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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: May, 2020
May 27, 2020

Simon Shares

  • Day 63 of lockdown, level 3 on Monday. As I record we're still waiting for details as to what is allowed under level 3, but it seems that rather than saying what we can do, the regulations will tell us what we can't do and that list will be short. We will be able to exercise, retail is open but restaurants and bars not. Alcohol will be sold, but not tobacco products. Personally I will pretty much stay in lockdown (aside from my daily radio show), but now with a drink.
  • NYSE trading pit opened again on Tuesday. A throwback to the days before technology but always fun to watch, not that I have been to the NYSE. I did see the JSE in the mid 80's on a trip to Johannesburg. It was wild and made no sense to me but it was energetic and I wanted to be a part of it all.
  • Famous Brands* (JSE code: FBR) results presentation made two comments “restaurant landscape will be irrevocably transformed” because of Covid-19. The market recovery in the casual dining segment will be “slow and unforgiving”.
  • Woolies (JSE code: WHL) trading date shows food doing well but clothing and Australia doing very poorly. They're talking to bankers in Australia about debt covenants and Australia may need a AU$100million cash injection.
  • Solid Coronation* (JSE code: CML) results with HEPS and dividend both up 8%. But risks remain, will private investors pull money or slow/stop deposits? Also as companies reduce head retirement money flows into their funds ever month. Tuesday in parliament Minister Dlamini-Zuma said unemployment may hit 50% and the Absa (JSE code: ABG) said they expect local 2020 GDP to be -10%.
  • Pepkor (JSE code: PPH) saw R5.5billion in lost revenue due to COVID-19 already so far. R476million to end March and another R5billion in April. May has seen a spike in shopping so they'll get some back, but likely not all.
  • FAANG annualised returns since the lows of March is averaging 970%. Wowzer, but as I said last week; don't fight the Fed.

* I hold ungeared positions.

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Understanding warrants

 

Warrants were the first derivative I traded, starting in October 1997 as they were launched in South Africa. SAWarrants was also my first successful website that launched me into the financial services industry. Recently I've been trading some warrants again as have a few traders I know and a tweetstorm I did over the weekend got a lot of question about trading warrants.

The short answer is don't.

They're derivatives and hence risky If you're an ETF buyer or even just a straight equity buy and holder, stay away. If you're successfully trading other derivatives then they're worth a look. Certainly, they have some benefits over traditional derivatives, but also lots of complexity.

A warrant is really an option that gives the holder the right to buy or sell an underlying asset.

  • Call goes up as does the underlying asset.
    • Last letter of the warrant code will be A-0.
  • Put goes up as the underlying asset falls.
    • Last letter of the warrant code will be P-Z.

The fact that it is a right, not an obligation, means your loss is capped at what you paid.

Warrants trade on the JSE just like any other share or ETF with six-letter codes. First 3 letters denote the underlying asset. 4th letter is the issuer, 5th letter the style (B for normal, I for instalment and K for knockout - be very careful of knockout warrants). The last letter is as above denoting call or put.

But a lot of greeks that can trip you up that are outputted by the Black-Scholes formula (this formula won the writers a Nobel prize).

  • Gearing ~ amplification of the move. For example, 4x gearing means for every 1% move of the underlying your warrant will move 4%. You don't want to gear much more than 5x, 8x on indices.
  • Theta ~ time decay. A warrant decays every day, every week, even if the asset moves in your direction it will lose some value. This reduces the warrant price and is very aggressive in the last third of the warrants life. Be very careful of tie decay.
  • Expiry ~ unlike CFDs, warrants expire and if you hold at expiry you'll be paid out. If it has value.
    • Make sure you have lots of time, at least 3 months, ideally 6 months. Time decay becomes very aggressive in the last few months.
    • Value is price above strike prce at expiry (for calls). For puts price below strike.
  • Strike is the price at which you can buy / sell the asset.
    • You want the current price to ideally be 10% - 15% of the strike price.
  • Delta ~ many things but more or less the likelihood the warrant will expire with value.

One major benefit is that with warrants you can only lose hat you paid, unlike with CFDs or futures you can lose more than you deposited.

The warrant issuers will also ensure there is a market maker buying and selling at fair value at all times. They will use a pricing matrix that can be found online.

If you trade warrants within a Standard Online Share Trading warrant account you pay flat brokerage of R50 +taxes.

And Standard Bank have a good website at warrants.co.za

And I will end where I started. Be very careful and do not jump into warrants unless you're a successful trader already, otherwise, the greeks will get you. The big challenge is that you may get the direction of the trade right (call or put) but pick the wrong warrant and lose money.


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

JSE Direct 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.


 

May 25, 2020

Offshore

/ Hertz bankruptcy

/ US initial jobless claims now over 38million (160m labour force), UK ver 10million (35million labour force)

/ This on the back of German Q1 GDP released this morning coming in at -2.2%

/ Moderna vaccine excitement, and then they raise capital on share price spike

/ Commodities having another good week.

/ Apple mobility data shows Europeana and US economy opening.

Local

/ 0.5% rate cut

/ Stor-age raises R250m in bookbuild.

/ Grand Parade Burger King sale being repriced?

/ Liberty 2 Degrees update, nice insights.

/ Nedbank update also offering solid insights.

/ Richemont raises Euro2billion debt as they strengthen their balance sheet

/ Online sales surging

May 20, 2020

Upcoming events;

Day 56 of lockdown

Simon Shares

  • Don't fight the Fed (The Federal Reserve). Markets are in full rally mode and the forward PE of the S&P5- makes it the most expensive in the last decade. During a pandemic and worst US unemployment since the great recession? Bu the point is simple, if the Fed is buying with guns blazing, don't stand in the way, markets will rally higher even if everybody I speak to is bearish.
  • With that in mind, I have bought some TOPSBZ as insurance against another market collapse. It is a put warrant over the Top40, expiry is December and strike is 41,000. So a decent amount of time and about 18% out-the-money.
  • Richemont (JSE code: CFR) raises Euro2billion of cheap debt to go with their almost Euro2.4billion of cash on hand. Now they've always been a conservative company, but they are storing up that balance sheet like crazy.
  • Dischem (JSE code: DCP) results disappoint and buys Baby City for R430million.
  • Solid Santova (JSE code: SNV) results, but to end February.
  • Oil is moving higher as production cus finally start taking effect.
  • Commodities remain strong. Makes no sense unless one assumes a massive post-COVID-19 infrastructure spending boom, and that does make sense.
  • I've been watching countries lifting their lockdowns, gentle but certainly lifting. Germany started lifting in late April (some stores open again) and then more broadly in early May. So far new cases continue to trend down, albeit the early May stats would only start coming in now. But early evidence is that an initial hard lockdown works and then slowly lifting restrictions seems to do the trick. Very early days, but the data is hopefully. Importantly, this is not about removing restrictions, just reducing them.
  • Liberty 2 degrees (JSE code: L2D) update gives great insights into the property sector. April & May saw rental collections around 40%, most malls are now operating at 60% - 70% GLA and foot traffic at 60% pre lockdown levels. All stats are improving during level 4.
  • ZAR at 18 as I record.
  • Video: Getting started in trading

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

JSE Direct 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.


 

May 18, 2020

**Global**

/ UK two-year government bonds traded negative last week as UK GDP -2% for Q1, -5.8% for March & retail sales fall 19% year on year. Biggest in 25 years

/ Tencent’s Q1:20 results showed a +19% jump in gaming subscriptions, overall Group revenue grew +26% and, on almost all metrics, the Group beat analyst estimates.

/ US, jobless claims came out as another nasty number today, now totally around 36m (the worst number since the Great Depression) while April retail sales collapsed -16.4% m/m.

**Local**

/ Barloworld is attempting to back out of its deal to buy Tongaat Hulett’s Starch business due to COVID-19 likely negatively impacting the business’s EBITDA and triggering a “Material Adverse Clause”. 

/ Dis-Chem announced the acquisition of 100% of Baby City

/ Richemont released FY 20 results showing revenue flat but profits collapsing by two-thirds. and are proposing a possible warrant instead of a dividend

/ Strong Aspen update while Life healthcare says EPS for full year likely 20% lower after mid year was +12%.

/ Knockout Sibanye Stillwater results that saw debt down 40%.

/ Impala Platinum Mine has temporarily suspended operations at its Marula Platinum mine in Limpopo. This follows the detection of six more COVID-19 cases among workers at the plant.
=====

 

May 13, 2020

Simon Shares

Day 49 of lockdown

  • Pick 'n Pay (JSE code: PIK) results were slightly down, but no dividend as they conserve cash.
  • Sibanye Stillwater* (JSE code: SSW) first quarter results knock it out of the park, strong cash flow and debt down 40%.
  • Tongaat (JSE code: TON) sale of their starch business to Barloworld (JSE code: BAW) has collapsed with the buyer claiming "material adverse change" due to COVID-19.
  • UK two-year government bonds traded negative this week. UK GDP was -2.0% for the first quarter (QonQ) with March saw a 5.8% contraction. Retail sales fall 19% year on year. Biggest drop in 25 years as 'excess deaths' top 50,000 but look to maybe have peaked, for now.
  • Norway oil fund exits Anglo American (JSE code: AGL), Glencore (JSE code: GLN) & Sasol (JSE code: SOL) as they "derive at least 30% of their income from thermal coal, base at least 30% of their operations on thermal coal, extract more than 20 million tons of thermal coal per year, or have a coal power capacity of more than 10,000 megawatts from thermal coal.".
  • Naspers (JSE code: NPN) and Prosus (JSE code: PRX) have both hit new all-time highs over the last week ahead of Tencent earnings that came out ahead of expectations.
  • Upcoming events;

* I hold ungeared positions.


ffff


The post COVID-19 reality is starting to emerge

It's very early days but an announcement from Twitter shows how things may look as the company says it will "allow its employees to work from home forever".

Hello new world.

This is surely going to be a large part of our post COVID-19 reality and has serious implications across many sectors. A recent IBM survey during April of 25,000 US adults found;

  • 54% of Americans say they want to work from home primarily
  • 75% say occasionally

Commercial property in this example will simple need less office space. This will hit not just office rentals, but for example also car an Uber usage as we travel less to work reducing fuel and car needs hurting the respective industries. Then of course lower insurance rates as less driving means less risk, and so the all rolls.

The flip side of course is that less travel time means more money and free time for an individual and how will we spend that? Reading? Eating out? Family?

Taking the Twitter example a step further, working from home means more virtual meetings (such as Zoom) and then it is a small step to less corporate travel as meetings or events that may required travel are now done virtually.

It'll be a long time before we get to the new post COVID-19 reality, but it's not going to be a new normal, it'l be way more. A new reality and importantly we get to define what this new reality will look like.


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

JSE Direct 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.


 

May 11, 2020

Global
/ Worst US unemployment since the depression, but lagging indicator. Likely 25% by end May
/ Last weeks PMI, local and global mostly setting records for worst ever
/ Nasdaq is up year-to-date
/ IMF warning that their 2020 GDP forecasts may be too low?

Local
/ Comair business rescue
/ Phumelela Gaming business rescue
/ Our bonds are strong, 10 year at 9.3%, shorter dated below 8%
/ Anheuser-Busch InBev QoQ volumes down 9.3%
/ Property stocks and risk of losing REIT status

May 6, 2020

This week’s episode of JSE Direct is courtesy of OUTvest, our preferred supplier in retirement products.


Simon Shares

  • April was the best month for equity markets since 1987!
  • Local ten year bonds are on a tear, just a week after we exited the World Government Bond Index the yields are back at pre-junk levels and even better as they trade below 8%. This is the search for yield playing out. If their mandate allows investors want yield, the rest they don't care about.
  • This has also seen the Government Retail Bonds locally drop their April rate of 11.5% to 10% for May and likely will fall further in June.
  • PMI shocker. The headline number was fine but that was due to some oddities. The real kicker was the business activity index that collapsed to an all-time low of 5.1 index points in April. During the 2008/9 crisis the lowest levels were low 30s.
  • Oil bouncing higher, albeit at US$30 Brent is still over 50% off the January levels.
  • Comair (JSE code: COM) went into business rescue less than a week after an update detailed no flying until October / November. They hope to be able to restructure and come back by then, but the airline industry globally is in melt down and locally we have three airlines in some form of bankruptcy (SAA and SA Express the other two).
  • Metrofile* (JSE code: MFL) updated the market on their proposed 330c delisting and the short answer is that it is still on but is delayed indefinitely. Pratically trying to raise capital and get all the Is doted and Ts crossed is largely not practical under lockdown. But the buyer also wants to get a better understanding of the business post lockdown. I hold the stock and am happy to continue holding as I'd rather it not be delisted. But price had dropped to 220c on the news, currently 250c. Lockdown does hurt the company a little, most work in contractual. But the issue is how many clients don't survive and of those who do will they require less boxes?
  • In very tough times for REITs Equites (JSE code: EQU) results really shone. Debt is low, distributions solid and they have very few clients not able to pay rentals as they state "since 29 February 2020, we have collected 92.8% and 100% of the contractual rental due in terms of our lease agreements in SA and the UK, respectively". This is largely as they are in the business of fancy logistics. No retail, no offices and many online customers, especially in the UK which os some 25% of their business.

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Property losing REIT Status

A REIT ~ Real Estate Investment Trust is essentially a special purpose vehicle for listed property stocks. In South Africa the most notable requirement is that 75% of 'distributable income' is paid to shareholders as a taxable dividend. This absolves the REIT of tax liability but that dividend received by shareholders is taxed as income, not the 20% dividend withholding tax (DWT). So depending on your marginal tax rate, it cold be higher or lower than DWT.

With this in mind I asked Redefine CEO Andrew Konig about this on my show on Tuesday. The company had some 33c per unit of distributable income due to investors but did not declare it rather saying they'd decide at yearend in August 2020. This is perfectly legal as this was an interim distribution and they only need to be paid annually.

Now that 75% rule is a SARS issue as it regards taxation, it is not a IFRS concept and as such it is a murky issue. So the REIT industry is engaging SARS in case some REITs can't pay the distribution. There could be lots of options such as delaying the payment and maybe spreading it our over a number of years. But if they lose REIT status frankly the property companies would unravel as the tax advantage from that status is huge and how they operate. As such I expect industry and SARS to come to some sort of agreement.

But what Andrew Konig said was that liquidity issues were of more a concern for REITs. Frankly their ability to actually pay anything and liquidity is a part of the companies act so is more immovable than the SARS REIT definition and allowances. This is the bind property stocks find themselves in. Debt that needs to be paid, income (rentals under pressure) and legal requirements to pay distributable income. There is going to have to be lots of clever thinking to get through this crisis.

* I hold ungeared positions.


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

JSE Direct 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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