rate cuts, expect the US market and US Dollar to be volatile during the press conference. There is EU CPI and GDP out today. The JSE All-share is lower this morning.

Sent to you by Team Vestact.

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