Simon Shares
Day 188 of lockdown.
- August CPI 3.1%.
- Everybody now suddenly knows about the expanded unemployment rate?
- Capitec* (JSE code: CPI) results were as always solid. Hit hard by the pandemic, but resilient. Valuations are rich, as always.
- Alviva (JSE code: AVV). Remember old Pinnacle, once a darling and then hit by claims of dodge tenders. They bought Datacentrix changed their name to Alviva and issued decent results.
- Everybody asking me about Ascendis Health (JSE code: ASC). To me it is binary, either they sell Remedica for a good price and they can bumble along, or they go bust. Debt is huge and risks are massive, sure some potential reward but why rush it?
- Remgro (JSE code: REM) results, +40% discount to net asset value (NAV). Either you view this as a cheap entry into some listed businesses inside Remgro. Or your view is that holding structures are value destroyers. PSG also at a massive discount to NAV. Typically discount used to be around 15%, but now we're seeing 40% discounts. Now the trade could be a closing of that discount, or just a cheap entry.
- Headline from CNBC "Disney to lay off 28,000 employees as coronavirus slams its theme park business". The pandemic is not over and some companies are still struggling to manage it.
Upcoming events;
Presidential markets
Less than five weeks until the US votes and then who knows how long to count the votes and get Trump out of the White House. The first debate on Tuesday shows what a mess the next few weeks will be.
After the debate, US futures markets were down some 0.75%, was it the debate or just markets? Maybe a bit of both.
Here's the thing. Some white man will win and be installed in January 2021. Market pundits will tell you it matters which. Remember the fear about a Clinton win and what it would do for markets back in 2016? Sure it became moot as Clinton lost, but the idea that one or the other will be better or worse for markets has scant evidence
Mostly it is trolling by one side or the other. The idea that one is anti markets is nonsense, both are ardent capitalists and sure Biden will keep the Affordable Healthcare Act, as an example, but after almost a decade in place, it has not broken markets. Biden may also want some minimum wages etc. Radical ideas for hardened capitalists, but there are minimum wages in many states - and non are bust as a result.
Raising taxes? Not on corporates, that boat has sailed and can't be recalled. On individuals, they can go up and while the rich will moan, what the NYT showed us on the weekend is that the rich don't pay tax anyway.
So how does one position a portfolio head of the election?
- Carry on carrying on.
- Ignore the noise.
- Buy quality when you like the price.
Elections are noise and best ignored and sure they may create volatility - but volatility creates opportunity.
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.
Simon Shares
Day 181 of lockdown.
- The Tongaat (JSE code: TON) deal to sell their starch unit to Barloworld for R5.35billion is happening and the Tongaat share price loved the news.
- We're seeing a strong bounce locally while the US markets are also having a better run, risk back on (for now). But what was odd was gold. It didn't run as stocks were selling off and has actually weakened. The point is that if fears were of a longer sell off gold should do better, except for two things. Firstly nothing is linear and secondly when there is real fear as we saw back in March everything is correlated at 1 and everything sells off.
- The UK back into lockdown, not the hard lockdown of March / April. But lockdown that the government is saying may last six months. This pandemic is not over.
- Property stock results are coming thick and fast and frankly, most are not as bad as I expected. Make no mistake, they're ugly. But I had expected worse and while distributions are being delayed and valuations were written down they're mostly staying within their debt covenants which is hugely important. That said it remains a long road back to the glory days.
- Value Capital Partners (VCP) has bought a 5.28% stake in Cashbuild (JSE code: CSB). VCP has a reputation of not being quiet silent shareholders, but also have an excellent record of fixing broken companies. Now Cashbuild is not broken, but worth watching.
- Under the hood of the SYG4IR ETF.
Upcoming events;
Missing the bus
How often do we not buy a stock only to watch it move higher and regret not buying as we think we missed the bus. Then it just continues moving higher and higher?
The mistake we make is that we think there is a limit to the upside of what stocks can do. But consider for example Capitec* (JSE code: CPI), 2000c during the last crisis and it eventually it some R1,500.
There are plenty of other examples, most recently gold miners.
The problem is that while we want a ten-bagger stock we truthfully struggle with the concept of such huge gains. Further, as I have mentioned before a ten-bagger first has to be a one-bagger and as such buying when it's on the move reduces risk markedly.
So we need to double down on our work. What makes this an excellent stock, no the best stock, to own. What are the real fundamentals and growth prospects and will the rest of the market catch on?
Lastly, use a PEG ratio. Is the expected HEPS growth higher than the PE ratio?
This is far from a perfect science, but don't abandon the bus just because you missed the first one.
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.
Offshore
/ BoE, Fed and BOJ all left rates unchanged, BoE ‘explores’ negative rates.
/ TikTok deal with Oracle (and Walmart) confirmed.
/ Wechat ban from midnight, 3.3million users in America and China threatens to expand its “unreliable entities list”. But “TRUMP'S PROHIBITION ON WECHAT IN U.S. IS PUT ON HOLD BY JUDGE”
/ OECD ups global 2020 gdp, but drops ours
/ Snowflake IPO price of $120 and it opened $245.
/ Apple has lost 22.6% from its intraday record high of $137.98 on 2 September, losing around $532 billion in market value.
Local
/ MPC no change and next move expected to be up, late 2021.
/ Level 1 and open borders
/ Comair rescue plans approved and will delist from the JSE, will resume flying in December
/ Eskom takes 139 farms from Municipality of Matjhabeng as security against R3.4bn debt.
/ Results; Pan African Resources, Woolies and Discovery.
Simon Shares
Day 174 of lockdown. Level 1?
- The Foschini Group (JSE code: TFG) trading update spooked the market, but it was the six months to end September. In other words, all lockdown.
- African Rainbow Capital (JSE code: AIL) results including an R750million non-renounceable rights issue. Trading at some 75% discount to the net asset value (NAV). Sure some decent assets, but the market has hated this one since listing.
- Super Group (JSE code: SPG) results were tough, especially as they have vehicle dealerships locally and in the UK.
- Pan African Resources* (JSE code: PAN) results saw debt halve and profits and cash flow essentially doubling. Remains the best gold miner on the JSE.
- Very solid Metrofile* (JSE code: MFL) results and I would think the delisting at 330c remains on track.
- Brexit deals seem stuck again over the hard border.
Upcoming events;
Buying after the lockdown
South Africa is through the peak of the pandemic.
The Lancet Covid-19 Commission classifies 1 case per 100k population as low levels of transmission and WHO says 5 per 100K. The former equates to around 600 new cases per day and the latter 3,000 and we under 1,000.
A second wave remains a real threat, but we're in level 2 with rumours that we'll move to level 1 as the president is speaking Wednesday evening. That'll surely mean borders opening (with restrictions) and maybe some lifting on large event restrictions.
So, should we be rushing out to buy SA Inc. shares? Certainly, they ran hard last week but have come back a bit since then.
Probably we should, but cautiously. Have a shopping list but also have a list of what you want to see;
- Debt levels. Sure business is returning but high levels of debt remain a risk.
- So high cash generation is important.
- Quality. Businesses struggling before the pandemic are best left to their struggles.
- Valuations still matter.
- Some sectors will be slower to recover. Leisure will have an initial boom, but what levels will it drop back to?
- Don't ignore the pandemic winners just because they won already. Some will still have room for more good growth.
- Also, think about the underlying companies. For example Airbus over airlines.
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.
Offshore
/ US markets remain volatile as Nasdaq has worst week since March
/ LVMH Tiffany deal is off/delayed
/ Brexit talks going all messy
/ UK economy grew 6.6% in July as gradual recovery continues
/ Opec turns 60
Local
/ Q2 GDP -51%, or -16.4%
/ Firstrand results
/ Shoprite results
/ Aspen sale & results
/ Zeder CEO quits and the company is looking for a new strategy
/ White & yellow maize above R3k a ton
Simon Shares
Day 167 of lockdown.
- Local Q2 GDP -16.4% (-51% if you annualise it). Makes us one of the worst-hit economies for Q2, not surprising as we did very hard lockdown. Now to get out of the hole and that's going to be the hard part. Of our three main political parties, the honest answer is none of them really have a workable economic policy that we need right now.
- Serious buying of SA inc shares the last two days.
Jeez peeps are buying SA Inc
Top movers in Top40 and MidCap pic.twitter.com/6zgQO5DmHS— Simon Brown (@SimonPB) September 9, 2020
- Shoprite* (JSE code: SHP) results knocked it out the park. Their Sixty60 app is killing it. My local Checkers has a bunch of full-time staff packing and scores of motorcycles outside. Right now they are well ahead of the local competition and even ahead of Amazon Fresh in the US.
Aspen (JSE code: APN) sells commercial rights and intellectual property for the thrombosis business in Europe for R12.6billion. They'll still manufacture & supply the product and will retain the EM part of the business. Good deal and reduces debt significantly. On Bruce Whitfield's show Stephen Saad also commented that they'd never issued new shares, all deals paid for themselves. Sure it got wobbly the last few years, but that remains a significant truth.- AstraZeneca (LSE code: AZN) shares drop 6% after the company announces ‘routine’ safety pause in a coronavirus vaccine trial. Basically somebody got sick from the vaccine. Happens often but does show the problem with rushing the vaccine. Surely we either do it safely or quickly?
* I hold ungeared positions.
Surprises to the upside
We're seeing lots of really bad results now that companies results include the second quarter. But the market is expecting this and in many instances not even selling the stock down much if at all as the bad results roll in.
The flip side is that when we see some decent results the market loves that news and sends the stock soaring higher.
This is because right now our expectation is for bad results so good is a pleasant surprise. I have often spoken about the fact that results or other announcements are often not about the actual numbers, rather it is about the expectations relative to those numbers.
What we are seeing is in part a two-part market. Remembering back in hard lockdown when the question was if the rebound would be V-shaped? Or perhaps W, U with some even suggesting L shaped. Well, Old Mutual says actually it is K shaped.
This makes sense. In the US the upper leg of the K is big tech socks with the rest being the lower leg of the K.
Locally miners are the upper leg and financials the lower leg.
So now we can put this together, K shaped recover and the market-loving positive surprises. Hunt out those top quality companies in the lower leg as they're cheap and if they're quality they'll not only recover but will do so quickly and with great profits. This is where we'll find stocks that still have great upside potential.
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.
Offshore
/ US unemployment 8.4% (Temporary Census work (+238,000 jobs) accounted for around one-sixth of the August gain of 1.4 million jobs)
/ Thursday sell-off with Friday red, but less bad. Monday closed for labour day.
/ India bans another 188 Chinese apps
/ Carnival Corporation's Costa Cruises to Restart Cruise Operations This Weekend out of Italy.
/ Tesla does not go into the S&P500. Instead Etsy, Teradyne and Catalent added. IN order to get into the S&P500 “Companies must be U.S. based, and listed on either the NYSE, the Nasdaq or the Cboe. They also must have a market cap of more than $8.2 billion, and report four straight quarters of profit as determined by U.S. generally accepted accounting principles (GAAP).”
Local
/ Prosus has now gone into the Euro Stoxx 50 and EUR2bn passive inflows should support the share price.
/ Local GDP on Tuesday
/ Results; Truworths, Northam & Implats, Libstar and ADvTech
/ Spur execs leaving (four going by year-end including CEO & COO).
/ Icasa delays spectrum auction to March 2021
Simon Shares
Day 160 of lockdown.
- Northam (JSE code: NHM) results had two comments that caught my attention. They are aggressively buying back their Zambezi pref shares (JSE code: ZPLP). The second was that the amount of rhodium used in a single catalytic converter was 0.3g in 2015 and will be 0.45g in 2025. A 50% increase that supports the price increase.
- Hammerson (JSE code: HMN) have consolidated their shares 5:1 ahead of a massive rights issue which either you follow or exit because if you don't follow you'll be diluted out of existence.
Upcoming events;
- 03 September ~ JSE Power Hour: Under the hood of a passive robo advisor
Level 2 winners?
We're now able to travel between provinces, visit friends and family, go out for dinner and even back to the office. Leisure is back, but is it investable yet?
So who are the first winners as we ease out of hard lockdown?
On the one hand, pent up demand is real. I was at a bush lodge over the weekend and it was full and trying to find somewhere for the September long weekend is proving tricky. So people are out spending. Reports from restaurants in late August are they were packed but then I was at dinner on a wet and cold Tuesday evening and things were quiet.
So the current surge is likely very much just pent up demand and money saved. But what's important is how long this pent up demand lasts and what's real?
- Easy wins are the prepared food space, quick service and sit down dining. But we're off a very low base and I think we'll start seeing discounting as the initial surge dies out and increased costs in terms of PPE and social distancing reducing capacity.
- Hotels are harder, especially those that cater to conferences and business travel. Personally, the idea of a hotel still doesn't sit easily with me. Whereas an Airbnb is something I am happy to do.
- Banks are cheap and the three reported so far all expressed cautious confidence about the second half. But I am less certain, payment holidays will start expiring and the broader economy is hurting.
- That said asset managers and stockbrokers are going to report record results. My preferred is Coronation* (JSE code: CML), Purple* (JSE code: PPE) and Sygnia (JSE code: SYG).
- Miners are certainly in a sweet spot. Pan African Resources* (JSE code: PAN) trading update for the year ending June 2020 had average R15.67 exchange rate and the average gold price was US$1,574. So lots more upside in the current period if the levels hold where they are now.
- Food retail should be doing fine with lower LSM the easy winner as people shop down.
- Food producers are under pressure with increased PPE costs and maize price increases hurting margins in those sectors in which maize is an input.
- Homebuilders, we're seeing massive demand in lower-priced units under R1.5million in large part due to low rates and to a smaller degree in work-from-home. Balwin (JSE code: BWN) is well placed but it a long road home even as they sit with solid land banks and low debt.
- Infrastructure spending is all the rage globally and here we have one clear stand out - Afrimat (JSE code: AFT).
- DIY gets real interesting and Cashbuiild (JSE code: CSB) noted in their results that "group revenue for the six weeks after year-end has increased by 22% on the comparable six week period.". We've seen this in the US with Home Depot and Lowes both having knock out results.
- Pharma, preferred over hospital groups but I do think likely the later has seen the worst of bed nights and should start seeing that increase.
- Property, no thanks.
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.