SA Stocks Brief - November 2013

• TBS: FY heps -3.8% (1624) vs sbge +3.8%(1754), Rev: R27bln vs sbge R28bln
• WHL: 20week Trading update: solid across the board - clothing l-f-l sales +9.4%, strong c.5% organic volume growth (vs. –ve low single digits implied by TRU and TFG recent updates). Food: l-f-l sales up 13.3%, 7.4% inflation, implying c.6% organic volume growth
• SHP: Investor presentation: management remain confident. Core SHP brand under some pressure, however Checkers and Newsave remain strong. Africa growth focus remains on Angola and Nigeria (interestingly, developed market acquisitions off the radar screen)
• PPC: FY normalized eps 214c vs cons 193c. Final div 118c (156c for the year). Revenue stood at R8.32bn, a 13.2% increase compared to the previous year. Diluted headline EPS rose 10.0% to R1.76 from a year earlier, helped by strong performance from its home market and Zimbabwe.
• AIP: trading update indicating FY heps to be between -17-18% lower (cons -9%)
• BAW : FY HEPS +26% at 860c vs guidance +20-30%. However, turnover is expected to rise between 18.0% and 19.0%, compared to last year.
• TKG : 1H heps +121.8% at 224.2c – looks well ahead market (FY HEPS cons expected at 268c vs 260c sbge)
• MSM: group l-f-l sales slowed from  5.5% in 1H to 2.8% in last 20 weeks, weighed by Massdiscounters (20wks c.1%), Masswarehouse/Makro (c.2%).  
• ILV: H1 hEPS +14%, guides FY 0%-10% on late season cane yield declines in Zambia & Mozambique, and “difficult sugar market conditions”.  
• RBP: strategic review in response to “deteriorating pricing environment” will cut R750m capex; defer drilling at BRPM; Styldrift. RBP has decided to upgrade and expand the existing concentrator plant at (BRPM). The upgrade initially would increase the existing concentrator capacity to 0.25mnt/month from 0.20mnt/month. The cost of the upgrade and expansion of the existing concentrator plant at BRPM is estimated at R2.00bn. RBP has renegotiated with IMP regarding the t's & c's of the 6 and 8 shaft royalty agreement concluded in 2010. It has agreed to substitute the royalty payment of 15.0% of revenue earned with a royalty payment linked to market conditions and therefore the profitability of the Impala Rustenburg operations.
• CML: FY EPS +110% bang in middle of guidance 100%-120%; AUM +45% to 492bn. Outlook on investment environment remains cautious.
• BCX: In its FY13 results, the company stated that its revenue was 5.9% higher at R6.17bn, compared to a year ago. However, diluted headline EPS dropped 12.1% to 34.10c from last year. Looking at acquisitions in Nigeria. 
• Truworths International: The retailer, in its business update for the 18 weeks ended 3 November 2013, indicated that group retail sales increased 7.0% to R3.50bn, compared to a 15.9% increase reported in the corresponding prior period. Like-for-like store retail sales grew 2.0%, compared to the same period prior year. Credit sales were 5.0% higher, while cash sales jumped 12.0% from the corresponding period last year. 
• Foschini Group: In its results for 1H14, the retailer announced that its revenue jumped 10.9% to R8.59bn, compared to the same period last year. Diluted headline EPS was 3.8% higher at R4.11 from the previous year. The company stated that it plans to more than double its African presence in the next five years.
• ACL: The steel producers, in its results for 3Q13, stated that its revenue stood at R8.79bn, a 15.5% increase compared to the same quarter previous year. It swung to a headline EPS of 50.00c compared to a loss of 42.00c/share posted in the corresponding period a year ago. The company expects weaker 4Q13 earnings due to poor demand.
• Sappi: The company, in its results for FY13, reported that its revenue came in at $5.93mn, a 6.6% drop compared to the previous year. It swung to a diluted headline loss of 6.00¢/share from EPS of 9.00¢ posted a year earlier, weighed down by weak demand in its main European markets. Separately, Sappi Fine Paper Europe, a division of the company, confirmed its investment plans over the next three years amounting to approximately EUR120.00mn for its two leading coated graphic paper mills.
• Oceana Group: The company, in its FY13 results, reported that its revenue stood at R5.00bn, a 7.5% increase compared to the previous year. Diluted headline EPS grew 5.6% annually to R4.43.
• AVI: The company, in its trading statement for 1H14, indicated that it expects consolidated EPS to increase by more than 20.0% from the same period previous year. Revised relationship with COTY. 
• NTC: The company, in its FY13 results, reported that its revenue increased 10.4% annually to R27.80bn. Diluted headline EPS advanced to R1.35 from R0.94 posted in the prior year, driven by a strong performance in its home market.
• BAW: In its results for FY13, the company stated that its revenue stood at R65.10bn, an 11.2% rise compared to the previous year. Diluted headline EPS jumped 26.8% to R8.56 from a year earlier, helped by the contribution from its recently acquired Bucyrus business and a strong performance from its logistics unit.
• TKG: The telecom company, in its results for 1H14, indicated that its revenue grew marginally to R16.48bn from the comparable period last year. Diluted headline EPS surged to R6.50 from R0.25 posted in the corresponding period a year ago, boosted by a weaker South African rand and lower payments to wireless operators. Separately, the company stated that it has given its CFO, Jacques Schindehutte, a R6.00mn interest-free loan to buy shares in the company while he was being probed for misconduct.
• Cadiz says it is leaner following turnaround plan: Financial services company, Cadiz Holdings, reported a diluted headline EPS from continuing operations of 1.50c for 1H14 from 1.20c a year ago. Headline earnings totaled R1.70mn, with diluted headline EPS 42.0% lower at 0.70c.
• Coal miner Keaton’s earnings soar on Vanggatfontein performance: Coal mining company, Keaton Energy, reported a 192.0% rise in headline EPS to 19.40c for 1H14, compared to a loss of 21.10c/share posted in the corresponding period a year ago.
• NPN: The company, in its trading statement for 1H14, indicated that it anticipates core headline EPS to be between 10.0% and 20.0% higher from the corresponding period prior year. Headline EPS is expected to rise between 5.0% and 15.0%, compared to the same period last year.
• MSM: The retailers, in its sales update for the 46 weeks ended 10 November 2013, stated that total sales increased 8.3% to R59.70bn, while comparable store sales grew 4.3%, from the same period last year. Sales in Massdiscounters, Masswarehouse and Massbuild rose 7.9%, 14.0% and 9.9%, respectively.
• ILV: In its results for 1H14, the sugar producing company reported that its revenue stood at R6.24bn, a 23.0% rise compared to the same period prior year. Diluted headline EPS increased to R1.90 from R1.67 posted in the same period last year, helped by an increase in sugar production. Separately, the company indicated that it expects FY14 EPS and headline EPS to be between flat and 10.0% higher from last year and warned that difficult sugar market conditions would negatively impact FY14 earnings.
• Spar Group: The company, in its results for FY13, stated that its revenue stood at R47.80bn, a 9.7% increase compared to the previous year. Diluted headline EPS jumped 13.9% annually to R6.50.
• MPC: The retailer, in its results for 1H14, reported that its revenue advanced 14.8% to R7.15bn from the comparable period prior year. Diluted headline EPS was 22.0% higher at R2.84, compared to the same period a year ago, driven by strong cash sales gains. Meanwhile, the company plans to open over 40 stores in 2H14.
• CML: The asset management company, in its results for FY13, stated that its revenue climbed to R3.64bn from R1.98bn recorded in the previous year. Diluted headline EPS jumped to R4.16 from R1.98 posted a year ago. However, the company expects a more difficult investment environment in future years.
• VOD: The telecom company, in its results for 1H14, reported that its revenue was 6.6% higher at R36.69bn, compared to the corresponding period prior year. Diluted headline EPS increased to R4.38 from R3.95 posted in the same period last year, boosted by increased data demand and the number of international users.
• LON: The platinum miner, in its results for FY13, stated that its revenue dropped 5.8% annually to $1.52bn. However, it reported a diluted headline EPS of 32.00¢, helped by higher production and improved margins. Separately, in its production report for 4Q13, it reported that platinum sales rose 23.7% to 0.29mn oz, while total platinum metal in concentrate production surged to 0.20mn oz from 0.11mn oz recorded in the corresponding quarter prior year. Palladium, Rhodium and Ruthenium production jumped 83.7%, 94.9% and 79.5%, respectively from a year ago.
• ABL: The banking company, in its FY13 results, indicated that interest income on advances came in at R11.96bn, a 20.6% rise compared to the previous year. However, headline EPS plunged to R0.45 from R3.78 posted a year ago, after writing down its furniture retail unit and a sharp increase in bad loans. Additionally, the company indicated that there is a risk of a further R800.00mn writedown at its Ellerines unit unless December 2013 sales allow the latter to return to profit in 1H14.
• TKG: In its trading statement for 1H14, the company stated that it anticipates basic EPS to be between R5.46 and R5.50 higher, compared to the restated numbers for same period previous year. Headline EPS is expected to be R6.22 and R6.28 higher from the restated numbers posted in the corresponding period a year ago.
• Tongaat Hulett: The company, in its results for 1H14, announced that its revenue stood at R7.85bn, a 6.2% increase compared to the same period prior year. However, diluted headline EPS slipped 1.2% to R5.86 from the previous year.
• Invicta Holdings: In its results for 1H14, the company stated that its revenue jumped to R5.13bn from R3.51bn recorded in the same period prior year. Diluted headline EPS was 17.8% higher at R3.51, compared to a year ago.
• LEW: The retailer, in its results for 1H14, indicated that its revenue grew 4.5% to R2.54bn from the comparable period last year. Diluted headline EPS advanced marginally to R4.17, compared to a year earlier.
• RBX: The company, in its results for 1H14, reported that its revenue jumped 14.6% to R3.22bn from the comparative period last year. However, diluted hEPS slipped marginally to 94.80c.
• Astral Foods: In its FY13 results, the company announced that its revenue increased 4.5% annually to R8.52bn. However, diluted headline EPS tumbled to R4.43 from R7.87 posted a year earlier, hurt by severe losses from its poultry division. Concluded wage negotiations with all its employees and labour unions at an average increase of 5.9%.
• CFR: The retailer, in its results for 1H14, stated that its revenue advanced 4.3% to EUR5.32bn, compared to the corresponding period last year. Diluted EPS rose 9.1% to EUR2.12 from a year earlier. Meanwhile, the company denied that it would sell any of its 20 brands, after its decision to review its brands sparked speculation that it could break up its fashion and leather-goods unit.
• NTC: In its trading statement for FY13, the company stated that it expects EPS to be between 211.0% and 221.0% higher, compared to the previous year. Headline EPS is expected to rise between 40.0% and 50.0% from a year ago.

Damodaran on naive value investing

On Valuation Myths:

"...some value investors rely on approaches for estimating value that are not only outdated, but simplistic. If your measure of value is to apply a constant PE (say 12) to next year’s earnings or to use a stable growth dividend discount model to value equity, you will never find a young, growth company to be a bargain. If you are creative in estimating value, willing to make assumptions about the future, persistent in tracking that value and patient in terms of timing (your buying and selling), there is no reason why you should not find growth companies to be bargains."

How Buffet makes money

How to explain Warren Buffet's superior performance? Via John Cochrane's lovely resource on his teaching website, I came across this paper, "Buffet's Alpha".

The abstract is posted below:

"Berkshire Hathaway has a higher Sharpe ratio than any stock or mutual fund with a history of more than 30 years and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha become insignificant when controlling for exposures to Betting-Against-Beta and quality factors. We estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns can thus largely be explained by the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ returns into a portfolio of publicly traded stocks versus private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to a direct effect on management."

Two observations on investing

Two observations from a recent Allan Gray interview:

1) "...even SA Breweries interestingly enough if one had to take a relative performance of South African Breweries relative to the stock market, while it was building its empire it was actually a very poor investment, which is something quite fascinating"

One of the free lunches in investing is for a company to invest and build scale without the market pricing in this growth potential. If the share remains flat after all this investment, you get all that growth for free. Note, the investments must be NPV accretive. 

2) Naspers: "...we did perhaps two or three separate reports on Tencent trying to understand the competitive position in China and I guess it was one of those shares that the winner takes all, it’s a network affect. As more people go on Tencent more of their friends join, which means more of their friends join and they really did come to dominate the market there." 

The fair value of the share is a number that one does not expect to materialize, to ever exist. It is instead a blended number based on either averaging different valuation methodologies, adjusting for risks or mean reversion. In this instance, the nature of the Tencent business meant that it would be all-or-nothing. The fair value would not rely on the best case scenario, one would discount this possibility to allow for a margin of safety. Unless during the investment period one binary outcome becomes inevitably more likely than the other, the Fair Value will not capture the true eventual value (i.e of Tencent ends up winning). But this is part of the value investors investment process. This is also partly why value investors sell too early, allowing for the option value that is evident to materialize, but perhaps not being exposed to the vulnerability of being tested by the business reality right at the end. The equivalent, in poker parlance, of 'betting on the river'. 

Is VIX a measure of risk?

Stock 'fear gauge' flawed, Citi equity trading chief says

"A big mistake the market makes is looking at the VIX as an indicator of stock market risk. Why? Because it's an asset class and it's more traded for yield than protection," Pringle said. "The growth of structured products around VIX drove that move. In most cases, the VIX is sold to generate yield but during some stress periods, the weakness in the spot level triggers significant computer-generated technical buying from these products," he said. Pringle cited Citi trading strategy research showing tens of billions of dollars' worth of assets under management linked to the VIX through structured notes, which had to be rebalanced to reflect actual market moves. This dampened volatility, he said. The Citi data showed these VIX-related contracts make up about 34 percent of overall volatility trading on the S&P 500 and as much as 44 percent of the short-term, 2-month volatility."

Platinum was the hardest hit commodity by the financial crisis

-from Lonmin presentation.  Note, this is demand, not prices:

SA Platinum Stocks Update

Implats preferred.
Then Amplats.
Then Lonmin.

SA Listed Property Update - June 2013

The sector has now given back all of the first quarter’s impressive gains and is flat year-to-date.
As a result of last week’s price declines, the one year forward yield on the listed property sector has risen to 7.3%, while prospects for medium-term growth in distributions remain unchanged at 7% to 8% per annum.

Might be attractive to enter the sector at these levels. By way of indication, Growthpoint hit R23 this week, placing it on forward yield of 6.73%. R22.15 if possible will give an investor a 7% forward yield. 

Institutional money at equity overweight extremes

From Reuters article: "Great Rotation" may have already begun

"While this switch may be small, it helped boost the equity weightings of U.S. pension funds and insurance companies - a $25 trillion industry - to 45 percent at the end of the first quarter, the highest level since 2007, according to JP Morgan."

What is unclear is the seeming contradiction between this statement in the article and the image that they subsequently link to: "until now, the available data showed the flows driving stocks have come out of money markets, not fixed income."

Which makes me wonder how Alan Higgins can say "equities are under-owned at institutions. They are rebuilding. You are likely to see more of this over time."

Vodafone stupidity

I was about to build a large position in Vodafone on the basis of the Verizon Wireless takeout. Thankfully i managed to get out before this disaster occurred.

We all make mistakes. The reason I was willing to go heavily long Vodafone was that I believed the Vodafone board would have learnt from their prior decade of poor acquisitions. It seems that I was mistaken. Reminds me of Warren Buffett: "Always try to invest in a company that a monkey could run and still reward shareholders because eventually a monkey will run it."

RECM on ArcelorMittal SA

Daniel Malan in the latest RE:CM commentary makes the bull case for ArcelorMittal SA.
The investment case relies primarily on a cyclical argument and that ACLJ.J looks good compared to historical multiples. Most interesting for the Bull case is this paragraph:
   
   Two recent corporate actions in the domestic 
   steel industry put much-needed perspective on 
   the valuations afforded by the market at present: 
   A BEE company called Nemascore is buying 
   Russian parent company Evraz's 85% stake in 
   JSE-listed Evraz Highveld Steel for R3bn, valuing 
   it at R30 per share - a substantial premium to the 
   market price of R13 at the time; A consortium 
   including the IDC and Shanduka bought Scaw 
   Metals from Anglo American in April 2012 
   for R4.6bn. Sell-side analyst Brian Morgan of 
   brokerage firm BNP Paribas Cadiz estimates that 
   on a value per installed ton of capacity basis 
   these transactions value Mittal SA in a range 
   from R60 to R74 per share.

That is all very good. However, it should be noted that both Evraz and Scaw are smaller operations, and are therefore more likely to hit full plant capacity, arguably the most important factor in profitability. ArcelorMittal SA's facilities are just too big for the South African market, and it is extremely unlikely that it will ever consistently operate at full capacity. So replacement cost and book-value valuations are relatively meaningless in this instance. Evraz and Scaw have also been making profits in the most recent quarters, the same difficult trading environment as ArcelorMittal SA has produced losses. At R32 a share, ACLJ.J could go to R50, but in the absence of getting back to the preferential iron ore agreement at Sishen, it's unlikely that it will ever be more than that. 

Ned Davis latest on growth, equities

"Ned Davis of Ned Davis Research told clients in a report Monday, "one can clearly see the disconnect between stocks and the economy by comparing all-time record highs on the Dow Jones Industrial Average and the S&P 500 on April 11, with the barely growing revenues on the S & P 500 over the last year." The popular belief among analysts is that profits will start soaring at double-digit rates later this year as uncertainty about U.S. budget cuts and payroll taxes ease along with improvement in the European economy. Davis said the people expecting strong growth "could be right, but I can't see it yet.""

Useful reminder here. Don't focus too much on EPS, it's a below-the-line number. Top-line much less susceptible to distortions. 

Intu Properties FY2012

Intu Properties, previously Capital Shopping, previously Liberty Properties, reported results last week. Key points:

• Valuation up 0.6 per cent (IPD down 5.8 per cent)
• Full year dividend 15p
• NAV per share 392p; total financial return for the year 4.1 per cent 
• Debt to assets ratio 49.5 per cent, 6.1 years average debt maturity 
• New debt funding platform, a secured group structure (“SGS”) 
• Branding across malls (Intu)
• 96% occupancy
• 169 new long term leases £44m (+7% reversion)
• Digital strategy (free wi-fi and intu.co.uk)
• Lease expiry profile - 58% expiring beyond 2017 (weighted average expiry 7.8 years)

So is it attractive? Currently trading at a yield of 4.5%. No visible signs of earnings growing significantly, so this is the income stream one will get for the next few years. It's trading at a 17% discount to NAV (at prevailing price of 329p today) so it seems like there is scope for slight yield compression to narrow the discount to NAV (to about 10%). Assuming this convergence occurs this year, GBP return will be 11.5%.

Intu used to trade at a discount to BBB GBP 10 Year corporate bond index yield (from 1994 - 2008). 

BBB GBP 10 Year corporate bond index yield is currently at 3.79%. If Intu had to valued as it was in the 1994-2008 period (say 3.6% yield), then it would be trading at 417p (which is 26% above current prices.)

The share performance since 2009 clearly shows how poorly UK retail has performed. It has been effectively flat over the period, with no clear signs of income growth imminent. 

Fed Governor Stein posits a measure for exuberance

As mentioned by PIMCO, Stein thinks that volume of credit issuance is a more reliable indicator of exuberance than credit spreads. 

On the oddness of this bull run

Markets near all-time highs, but consumer confidence at recessionary levels.
While corporate profits are at all time highs.
But as this Bernstein research piece notes, the bulk of this high earnings level is a result of (1) low interest payments due to the Fed keeping rates near zero and (2) low depreciation due to low capital investment.

Investec Value Fund 2012

As stated in a prior post about Value Investing, too rigid an approach can sometimes lead to problems in performance. Lets look at Investec Value Fund's performance in 2012 to understand how and why things go wrong. The fund had a negative 24% alpha versus the JSE All Share Index in 2012 (2.0% vs 26.7%). The top 10 holdings at the end of 2012 were:


1) Steinhoff Int'l Hldgs Ltd [+12%]
2) Gold Fields [-15%]
3) Anglo American Platinum Ltd [-20%]
4) Anglogold Ashanti Ltd [-30%]
5) Sappi Ltd [+24%]
6) Sasol Ltd [0%]
7) Kap Industrial Holdings Ltd [+13%]
8) Absa Group Ltd [+17%]
9) Sun International Ltd [+13%]
10) JD Group Ltd/south Africa [-7%]

Note that the entire fund is not fully invested in the South African stock market. Domestic Equities make up 68.2%,  International Equities 25.4% and Domestic Money Market 6.4%. Part of the funds negative alpha may have materialized from the allocation to International Equities. The S&P 500 returned (1277 >1426 = 11.66%) and MSCI World (1186 >1338.50 = 12.85%). Given that the rand only depreciated by 5% against the dollar in 2012 we can see how having exposure to offshore equities affected performance.

Let's look at the year end portfolio against the top 10 shares in the Top 40:

1) BHP Billiton [+17%]
2) SAB Miller [+50%]
3) Anglo American PLC [-17%]
4) Richemont [+69%]
5) MTN [+38%]
6) Sasol [0%]
7) Naspers [+48%]
8) Standard Bank [+16%]
9) Firstrand [+50%]
10) Old Mutual [+55%]

Comparing the Investec fund to the Top40, we notice a few things:
1) Preference for foreign, rand weakness. SA Value investors perennial 'short' bias to SA - get hurt in periods of SA outperformance
2) Preference for rule-based cheapness (low PEs) rather than quality. This could lead to value traps.
3) Crisis exposure (gold, in two large holdings).
4) Preference for Book Value based cheapness over near-term earnings (platinum holdings).


References:
http://www.investecassetmanagement.com/south-africa/upload/pdf/SA_Fact_Sheet_Value_Fund.pdf
http://www.investecassetmanagement.com/namibia/upload/pdf/SA_Inv_Comm_Value_Fund.pdf

Cost to GDP of the 2013 Fiscal Cliff Deal

Here is what I've come across so far in terms of what the deal will do to US growth in 2013:

Feroli (JPM) says growth will be hit by 1%
Rosenberg (Gluskin Sheff) thinks it will be 1.5%
Goldman Sachs says 1.3%
Kit Juckes (SocGen) oddly sees the deal adding 0.5% to GDP. Perhaps this is from a baseline of a fiscal cliff occurring.

In summary, US GDP should struggle in 2013, coming in around 1.0% - 1.5%.

UPDATE: Chicago Fed Charles Evans sees US growth at 2.5% for 2013