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JSE Direct with Simon Brown

Weekly podcast hosted by Simon Brown covering the JSE and listed companies.
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Now displaying: September, 2018
Sep 26, 2018

Simon Shares

  • This JSE Direct is proudly brought to you by IG, the specialists in CFD trading and a registered financial services provider.’
  • Alexander Forbes (JSE code: AFH) fires their CEO with zero f***s given.
  • Nigeria making nice to MTN (JSE code: MTN) and Standard Bank (JSE code: SBK).
  • Choppies (JSE code: CHP) snuck a late Friday SENS into the market stating that results would be late (again) and profits at least 20% lower (but no hard details as how much). No surprises that the market did not like and the stock got punished when we opened on Tuesday trading down at 25c. I never liked the stock and have repeatedly suggested investors stay away.
  • Capitec* (JSE code: CPI) results were once again stellar with HEPS +20% and cost-to-income at 38%. The cost-to-income is edging higher, as expected, and was 36% last year. Likely will settle in the mid 40s. Active clients is now 10.5million.
  • Top Broker awards were held on Tuesday evening. In the main category the winner was Standard Bank followed by Rand Swiss and ABSA. All the results will be in this weeks Financial Mail supplement, Investors Monthly.
  • Friday is month and quarter end, so we may see some stock price ramping to make returns look prettier. But it has been a tough quarter for local investors.
  • Wealthy Maths: Calculating cost per use
  • OUTStanding money with Outvest: Long-term saving goals.
  • Upcoming events

* I hold ungeared positions.


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Are you buying?

I post a lot on Twitter, probably too much. Much of it is not opinion, they're just interesting charts or stats, especially of collapsing stocks (not many flying to the moon these days).

Almost every time I Tweet about a collapsing stock somebody asks "are you buying?". And the answer is pretty much always no.

The one theory is that at the right price any stock is attractive - so a collapsing price may well make an unloved stock worth buying. But I do not agree with that sentiment at all. I only want to own quality, no dogs in my portfolio. So for me it doesn't matter what the price is - I want nothing to do with the stock, in fact I want nothing to do with the vast majority of stocks on the JSE for one reason or another.

There are of course exceptions. The few stocks that I do love and will buy more of if the price were to collapse, but that list is small - around twelve at most.

There is another point here, FOMO, I have covered this before. The belief is often that a 'great' collapsing stock will rebound with vigour and those 'lucky' enough to have bough at the bottom will find themselves instantly rich. But this seldom happens. Most collapsed stocks remain collapsed for a long time - if not forever.

So follow me on Twitter, enjoy the charts and other stuff I post. But don't ask me if I am buying. Likely if I am, I will mention it in the Tweet or you can check my portfolio here.


JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

Sep 19, 2018

Simon Shares

  • CPI 4.9% vs 5.2%, rates on hold?
  • Naspers (JSE code: NPN) unbundling Multichoice. About R5.5billion profit so market cap some R55billion on 10x PE. That puts them into the Top40. The theory that Multichoice is dead is very misplaced.
  • Aspen (JSE code: APN) gives another update to the market trying to help investors make sense of their results, and the stock is off +9% at just over R170.
  • JSE is looking for feedback "In response to a range of corporate scandals, speculation and innuendo that have characterised South African financial markets over the past year". Details here 
  • Cash Club: Start where you are
  • Upcoming events

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Managing fallen angels

Those once unstoppable high flying stocks that have come back to earth with a thud, now what?

We have a lot in our market right now; Aspen (JSE code: APN), Steinhoff (JSE code: SNH), MTN (JSE code: MTN), EOH (JSE code: EOH) and many more.

Firstly understand the difference between cyclical and non-cyclical stocks. The former is resources, construction - those sectors that will always experience boom and bust and here we should really be long-term trading them rather then bottom draw investing in them.

Secondly is to be careful when buying our high flying, unstoppable non-cyclical stocks. I may love a stock but if it's above my idea of a fair rice I simple won't pay the price. I wait, sometimes waiting years, for prices to be at my levels and then I'll buy. Sometimes like with Richemont* (JSE code: CFR) this works well when I was buying in the 80's some two years back. Other times like Woolies* (JSE code: CFR) I was buying from around 8850c all the way down to 6250c odd and then I stopped as I had full weighting and yet the stock went still lower. So manage the price you pay, you do not want to be the person who paid +R440 for Aspen and if you were ideally you want that to be one of many price points you paid with an overall much lower average price.

But that all said these unstoppable angels do sometimes fall from grace, so lets delve into that.

The first question is if this is naked fraud or horrid business that we (the market) had missed. With Steinhoff the answer was an easy yes to fraud. With MTN the answer is more complicated but my view at the time of the first Nigerian issues was that this was a massive failure on the part of management and that markedly changed the investment case - so I exited.

Woolies the issue is over paying for David Jones and again messing up on women's fashion. Both repairable and not likely to be terminally damaging, albeit most definitely expensive.

But what of Aspen? I think that the stock had got well ahead of itself with a PE of almost 40x just two years ago, wildly expensive but supposedly justified by HEPS growth that was around 30% a year. However nothing grows at 30% a year and this is the error I think the market has made. Aspen is maturing, all successful companies mature and when they do they rerate in terms of valuations (PE) but with Aspen the market seems to have been caught by surprise.

So in short;

  • Cyclical stocks are for trading.
  • Buying price is very important. Don't overpay and ultimately stagger buying over many years (decades) to ensure a decent average price.
  • Also stagger buying across many stocks, you don't want all your investment concentrated in a few stocks or sectors.
  • Ask if this is as a result of a management error that is not terminal? If yes stay the course and maybe use the sell off to pick up some more - but again be carefull of being way over weight a single stock.
  • Ask yourself if the fall off just a rerating / maturing of the business or as a result of real damage to the company (fraud, horrid management, etc.).
  • Go back and check you initial notes from when you first bought the stock. What's changed and does that change make for a better (albeit different) investment or worse?

Lastly, never just shrug and say "how much worse can it get?". It can get a lot worse, Steinhoff offered a +2000c exit last December when the news broke. Now it sub 300c.

Last last point. Within a diverse portfolio not everything is always going up - unless it's a stonking bull market.

* I hold ungeared positions.


JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

Sep 12, 2018

Simon Shares

  • Metrofile* (JSE code: MFL) results were a mixed bag with the reduced dividend expected but they are essentially going to almost halve the cover ratio over two years and that is more aggressive than expected. Growth was modest, but the results commentary was even ore modest. Two analysts I know spoke to management and both came away very confident of the stock and its prospects. A lot of talk is about the move to digital and the cloud and firstly Metrofile is well positioned there and secondly I have been hearing about paperless office for over 30 years.
  • ADvTech* (JSE code: ADH) purchase of Monash University looks great but expensive. On a PE of around 39x that is chunky. However will be able to remove a fair bit of costs plugging central services into existing infrastructure the company has. It also gives them degree levels offerings which is a great step and so while not cheap I like the deal.

* I hold ungeared positions.


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Shares or cash for dividend?

Often a company will offer you shares instead of receiving a cash dividend. Assuming you still like the stock (if you don't, then why haven't you sold it?) I always take the shares. The exception could be if I think valuations are crazy and there are other stocks with much better valuations to buy. Then I'll take the cash.

By taking shares you save on brokerage, likely very saving but further often times a dividend is not enough to actually reinvest economically. My brokers minimum of R100 brokerage for a trade at 0.5% means that I need to do a R20k trade to get an effective 0.5% brokerage. Sure I can save up the dividends or add them to other cash I may have in the account - but taking the shares is easy and brokerage free.

For tax purposes the free shares reduces your base cost price as the new shares come in at zero cost, so you have same total base cost but extra shares effectively meaning average purchase price is now lower. When you sell this new lower base cost will be used for tax purposes.

However you'll save a little on tax as DWT is 20% (this is what you would have paid on the dividend) and maximin CGT is 18%.


JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

Sep 5, 2018

Simon Shares

  • MTN (JSE code: MTN). Woe is MTN, another $2billion for tax evasion. Is it a shake down? Maybe, maybe not. Truthfully we have no idea and it does cover the same period (2007-2015) of their previous Nigerian fine. I long ago sold my MTN shares and no interest in buying more.
  • Steinhoff (JSE code: SNH) ex directors Jooste and La Grange have now both appeared before parliament and both blame everybody but themselves.
  • Nice break out last week on the Top40, and then the retest and now we're back inside the range of 49-52k trading at 51,000 with ZAR at 15.46. Sure some if this is general EM issues but GDP data from Tuesday showing us in a recession is weighting heavy on markets. Where to next? Well let's see if 49k holds.
  • Lots of talk about another drought locally in 2019, experts saying about 60% chance. Going to be rough, especially on food producer stocks (growing and makers).
  • Practical trading setups and rules
  • Tax Tuesday: Medical aid tax deductions
  • OUTstanding money: The inflation monster
  • Upcoming events

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NAV, value or trap?

A listener asked about net asset value (NAV).

Often when watching I hear a lot of market analyst talk about discounts to Assets, sometimes they say its bad sometimes they say its good. What does it actually mean when they say a share is trading at a discount to its assets or NAV, how is it calculated and is it good or bad?

NAV is the break up value of a company. If all assets were turned into cash and all liabilities paid off, what's left? Divided by the number of shares is NAV per share and sometimes called book value. We then relate the NAV or book to the share price and get a ratio between price and NAV often called the price to book (P/B) ratio.

Also note the difference between tangible NAV which excludes intangible assets such as brand value and good will. I prefer tangible NAV.

As a rule a share trades at a premium to NAV as you're not buying the break up value of a company but the future earnings and cash flow. Different industries will have different premium, banks typically max out at around 2x while retailers at times 3-4x and miners anywhere from below 1 to 10x.

A valuation strategy is to consider stocks cheap when their NAV premium is lower than typical for that particular stock and lower than industry peers. Sasfin (JSE code: SFN) is a case in point. NAV is around 4400c and the longer term average is some 1.5x, so seems like a steal. Except the stock has now fallen to around 3400c!

Another strategy is to buy below NAV, essentially you're getting future earnings and cash flow for free. But is this value or value trap? Argent (JSE code: ART) has traded at around 50% below NAV forever and a day while The Don Group (now delisted) was at a chunky discount to NAV but that NAV kept melting away and the stock price kept on falling.

So a useful indicator but as always needs to be more than just one piece of data when buying a stock.


JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

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