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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: March, 2019
Mar 20, 2019

Simon Shares

  • No Brexit deal with 8 days to go. A mess of epic proportions.
  • Load shedding is in full force (well only force 4 with more stages to go) and it's bad. Seems we can expect a 'stable' electrical grid sometime towards the end of the year, albeit stable may still include stage 1 load shedding according to experts I have spoken to. The reasons we know and frankly don't matter. It also doesn't matter who wins on 8 May, this is not a problem that goes away over night. For us individually it s a hassle, a real hassle. For business it is a major issue. Our expected modest GDP growth for 2019 is going to be even more modest while Moodys eyes us for junk status. Most exposed will be retail (extra costs) and property(lost sales and extra costs) while mining has largely managed to get off grid.
  • Metrofile* (JSE code: MFL) results were a horror show with the tax rate hitting 40%, up from 24%. Seems the two now fired CFOs messed up the Kenyan deal so that interest was not deductible as an expense. They out, new CFO will be able to fix and get the tax rate back to normal. Debt should be easy enough to pay off in 5-7 years. That all said it is currently my worst performing share in my portfolio and I continue to hold. Sure the pain has been plentiful, but the business model still stands, some issues (re tax rate) should be easy to fix and I wonder if a take over may not be on the cards?
  • Up coming events;

* I hold ungeared positions.

Avoiding the next Steinhoff

Up front let me state you're unlikely to be an investor in individual stocks and over a life time of investing never invest in what turns out to be a fraud. So far I have been lucky in that my only fraud was way back in the mid 90's (I can't even remember the name of the company) when the CEO suddenly rushed off to Australia and my loss was fairly modest (as I was poor), albeit I did make the horrid mistake of doubling up when the price had halved.

Back to Steinhoff, the PWC report is finally out. Three thousand pages and four thousand attachments, albeit we only got a ten page summary that detailed over R100billion in fraud over the 2009-2017 period. Profits for this period were only some R60billion and while the fraud number may include some double counting, it basically means Steinhoff (JSE code: SNH) was a ponzi from day one.
So how do we avoid being suckered into a ponzi scheme?

  • Avoid the cult of the personality. Far too many people said that they didn't fully understand the business, but were happy to follow (and trust) Markus Jooste. Big mistake. I remember somebody on twitter saying if accounting was an olympic sport Markus Jooste would be a gold medal winner every time. To which I responded that hopefully he wasn't a drug cheat - turns out he was. I am not saying that every great person is a crook, but being great is not an investment case. Sure management is important, but we need more.
  • Other red flags on the cult of personality is when they attack critics. Sell reports on Steinhoff were meet with rage from Markus Jooste and demands that they be retracted and the person involved be fired. Remember the recent Investec report on the Tongaat (JSE code: TON) CEO that got the company all upset and complaining to the Investec bosses? That was in June 2018, the share was over 8000c, now under 2000c.
  • Avoid complexity. As humans we believe in complexity. We think complex is great, complex is best. It's not. In large part we believe in complexity because it is easier to do so. It helps explain why our portfolio growth is modest, why we're not hitting it out of the park with our trading. Truth is luck plays more of a role than complexity (read Fooled by Randomness by Nassim Taleb). The other issue with complexity is that it is easy to hide the fraud and diss naysayers. The reason I avoided Steinhoff is because I couldn't get the balance sheet to balance nor the debt to reconcile to the balance sheet. I am no CA nor a rocket scientist, so I go for the easy and these two should be easy. But I couldn't get them working so I just walked away. (Disclaimer, I did trade Steinhoff a few times, mostly in my momentum portfolio and can't remember if I made money or not).
    • As an aside, I hold a complex stock ~ Discovery (JSE code: DSY) and when Viceroy was threatening to come after a second JSE stock last year, I ran my eye down my list of stocks and figured Discovery was a potential candidate. Point is I hold the stock knowing it is complex. Knowing its accounts are beyond my ability. Knowing that maybe it'll all collapse one day. I have built this understanding into my risk tolerance in that to is the only complex stock I hold and I cap the percentage weighting.
  • Debt, always watch debt especially when paying top dollar for assets, such as the 100% premium offered for Mattress Firm. As Buffett said, debt is like Russian roulette. It's fine until it's not and then it is fatal. Know the debt ratios, watch them and compare to previous periods and their peers.
  • Watch governance. Independent execs, are they really independent? Do we have a strongman CEO who has been there forever? Again a double edge sword, some such as Gore and Saad are important to the business. But so was Asher Bohbot to EOH, and now he's gone. They're great till they're not. What we then need is a strong, diverse and truly independent board. Can a non-exec really be independent after ten years on the board?
  • Denial is another issue that we should largely ignore. We've had two execs at parliament saying, no not us. Yet both are named in the report. Ask yourself, how many guilty people confess when first accused? How many ever confess even when finally convicted? Remember the chairman, Christo Wiese on the radio flatly denying concerns. Now he claims he didn't know (and he is not named in the report), but then why the flat denial?
    • Another aside. Why did the so smart Wiese sell his Pepkor holdings into the ponzi scheme in return for Steinhoff shares? Maybe as a rushed and easy way to offshore his money?
  • Avoid falling darlings. We have lots of examples locally of once high flying darling stocks under severe price pressure. We missed them on the way up but now that they're lower we're buying, but they keep on falling. EOH R180 to under 2000c. Aspen (JSE code: APN) was over R400 now under R100. This is tough because sometimes the sell off does offer a great entry, but we need to be extra sure that the sell off is not the start of a collapse. Best way to do this is on a valuation and full understanding of the business. Aspen is maturing so the +30 PE levels were not reasonable and the price needed to come down while EOH was always built on using script as currency and that uravels as the price falls.

So what next? Well Steinhoff is bust, 100% bust. Sue they have some assets (such as c70% in Pepkor and Conforama and bankrupt Mattress Firm in the US) but the claims against the company are in excess of R200billion and current shareholders are last in line. The process will take a while, maybe a decade, and by the end there is nothing left for shareholders. If you're holding or buying Steinhoff, understand you're trading because you can't invest in a share that's going to zero.


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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.

Mar 13, 2019

Simon Shares

  • Group5 (JSE code: GRF) goes into business rescue with "a slim chance for any realisation of value.". It seems the construction of a power station in Ghana was the final nail. Remember the +R1billion they were offered to their Eastern European toll operations? But in the end a lack of liquidity killed them. Be very careful of holding Aveng (JSE code: AEG), if nothing else check the bid/offer, price is heading to 1c.
  • No Brexit deal with 15 days to go. A mess of epic proportions.
  • Back in November 2017 I wrote in FinWeek that we'd get zero fee ETFs and eventually negative fee ETFs (they'll pay you to hold them). It has happened. MoneyWeb is reporting on a US ETF offering to pay investors to buy their ETF. Locally our much smaller market and hence much smaller ETFs means we're a long way from free, but I do think in time it'll happen locally and Satrix40* (JSE CODE: STX40) would probably the one able to do it.
  • Aspen (JSE code: APN) taught us some important important lessons. Debt is fine until it's not and then it can be fatal. Buffett talks about this in his latest shareholders letter. Secondly the market has become a lot more skittish and punishing since Steinhoff (JSE code: SNH). This is not likely to go away any time soon. The answer is simple, watch a companies debt and hold quality, real quality, only. Lastly, all growth stocks mature and that process of maturing is often painful.
  • 5 ways minimalism helps your finances
  • Searching for value the Benjamin Graham Way

* I hold ungeared positions.

Investment lessons from Boeing

We live in wild times made possible by the internet and powerful computers in our pockets. Much of it is good with a fair amount of bad as well (think Twitter trolls), but for large old school companies it can be especially bad.

    • Think Momentum refusing to pay out the life policy. They were correct as per the law and policy wording, but they showed a complete lack of compassion and eventually backed down.
    • Think Vodacom trying to scam us on the ICASA rules for rolling over data with crazy fees. They backed down and from a business profit motive they may have been right but they were a million miles away from the spirit of the law and ICASA may have blocked their fees anyways.
    • Think TigerBrands and their total lack of empathy as they responded with legal speak while South Africans were dying from listeriosis originating at their production facilities.
    • Think Boeing, standing firm after another of their new Boeing 737 Max8 crashed shortly after take off. In the olden pre Internet days Boeing would have been able to control the message with ease and insisted everything was fine, hoping like hell another plane didn't crash and quickly rolling out a software 'update' that may or may not fix the issue (from what I have read the issue is training, not software, here's a long NYT read on it). Boeing have failed to understand the new rules in which businesses operate.

Firstly those rules are a lot more ethical. Consumers want to be treated fairly. Hey we always did, but we never really had any power. And that's the second and very important point, consumers now have power. That power comes via the Internet and very quickly a raging anger can over whelm any attempt to manage the message. Now sure often the raging anger is actually just a lynch mob and this is very much the dark downside of the Internet. But the upside is that consumers have power and they'll exercise that power. Sometimes for good and sometimes for bad.

A business needs to understand this. I remember attending a presentation on generational theory a decade back where the message was that millennials wanted ethical companies and would pay more to these companies. The flip is that they'll boycott a business they consider to be unethical. Now this is way more than just millennials, the issue is that millennials were given the power to firstly know a companies ethics and secondly do something about it.

Companies that are going to survive and thrive in this new world will have fairness and ethics at their core, and that's hard. It's easy to put that into a mission statement, but living it is something else entirely and often a company messes up. For example the news that a company will phase out plastic straws by 2022. Nice, but why so long? Simple because they're trying to protect profits. Fair enough but the ethical demanding consumer doesn't care about your corporate greed, they care about the planet.

The even harder issue is how do we manage this as an investor? Truth is we need a crisis to see how a business manages it and that is late in the process. But we can see glimmers of it via other means, such as the plastic straw example mentioned earlier. If a company is not putting the customer and ethics front and center they will eventually be in trouble.

Lastly as investor we need to not chase profits at any cost. We need to invest ethically as well, this means fair fees we're charged by providers. It also means exiting dodge companies even if we think there is money to be made. We also need to focus on ESG (environmental, social and governance) issues.

A very last point. Will Boeing survive? Of course. Will this hurt? Absolutely. Will it be a great investment going forward? No chance.


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  • Subscribe or review us in iTunes

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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