Will we see a breakup in the European Union?
Jozi, Jozi. Whoa…stocks globally started to sell off, I guess you could point the fattest finger at the Chinese and their hot economy and now a bit of an inflation pickle and you would probably have the answer that you are looking for. Although what few people are talking about is the root of the inflation problem, the fact that adverse weather conditions have seen food prices run unnaturally ahead. Part droughts, part floods, but natural disasters are more common in China than in many other places around the world. In fact the worst three natural disasters recorded from a loss of human life are all Chinese events. And then the Chinese have recorded two other top ten spots, so you know what I am talking about here.
And, to add in an Irish problem that is gripping the media, and “a will they or won’t they” accept EU help is starting to weigh on markets. Sure it is a big problem, but is it a new problem? No. Resource prices weighed on the majors in our index, that sector down over two and a quarter percent, the diversified stocks taking most tap. The overall market, the Jozi all share index closed down at 31419, down 396 points or 1.25 percent, a drubbing for the bulls.
Spar good for you. Results for the full year this morning. I must admit, I quite like the model. I quite like the brand. I used to like the share price. Turnover of 34.8 billion ZAR, which is a 9 percent increase on last year. Whilst operating expenses seem to have been kept in check, a rise of only 6.7 percent (I say only), operating profits are better by 14.2 percent. Net income of (perhaps insert only) 915 million ZAR. Phew, you work so hard, nearly 35 billion ZAR turnover for less than a billion ZAR of profits.
That translates to EPS of 536 ZA cents. With an annual dividend of 362 cents per share, hey, that is good. The stock trades at 99 ZAR a share. So take the yield part, 3.6 percent is not bad, that is pretty decent bearing in mind that cash rates are going to fall further, perhaps as early as tomorrow afternoon again. The analyst community has the company making nearly 7 ZAR a share worth of earnings in 24 months time, and paying a dividend of over 450 cents a share. So on that basis, the stock trades two years forward on 14 times earnings and has a yield of four and a half percent. Is that good value? And I guess you should be paying a little more if the company has managed to grow that fast.
I guess this is the tricky part that everyone is struggling with, how do you value these companies? Revenue has doubled in five years. HEPS has grown at 23 percent per annum over the same time. Dividend payments have grown from 123 cps back in 2006 to 362 cps now. Margins have actually been maintained, although they look a little “light” for my liking, with net margins below 3 percent. But, they have crept up over the last five years. Operational cash flows are strong. Gearing is low. Did I mention that net margins are low? But then again it is a franchise business.
I get the sense that companies are starting the thaw to the idea that consumers are starting to feel more comfortable, check out the prospects column: “We anticipate that consumer spending will remain under some pressure, however the impact of lower interest rates, improving economic activity and a gradual increase in food inflation are positive signs for an improvement in trading.” Ahhh, light at the end of the tunnel for the battered (embattled?) consumer.
A rental car business? The Sub-Saharan, Siberian and Iberian (Spain and Portugal) Caterpillar franchise? Bulk Handling? Logistics? Second hand cars? This of course is a business called Barloworld, who reported full year numbers this morning. A shadow of their former self, the business used to be a South African icon a mere thirty years or so ago, and were one of the biggest back then. Nampak, Tiger Brands (and all the subsequent unbundlings including Spar, Astral foods and Adcock), Reunert, any mine with a Rand name back then, that included JCI (with the significant current Anglo Platinum assets). Phew, add those all up and this would be a giant conglomerate, if it still existed. One that Punch Barlow envisaged.
But now they are a business that turned over 40.8 billion ZAR last year. Discontinued operations made a wider loss per share than last year, whilst continuing operations per share were much lower too. I don’t know, they seem pretty upbeat about the outlook, their heavy duty franchise business will benefit from growing markets in mining here in Africa, they make specific reference to growing copper output from Zambia, and increased excitement in Siberia, both markets took a whack as commodity prices imploded. Spain is still set to struggle as government expenditure in the great age of austerity (or call it a return to what your grandparents would refer to as the norm) is toned down on infrastructural projects.
And in fact this is the division that they will look mostly to in the coming year: “Equipment southern Africa is entering the new year with a strong order book particularly from mining customers.” But….. “The anticipated recovery of the construction market in South Africa and Angola driven by governmental infrastructure spending is not expected before mid 2011 calendar year.”
And the same, as mentioned previously is the outlook in Spain and Portugal: “The austerity measures introduced by the Spanish government mean that the public works sector will remain subdued for most of 2011.” But it is a completely different story in Siberia (note, not Russia), a good story: “In Russia, order books have increased significantly on the back of a recovery in mining activity and we expect a strong first half of next year” Excellent.
Fleet services business looks fine and the year ahead is all good. The automotive business is set to recover here locally, led by better consumer access to credit and rising consumer confidence. You know, it is time to buy a car. A new one. You will probably find that this time next year we are talking about a much improved performance, but I am not too sure that a geared investment to the credit cycle is predictable enough to make me comfortable.
Reunert full year numbers this morning too. It has been a busy morning here. A four percent change in revenue to 10.6 billion ZAR with a bottom line of 911 million ZAR. So, you would have to say, decent net margins, although in the world of Warren Buffett I think anything below ten percent is a no-no, that is quite hard to achieve. Nashua is two thirds of overall revenue and 52 percent of operating profits. What is quite (or very interesting) is CBI-Electric is a 45 percent operating profit contributor but only contributes 28 percent to total group revenue. So clearly the operating margins in the CBI-Electric businesses are double that of the more talked about Nashua business.
I guess cables and low voltage equipment are much more exciting to engineers than the mobile business, with around three quarters of a million customers. Although the same could be said for office equipment, they try their best with those adverts, but darnit, a printing solution is boring, whichever way you look at it, regardless of your geniuses at Nashua. And then of course there is a separate third division which is related with defence systems, perhaps the SANDF used to be a bigger customer in years gone by.
And how do the geniuses at Reunert see the outlook? “The economy is in a delicate state with lower interest rates encouraging growth. However, the strength of the rand is of serious concern with increased imports and reduced export opportunities hampering growth. Subject to the prevailing economic conditions remaining unchanged, the group predicts an increase in earnings for the year ahead.” I would venture to say that again, this time next year as is the same for Barloworld, “things” will be better. Disclosure: I am an optimist and no, we don’t own any of these shares in our client longs.
Ye olde world Ireland was actually running a surplus a mere four years ago. Public debt now tops 35 thousand Euros per man, woman and child, according to Bloomberg. WHAT!!?? How did this happen? Well, most folks think that the root of the problem was the root of most of the problems, easy money (easy lending criteria) led to massive speculation in the Irish property market. Fuel was added to the hot property flames in the form of lax laws surrounding the flipping of primary properties. And of course, access to easy money, did I say that already? I heard an American property commentator say something along the lines, “well this time around if you want to obtain a mortgage you actually have to HAVE A JOB!” You get the point he is trying to make.
“Ireland built half as many homes as the UK in 2007 despite having one thirteenth the population” is what I read on Candid Money. In fact, you should read the whole article —> The Irish problem. I don’t agree with his conclusion and do believe that he is way too bearish. And that is probably because in 18 months time problems like these will be less problematic for the EU and for the global economy.
Again, the same questions are starting to be asked, will we see a breakup in the European Union. The biggest problem for the Irish is that they cannot weaken their currency, they share one with a whole lot of bigger economies and they can’t tap lines of credit from the IMF, they have to ask the other union members first. They apparently need around 20 percent of their GDP just to bail out the local banks. To put that into local terms OK, would mean that we would need 60 billion US Dollars, or 420 billion Rands to help our banks out, if we got into the same pickle. To answer that question, will they exit the EU, well first things first, there is no mechanism to implement such a mechanism and politically it would lead to civil unrest, as I no doubt think the masses would view this as a step backwards.
Christine Lagarde, the French Economic minister said in an interview last night that if Ireland needs help, they will help. But, she said, they have not asked for help. So everyone seems to think that Ireland needs help, except the pride of the Irish. Politicians I tell you. And did you know that the 1 in 5 people in the Irish workforce is a civil servant. A bloated civil service no doubt. This seems to have been a global trend over the last decade, to add more people to the government payrolls and not fewer.
It is not all doom and gloom though. Remember Latvia? Remember the nearly one fifth contraction of their economy overnight because of the over extension, housing and consumer led economy? Well, not that things are fixed, but they took their medicine and now the economy is growing slowly again. Perhaps there are some hard knock lessons in there for Ireland and Greece. Take all the pain now. But I don’t think that they will.
New York, New York. Trounced. Thrashed. Irish debt problems in their banking system and the Chinese inflation problem were blamed. Oh, and if you want, Austria and their school of economics and attitude towards Greece. Because, if the Austrians want to withhold a payment to Greece is that any different from the Greeks having broken the rules in the first place? Methinks not.
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But that has nothing to do with what is happening or happened in New York last evening. There is of course a small matter of a General Motors IPO. And everyone is going gaga for that. Not like meat dress gaga, but rather a forward multiple at the thought current pricing is less than seven times. Cheap. And the US government in order to get back their bail out of the motor vehicle manufacturer, their remaining or residual stake will have to increase 50 percent. Hey, remember when they were not going to get anything back at all? Morons, yes, turns out that the government might get all of it back.
Silk road, riced and diced What do you make of the Chinese setting out on price controls again? Is this a step backwards? Or is this a step in to control what could lead to violent protests, elevated food prices? Because food prices impact more on poor people and poor people have to turn to violence (as history shows us) when they are desperate. So this is not an economics move from Beijing central, but rather a political move. Although, this Marketwatch piece suggests that the price controls could have the opposite effect: China controls may do little to curb prices.
This line I guess will spook almost everyone, except the growers: “Data released this week by the Ministry of Commerce showed that average wholesale prices for 18 key vegetables in 36 Chinese cities soared 62.4% year-on-year in the first 10 days of November.” I guess that is the other issue, what might not be good for urban consumers is good for rural farmers. Who, just remind everyone, feel marginalised anyhow. I do not know enough about Chinese politics to know what Beijing central is up to. All I know is that their approach to many matters economic and political is seemingly VERY WELL thought out.
Chinese stocks continued to take a thrashing, down nearly two percent, Hong Kong down 2 percent too. Japan bucked the trend though, a weaker Yen is good for exports, excellent. And of course this is having a negative impact on all of the commodity prices.
Commodities corner Which are: the gold price last at 1338 Dollars per fine ounce. I thought a crisis was good for the gold price? There were CME margin requirements raised yesterday too, some folks thought that might have led to some selling in commodities too. My favourite currency guy, Ashraf Laidi said he thought that the gold price would retrace to 1320 Dollars per fine ounce. I think based on currencies of course. The platinum price is lower at 1640 Dollars per fine ounce. Jeepers the copper price has been bashed, down to 368 US cents per pound. The oil price is lower at 82.05 Dollars per barrel. The Rand is about steady at this time, 7.03 to the US Dollar, 11.20 to the Pound Sterling and lastly 9.50 to the Euro.
Up periscope. We started off on a poor note, but have improved through much of the day. There are of course housing numbers a little later.
*Sasha Naryshkine is from Vestact Asset Management
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