Imagination has no Age


Market Scorecard

On Friday Trump told journalists that the US had not agreed to a tariff rollback with China. One of the demands from China is a reduction in tariffs and is something that markets thought had already been agreed upon. When the news broke, the US market immediately lost ground and spent some of the trading morning in the red. Even this trade talk back and forth couldn’t keep the US market down on Friday though. Equity markets are looking very strong at the moment, having the US Fed drop interest rates at three meetings in a row has had a massive positive impact on global financial markets.

Locally on Friday, Tiger Brands announced that after a review of their assets, they will sell their meat processing division. That is their Enterprise Brand and the division that was responsible for the listeriosis outbreak. The company said that they have already received offers to buy the division and they are now in the process of evaluating all their options. The stock closed up 6% on Friday. Another company having a good day on Friday was Multichoice. The stock closed up 6.7% after the company released a trading statement on Thursday evening. The company said that it expects its profits to be higher by 20% – 25%.

On Friday the JSE All-share closed down 1.51%, the S&P 500 closed up 0.26%, and the Nasdaq closed up 0.48%.

Company Corner


Michael’s Musings

On Friday morning before the market opened Richemont released their six months numbers. Unfortunately they missed market expectations resulting in the stock dropping 5.7%. One of the main reasons for the miss is due to the protests currently going on in Hong Kong. With all the unrest that has been around since June, tourism numbers have plummeted, meaning the number of customers going through their stores has also dropped.

Another reason for the miss is due to the group going through a transition phase. They are making the online sales channel a more significant part of their business model. The shift to online means that they are having to spend and invest in the future of the business, which translates into lower profits now.

Here are the numbers: their sales increased by 6%, operating profit was up 3% and the net cash position was up EUR 186 million. The online segment accounts for 17% of sales but is still loss making. Importantly, online sales increased by 28% for the period. A few more halves like that and the group will be making money.

The move to online also allows the group to diversify further because customers on a relative basis buy more of their leather products and clothes through the online platform. What probably excites me the most about the future is a JV that they are doing with Alibaba to have their NET-A_PORTER online shop operate through Alibaba channels.

All in all, sales grew in every region. They still own timeless brands, which consumers love. I suspect that the share price will continue to go sideways while they go through this transition phase though. Continue to hold this one as a defensive, Rand hedge position.


Byron’s Beats

On Thursday night Disney reported Q4 and full Year numbers which managed to beat expectations. As you know the entertainment conglomerate has a plethora of brands that is the envy of all their competitors. In case you needed reminding, here are some of those brands after the 21st Century Fox acquisition.

And here is where they make their money.

Because of the big deal (buying Fox) being pushed through, it is hard to look at comparables. For the full year the company made $6.27 a share which equated to $14.9bn in operating income; this a big business with a market cap of $240bn and a PE of 21. Granted, it does have a fair amount of debt, around $40bn due to the Fox acquisition. But considering how profitable the business is, I wouldn’t be concerned about that.

Direct to Consumer (DTC) is their combined streaming business. It lost $740 million in the quarter. CEO Bob Iger said that a beta version is already being tested in Holland and the launch is imminent. As you can imagine, they are fine tuning this business before its launch.

It is also interesting to see who are friends and who are not in this content race. , For example, Disney have formed a partnership with Amazon Prime but have pulled all their content from Netflix.

But you have to believe that Disney will do well here. They are launching an eight episode Star Wars mini-series called The Mandalorian which is bound to immediately lock in the millions of Star Wars fans out there. That is just one example of how they will attract a mass of clients.

Disney is not a mainstream Vestact stock but we do like it and if you are a fan, get in touch. We are happy to endorse owning this stock.

Our 10c Worth


One thing, from Paul

JP Morgan is a core Vestact holding in New York, and it is doing just fine. We started buying it for customers in late 2017. The two basic reasons for owning them was that interest rates in the US were finally normalising after the aggressive interventions of the US Federal Reserve in the meltdown of 2008/09, and that new banking technologies were improving bank profits.

JP Morgan was (and remains) the highest quality stock in the US banking sector, which is how Vestact likes to be positioned. At that time it traded at just above $100 per share. I’m happy to say that two years later its share price is above $130. In the last two years it also paid out $5.78 of dividends, so the overall return in the period is over 35%.

The bank is pushing retail customers to use online tools and mobile applications, instead of paper cheques. They want to get people out of the branches, but they are in fact expanding their operations to new parts of the US. Management noted in a recent interview with Goldman Sachs that they intend to expand their physical consumer footprint to cover 93% of the US population over the next 4 years (compared to 69% in 2018), which would allow them to potentially reach another 80 million more customers. JPM is currently opening roughly one new branch per day. Note that they often trade under the Chase brand. The full name of the company is actually JP Morgan Chase.

There are ongoing initiatives by JP Morgan to modernise its core banking functions by greater use of cloud hosting, data analytics, artificial intelligence, and blockchain technologies. These projects will also reduce costs, lower internal risk and improve profits. Management noted the US is behind many foreign jurisdictions in terms of digitising payments, and the company views the continued adoption of digital solutions as an opportunity to structurally reduce operating costs over time.

Of course, interest rates have fallen a bit in recent months. Management noted that they have been able to lower deposit rates. They noted that some all-digital and startup banks are currently providing deposit rates significantly above their offerings, but customers typically only allocate a portion of their cash balances to higher yielding savings accounts and JPM typically retains the primary banking relationship. There is clearly some cachet in holding an account at the US’ most highly-regarded bank.

We will continue to accumulate shares in JP Morgan, especially favouring it in portfolios where clients are a bit risk averse, and don’t want too much excitement.

Linkfest, Lap it up

Here is a fun and interesting infographic showing some key events in the history of the world wide web – The 30-Year History of the World Wide Web.

There is a tax burden in the financial sense, and then there is a tax burden in terms of the bureaucracy around the tax code. Brazil’s tax code is 41 266 pages long – Brazil’s Massive Tax Code May Face Moment of Reckoning.

Signing off

Asian markets are red this morning due to Hong Kong protests and reports that the police have shot a protestor. US markets are closed today for Veterans Day remembrance. South African earnings start to pick up from this week. Vodacom released their results this morning, they announced the payment of their first special dividend.

Sent to you by Team Vestact.

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