All Share
All Share
APRIL 2011
Market Report Just like a Hollywood blockbuster film, the month of March was action-packed, from rising inflation concerns around the globe; to credit rating downgrades in the Euro-zone; to raised tensions and the outbreak of civil war in North Africa and the Middle East; and a major earthquake and nuclear crisis in Japan. Considering that any one of the above mentioned headlines would have caused global markets to pull back, the fact that we got through all of it to end the month relatively on par is testament to the resilience of markets of late and the sound economic fundamentals providing support.
Resources
We might have only ended the month slightly down, with the JSE All Share down 0.21% and the S&P 500 down 0.1%, but it was still a very bumpy ride as volatility spiked at various occasions throughout the month. Risk aversion and volatility measures peaked just after the tsunami hit Japan and the precarious state of the nuclear power plant was revealed - which caused a sharp fall in Japanese markets - and around the same time tensions in Libya and the Middle East escalated further. These developments really tested global markets as equities were sold off across the sectors. However as the nuclear cloud hanging over Japan lifted as efforts to contain the radiation seemed to be working and the UN security council approved the principle of imposing a no-fly zone over Libya; markets staged a strong comeback as traders seemed convinced that the global economy can absorb the supply-chain disruptions (caused by the damage to Japan and higher oil prices from tensions in North Africa & Middle East). This comeback was not purely emotional and had some sound economic backing as the US labour market continued to show signs of improvement by posting its fourth straight decrease in its jobless rate to 8.8% in March (from 8.9% in February). This was particularly good news as it showed that the world‟s largest economy is weathering the highest energy prices in more than two years and underlining the Federal Reserve‟s assessment that the US recovery is on a firmer footing. China seems to be successfully pulling the breaks on its rampant economy while still managing to keep growth in tact as supported by decreasing Manufacturing PMI numbers which are still keeping within expansionary levels (above 50).
Industrials
On a less positive note though, March also saw a flurry of sovereign credit downgrades for some of the peripheral Euro-zone states, with Greece, Portugal and Spain all coming under the sovereign chopping block. Portugal seems poised to follow the path of Greece and Ireland and accept a bailout form the IMF and the rest of the Euro area. However the Portuguese don‟t seem to be willing to accept the same type of austerity treatment that Greece and Ireland got as the country‟s parliament rejected the package of budget cuts proposed by Prime Minister Jose Socrates, prompting him to offer his resignation. They do have a point though when you consider how little the IMF-EU support programmes have done to reduce market interest rates for Greece and Ireland and how the credit crunch situations in these nations have exacerbated the adverse affects of severe fiscal cutbacks on growth prospects. Greece is still stuck in recession and Ireland‟s economy is only sinking further into the mud. As much as 20 billion euros of bonds will need to be sold this year to finance the nation‟s budget and cover maturing debt and it doesn‟t look as if markets are willing to come up with that kind of cash, thus a bailout might be the only viable option.
Financials
Market Indicators 31 March 2011 Index
Value
All Share Resources Industrials Financials S&P 500 FTSE Rand/USD Rand/GBP USD/Euro Gold ($) Platinum ($) Brent Oil ($)
32204 57241 26767 21609 1326 5909 6.81 10.93 1.41 1439 1773 117.2
Monthly Move (%)
▼0.21% ▼2.96% ▲1.77% ▲1.88% ▼0.1% ▼1.42% ▲2.74% ▲2.63% ▼2.75% ▲1.98% ▼1.72% ▲4.64%
The above candlestick data represents the daily movement of each index for the past month. Blue represents upward movement and red represents downward movement.
Back home, the South African Reserve Bank released a quarterly bulletin for the first quarter of 2011 which showed that final demand for goods and services from households, government and firms grew at a robust 4.2% in Q4 and household consumption spending maintained a solid 5% rate of growth. These figures support the general consensus that our local economy is firmly on the path of recovery, but as was reiterated by Reserve Bank Governor, Gill Marcus, our local economy is still performing well below potential – especially when put alongside an unemployment rate of 24%. Thus the decision to leave interest rates unchanged in March despite the raised inflation forecasts (currently at 3.7% and expected to average 4.7% in 2011 and 5.7% in 2012) confirms the view by the MPC that the inflationary pressures prevalent at the moment are “cost push” rather than “demand pull” forces; the likes of which respond little to interest rate adjustments. We thus welcome the emphasis the MPC is placing on the state of the economy and on the absence of demand side pressures on the economy, as the last thing our recovering economy needs is a too hasty upward adjustment in rates.
Company results Cashbuild Ltd (Interim): HEPS 528.3c ; PE 10.9 ; Dividend yield 2.9% ; details hereunder… Pinnacle Technology Holdings Ltd (Interim): HEPS 48.0c ; PE 7.5 ; Dividend yield 2.2% ; details hereunder…
Trading updates Share Mr Price Clicks PPC Pinnacle Cadiz
Price 6195 4330 2395 695 280
Increase / Decrease Increase Increase Decrease Increase Decrease
Expected change in HEPS 20% 20-25% 30% 46.5-49.5cps 45%
Snippets Local vs offshore equities…
Corporate Cash Management Rates Up to 5.47% net – Call Deposits Effective rates from 5.00% to 6.20% - Fixed Deposits
VISIT US AT WWW.PRIVATECLIENT.CO.ZA
TELEPHONE: +2721 671 1220 Directors:
GAJ Alexander BCom Hons (FAPM) (Tax) CA (SA) LLM
AS Ratcliffe BCom (HDip Tax) Professional Accountant (SA) CFP
Company Results Cashbuild Limited – Interim results for the period ended December 2010 Headline EPS
528.3c
Historical PE
10.9
HEPS growth
48.1%
Turnover growth
6.6%
ROE
39.5%
NAV per share
2893.8c
Dividend yield
2.9%
Share price
R92.35
Cashbuild is southern Africa‟s largest retailer of quality building materials and associated products, selling direct to a cash-paying customer base through a constantly expanding chain of stores. Cashbuild reported a strong set of results for the six months ended December 2010, despite tough trading conditions with selling price inflation of only 2%. The group reported growth in customer transactions of 5%, of which 2% was attributable to the existing store base. Revenue came in 7% higher at R2.9bn, with the existing store base accounting for 4% of the increase and the remaining 3% attributable to the 12 new stores opened. Gross profit managed to jump 17%, resulting in the gross margin improving from 20.3% to 22.3%. EBIT jumped 45% to R168m, while net finance income jumped 67%. This contributed to EBT growth of 47% to R183m. Profit for the period ended 47% higher, translating into a normalised effective tax rate of 31.7%. Consequentially adjusted HEPS jumped 48% from 356.6 cents to 528.3 cents. The difference between the group's reported HEPS of 280.5 cents (2009: 356.6 cents) and the adjusted HEPS of 356.6 cents was due to the BEE transaction, in which R50m worth of the ordinary shares were repurchased by the group from the Cashbuild Empowerment Trust. Dividend An interim dividend of 157cps was declared, 48% higher than the previous period. Cash generation remained strong for the period, benefiting from a 3% decrease in stock levels and well controlled trade receivables. During the period, four new stores were opened, five stores were refurbished and one store was relocated. Prospects Management remains optimistic about the future revenue prospects in the coming quarter. The group reported a revenue increase of 5% in the first nine trading weeks since the year-end on the comparable nine weeks. However, management anticipates gross profit margin pressure in the second half. The group's high ROE, strong cash generation and strong balance sheet are indicative of the company's strength and potential going forward. The group's niche focus of building supplies for the lower LSM segment should sustain growth in the medium term. Back
Pinnacle Technology Holdings Ltd – Interim results for the period ended December 2010 Headline EPS
48.0c
Historical PE
7.5
HEPS growth
39.9%
Turnover Growth
43.3%
ROE
37.7%
NAV per share
331.1c
Dividend yield
2.2%
Share price
R6.95
Pinnacle is a diversified group active in all areas of Information, Communication and Technology hardware, software and services. The group offers a world-class selection of branded products including Microsoft, VMWare, Apacer, Dell, Hewlett-Packard, Sun, Intel and IBM. The group reported a pleasing set of results for the interim to December 2010. Revenue increased by 43% to R2.1bn attributable to a 25% organic growth as well as the acquisitions of Axiz and CentraFin. Gross profit was 35% higher at R300.6m but the gross margin decreased from 15.2% to 14.3%. This was partly attributable to an unfavourable product mix and the group will focus on higher margin products going forward. Some of the divisions were placed under pressure due to a stronger Rand and as the government's IT investment remaining below expectations. As a result, operating margin was relatively unchanged at 5.6%. Headline earnings rose by 39% to R86.9m, positively impacted by the acquisition of Axiz. Dividend Cash generation was poor as working capital increased significantly to R144m due to higher trade debtors and CentraFin's term loans. No interim dividend was declared for the period under review. Prospects Pinnacle continues to diversity its revenue stream with the addition of international brands which includes hardware, software and infrastructure technologies and the group boasts a high ROE that is consistently ahead of 30%. The acquisition of Axiz provides Pinnacle the opportunity to expand or develop its footprint in large and medium corporate market segments. In addition, the vertical integration of CentraFin should enhance sales in Explix Business Solutions, Pinnacle Africa, WorkGroup, DataNet and Infrasol through financial services rendered to customers. This should support further improvement in sales and earnings in the period ahead. Whilst the economic outlook appears positive, uncertainty remains in the forthcoming period regarding the retail market and government forecast. Large swings in foreign exchange profits/losses also add a level of volatility to its earnings. Back
Snippets Local vs offshore equities – Trevor Garvin and Matthew de Wet, Nedgroup Investments Over the past year there has been much talk about the strength of the rand and the performance of local stock markets. The fact is that for the last decade the local stock market has been the place to be, having produced a return of over 400% over the period. This equates to a return of inflation + 12% pa, well in excess of the long-run average return of inflation + 8% pa. Compare this to an investment in the US stock market which is close to flat in dollars and negative in rands because the rand has been stronger than the dollar over the past decade. Let‟s explore now the sources of return from equity markets as well as current valuations versus valuations a decade ago, to help understand this positioning. The sources of return: The 8% pa real return that local equities have delivered over the past 50 years is made up of the following three drivers of equity returns: • Earnings growth: This is largely dependent on a country‟s economic growth over the very long term as well as changes in corporate profit margins over the shorter term. Over the past 50 years earnings growth has averaged 3.5% pa in real terms (after inflation). • Dividends: The average dividend yield over the past 50 years has been 4.5%. • Price to Earnings re-rating: Changes in investor sentiment – either positive or negative – cause a share‟s P/E ratio (the price investors are prepared to pay for the earnings of the companies that make up the market) to re-rate, driving share prices up or down. Over the long term this tends to mean revert or revert to its long-run average (which means it has little impact), but in the short and medium term these fluctuations may significantly add to or detract from total returns. The average P/E for the JSE All Share Index over the past 20 years has been around 14.5. The current P/E of the market is over 17, which in statistical terms is more than one standard deviation above the long term average. Simplistically, this would indicate that the market is now showing signs of being expensive. This wasn‟t the case 10 years ago when the P/E was 12. This was more than one standard deviation below the long term average which indicated a cheaper than average market and possibly a good time to invest. The current P/E of 17 is 45% higher than it was 10 years ago, which equates to a 4% pa expansion in the rating of the market. Add this 4% pa „re-rating‟ to our long-run average annual return of inflation + 8% and we get close to our actual 10-year annual return of Inflation + 12%. In other words, the great 10-year period that we have just experienced in South Africa is largely due to an upward re-rating of the market. It is unlikely that the next five to 10 years will be as good. If the P/E reverts to average levels over the next five to 10 years, it will reduce „average‟ equity returns by 2% to 4% pa over the period. Furthermore, because the dividend yield is currently 2% lower than the long-run average, the contribution to total returns from dividends is also likely to be lower. A more likely scenario over the next five to 10 years is for local equity markets to produce returns in the region of inflation +2% to 4% pa, which is lower than what we have become accustomed to over the last decade. Offshore market P/Es, bond yields and cash rates are close to 20-year lows Using the S&P 500 as a proxy for global equities, as oppose to our local JSE, its current P/E of 17 (well below the 20-year average) is close to the lowest point it‟s been in the past 20 years. Although 17 is not low in absolute terms, bond yields and cash rates in the US are at historic lows, a situation that has historically supported higher valuations due to the increased relative value of equity earnings compared to bond and cash yields. Furthermore, corporate balance sheets in the US are cash-laden which could induce share-buybacks or increase dividend payouts. A reducing US P/E over the last decade has reduced returns The long run average return from the US market has been inflation + 6% pa (in dollars) but over the past decade, returns have been close to zero. This is because ten years ago, valuations were sky high at 30x earnings. The reduction of the P/E from 30 to 17 over the past decade has had the impact of reducing returns by about 6% pa. Because inflation has been very low over the past 10 years in the US, one can see that this P/E reversion has accounted for the bulk of the low returns that investors have experienced. [Note: the upward spike in 2009 was as a result of company earnings falling to extremely low levels in the aftermath of the credit crisis, distorting the average upwards.] Currency movements have reduced returns for rand investors over the past decade For South African (SA) investors in offshore assets, currency movements can also play a material role in their total rand return. Large movements in the rand relative to the US dollar, pound sterling or euro can add to or detract from total returns to SA investors. Over the past 10 years, currency fluctuations have reduced returns to SA investors in offshore markets by 2% pa. We think that over the next five to 10 years it is likely to add significantly to returns SA investors will receive by investing offshore. A well-known indicator of how one currency should behave relative to another is the Purchasing Power of Parity (PPP), which expects one country‟s currency to weaken relative to another by the inflation differential between the two countries over time. The graph below plots the rand/dollar exchange rate over the past 40 years and shows how one country‟s currency may remain over - or under-valued relative to the other over extended periods of time. It also shows that it does tend to return to PPP (the solid grey line in the centre).
Investing offshore while the rand is strong may enhance future returns Investing offshore while the rand is strong may enhance future returns The graph further indicates that the rand is currently in over-valued (strong) territory, with its „fair‟ value being around R8.50 to the US dollar. We do not necessarily anticipate a quick, short term correction, but investing offshore at these levels is likely to enhance returns when the rand reverts to more normal levels. The graph below shows the percentage over- or under-valuation of the rand against the US dollar over the past 40 years, as per the PPP model above. The graph illustrates that the rand is approximately 30% over-valued at present, which is at it‟s most expensive level since the early 1980‟s. Should this revert over the next five to 10 years, it could add 3%-5% pa to SA investors‟ returns.
The analysis tells us that offshore equities offer better value than local equities The analysis illustrates two key points: • Offshore equities are currently demonstrating better value than domestic equities. • The rand is currently overvalued on a PPP basis. The easing of restrictions on international exposure for retirement funds has come at a good time, with retirement funds now able to have an exposure of up to 25% of their total asset base. Trustees who increase their offshore equity allocation at this time (at the expense of local equities), will be well positioned to benefit from both the expected re-rating of offshore stocks relative to SA stocks and the reversion of the local currency to more normal levels. * The opinion and comment in this newsletter is opinion and comment only and does not in any way constitute financial advice. For any financial decision please consult one of our PCH professional financial advisers.
Corporate Cash Manager Rates FUND CALL ACCOUNT
CALL MONEY FUND
Cash Manager Rates at 01 April 2011 BALANCE RATE 0.00 - 9.999.99 5.00 10.000 - 24.999.99 5.00 25.000 - 49.999.99 5.00 50.000 - 99.999.99 5.00 100.000 - 249.999.99 5.00 250.000 - 499.999.99 5.57 500.000 - 999.999.99 5.57 1.000.000 - 9.999.999.99 5.57 10.000.000 upwards 5.57
FEE 1.60 1.10 0.85 0.60 0.45 0.35 0.25 0.15 0.10
NET RATE 3.40 3.90 4.15 4.40 4.55 5.22 5.32 5.42 5.47
Dividends payable Dividends in LDT order Company AECI Ltd (AECI)
Decl 22-Feb
LDT 08-Apr
Pay 18-Apr
Amt 135
Curr ZARc
Capital & Counties Properties PLC (CAPCO)
02-Mar
08-Apr
19-May
1
GBPp
Group Five Ltd (GROUP 5)
14-Feb
08-Apr
18-Apr
52
ZARc
Marshall Monteagle PLC (MARSHALL)
29-Mar
08-Apr
29-Apr
1.5
USDc
Mondi Ltd (MONDILTD)
21-Feb
08-Apr
12-May
16.5
EURc
Mondi plc (MONDIPLC)
21-Feb
08-Apr
12-May
16.5
EURc
Old Mutual plc (OLDMUTUAL)
08-Mar
08-Apr
31-May
2.9
GBPp
Steinhoff International Holdings Ltd (SHFINV-PREF)
01-Mar
08-Apr
18-Apr
362
ZARc
Wilson Bayly Holmes - Ovcon Ltd (WBHO)
21-Feb
08-Apr
18-Apr
110
ZARc
African Oxygen Ltd (AFROX)
16-Feb
14-Apr
26-Apr
8
ZARc
Cashbuild Ltd (CASHBIL)
29-Mar
14-Apr
26-Apr
157
ZARc
Netcare Ltd (NTC PREF)
01-Apr
19-Apr
03-May
341.6
ZARc
Sanlam Ltd (SANLAM)
10-Mar
19-Apr
10-May
115
ZARc
TeleMasters Holdings Ltd (TELEMASTR)
01-Apr
19-Apr
03-May
4
ZARc
Country Bird Holdings Ltd (CBH)
27-Jan
06-May
16-May
11.1
ZARc
Cipla Medpro South Africa Ltd (CIPLAMED)
17-Mar
06-May
16-May
6
ZARc
AFGRI Ltd (AFGRI)
02-Mar
12-May
23-May
24.15
ZARc
JSE Ltd (JSE)
15-Mar
20-May
30-May
210
ZARc
Spanjaard Ltd (SPANJAARD)
28-Feb
20-May
30-May
16
ZARc
Basil Read Holdings Ltd (BASREAD)
24-Mar
27-May
06-Jun
30
ZARc
Capital Shopping Centres Group PLC (CAPSHOP)
23-Feb
27-May
21-Jun
10
GBPp
Capitec Bank Holdings Ltd (CAPITEC)
30-Mar
17-Jun
27-Jun
205
ZARc
FULL CONTACT DETAILS CAPE TOWN 46 Main Road Claremont 7708 Tel: +27 21 671 1220
PO Box 24033 Claremont 7735 Fax: +27 21 671 1149
E-MAIL: [email protected]
PRETORIA 142 Gillies Road, Glenwood Village Lynnwood Glen 0081 Tel: +27 12 361 1929
WEB:
PO Box 74924 Lynnwood Ridge 0040 Fax: +27 12 361 1929
www.privateclient.co.za
Disclaimer This document does not constitute an offer or the solicitation of an offer for the sale or purchase of any security. While every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given and neither responsibility nor liability is accepted by any member of the Private Client Group (PCH), its employees and agents, as to the accuracy of the information contained herein. Any member of PCH cannot be held liable for the use of and reliance on the opinions, estimates and findings. All opinions, estimates and findings contained in this document may be changed after distribution at any time without notice. This document has been prepared by PCH from resources believed reliable. PCH is an Investment Manager registered with the Financial Services Board. The company is a Licensed Financial Services Provider in terms of FAIS (registration number 613). The recipients of this document are urged to seek independent advice from their Private Client Holdings Wealth Manager or other independent advice with regard to the securities and investments referred to in this document. AS MEMBERS OF:
APRIL 2011
Market Report Just like a Hollywood blockbuster film, the month of March was action-packed, from rising inflation concerns around the globe; to credit rating downgrades in the Euro-zone; to raised tensions and the outbreak of civil war in North Africa and the Middle East; and a major earthquake and nuclear crisis in Japan. Considering that any one of the above mentioned headlines would have caused global markets to pull back, the fact that we got through all of it to end the month relatively on par is testament to the resilience of markets of late and the sound economic fundamentals providing support.
Resources
We might have only ended the month slightly down, with the JSE All Share down 0.21% and the S&P 500 down 0.1%, but it was still a very bumpy ride as volatility spiked at various occasions throughout the month. Risk aversion and volatility measures peaked just after the tsunami hit Japan and the precarious state of the nuclear power plant was revealed - which caused a sharp fall in Japanese markets - and around the same time tensions in Libya and the Middle East escalated further. These developments really tested global markets as equities were sold off across the sectors. However as the nuclear cloud hanging over Japan lifted as efforts to contain the radiation seemed to be working and the UN security council approved the principle of imposing a no-fly zone over Libya; markets staged a strong comeback as traders seemed convinced that the global economy can absorb the supply-chain disruptions (caused by the damage to Japan and higher oil prices from tensions in North Africa & Middle East). This comeback was not purely emotional and had some sound economic backing as the US labour market continued to show signs of improvement by posting its fourth straight decrease in its jobless rate to 8.8% in March (from 8.9% in February). This was particularly good news as it showed that the world‟s largest economy is weathering the highest energy prices in more than two years and underlining the Federal Reserve‟s assessment that the US recovery is on a firmer footing. China seems to be successfully pulling the breaks on its rampant economy while still managing to keep growth in tact as supported by decreasing Manufacturing PMI numbers which are still keeping within expansionary levels (above 50).
Industrials
On a less positive note though, March also saw a flurry of sovereign credit downgrades for some of the peripheral Euro-zone states, with Greece, Portugal and Spain all coming under the sovereign chopping block. Portugal seems poised to follow the path of Greece and Ireland and accept a bailout form the IMF and the rest of the Euro area. However the Portuguese don‟t seem to be willing to accept the same type of austerity treatment that Greece and Ireland got as the country‟s parliament rejected the package of budget cuts proposed by Prime Minister Jose Socrates, prompting him to offer his resignation. They do have a point though when you consider how little the IMF-EU support programmes have done to reduce market interest rates for Greece and Ireland and how the credit crunch situations in these nations have exacerbated the adverse affects of severe fiscal cutbacks on growth prospects. Greece is still stuck in recession and Ireland‟s economy is only sinking further into the mud. As much as 20 billion euros of bonds will need to be sold this year to finance the nation‟s budget and cover maturing debt and it doesn‟t look as if markets are willing to come up with that kind of cash, thus a bailout might be the only viable option.
Financials
Market Indicators 31 March 2011 Index
Value
All Share Resources Industrials Financials S&P 500 FTSE Rand/USD Rand/GBP USD/Euro Gold ($) Platinum ($) Brent Oil ($)
32204 57241 26767 21609 1326 5909 6.81 10.93 1.41 1439 1773 117.2
Monthly Move (%)
▼0.21% ▼2.96% ▲1.77% ▲1.88% ▼0.1% ▼1.42% ▲2.74% ▲2.63% ▼2.75% ▲1.98% ▼1.72% ▲4.64%
The above candlestick data represents the daily movement of each index for the past month. Blue represents upward movement and red represents downward movement.
Back home, the South African Reserve Bank released a quarterly bulletin for the first quarter of 2011 which showed that final demand for goods and services from households, government and firms grew at a robust 4.2% in Q4 and household consumption spending maintained a solid 5% rate of growth. These figures support the general consensus that our local economy is firmly on the path of recovery, but as was reiterated by Reserve Bank Governor, Gill Marcus, our local economy is still performing well below potential – especially when put alongside an unemployment rate of 24%. Thus the decision to leave interest rates unchanged in March despite the raised inflation forecasts (currently at 3.7% and expected to average 4.7% in 2011 and 5.7% in 2012) confirms the view by the MPC that the inflationary pressures prevalent at the moment are “cost push” rather than “demand pull” forces; the likes of which respond little to interest rate adjustments. We thus welcome the emphasis the MPC is placing on the state of the economy and on the absence of demand side pressures on the economy, as the last thing our recovering economy needs is a too hasty upward adjustment in rates.
Company results Cashbuild Ltd (Interim): HEPS 528.3c ; PE 10.9 ; Dividend yield 2.9% ; details hereunder… Pinnacle Technology Holdings Ltd (Interim): HEPS 48.0c ; PE 7.5 ; Dividend yield 2.2% ; details hereunder…
Trading updates Share Mr Price Clicks PPC Pinnacle Cadiz
Price 6195 4330 2395 695 280
Increase / Decrease Increase Increase Decrease Increase Decrease
Expected change in HEPS 20% 20-25% 30% 46.5-49.5cps 45%
Snippets Local vs offshore equities…
Corporate Cash Management Rates Up to 5.47% net – Call Deposits Effective rates from 5.00% to 6.20% - Fixed Deposits
VISIT US AT WWW.PRIVATECLIENT.CO.ZA
TELEPHONE: +2721 671 1220 Directors:
GAJ Alexander BCom Hons (FAPM) (Tax) CA (SA) LLM
AS Ratcliffe BCom (HDip Tax) Professional Accountant (SA) CFP
Company Results Cashbuild Limited – Interim results for the period ended December 2010 Headline EPS
528.3c
Historical PE
10.9
HEPS growth
48.1%
Turnover growth
6.6%
ROE
39.5%
NAV per share
2893.8c
Dividend yield
2.9%
Share price
R92.35
Cashbuild is southern Africa‟s largest retailer of quality building materials and associated products, selling direct to a cash-paying customer base through a constantly expanding chain of stores. Cashbuild reported a strong set of results for the six months ended December 2010, despite tough trading conditions with selling price inflation of only 2%. The group reported growth in customer transactions of 5%, of which 2% was attributable to the existing store base. Revenue came in 7% higher at R2.9bn, with the existing store base accounting for 4% of the increase and the remaining 3% attributable to the 12 new stores opened. Gross profit managed to jump 17%, resulting in the gross margin improving from 20.3% to 22.3%. EBIT jumped 45% to R168m, while net finance income jumped 67%. This contributed to EBT growth of 47% to R183m. Profit for the period ended 47% higher, translating into a normalised effective tax rate of 31.7%. Consequentially adjusted HEPS jumped 48% from 356.6 cents to 528.3 cents. The difference between the group's reported HEPS of 280.5 cents (2009: 356.6 cents) and the adjusted HEPS of 356.6 cents was due to the BEE transaction, in which R50m worth of the ordinary shares were repurchased by the group from the Cashbuild Empowerment Trust. Dividend An interim dividend of 157cps was declared, 48% higher than the previous period. Cash generation remained strong for the period, benefiting from a 3% decrease in stock levels and well controlled trade receivables. During the period, four new stores were opened, five stores were refurbished and one store was relocated. Prospects Management remains optimistic about the future revenue prospects in the coming quarter. The group reported a revenue increase of 5% in the first nine trading weeks since the year-end on the comparable nine weeks. However, management anticipates gross profit margin pressure in the second half. The group's high ROE, strong cash generation and strong balance sheet are indicative of the company's strength and potential going forward. The group's niche focus of building supplies for the lower LSM segment should sustain growth in the medium term. Back
Pinnacle Technology Holdings Ltd – Interim results for the period ended December 2010 Headline EPS
48.0c
Historical PE
7.5
HEPS growth
39.9%
Turnover Growth
43.3%
ROE
37.7%
NAV per share
331.1c
Dividend yield
2.2%
Share price
R6.95
Pinnacle is a diversified group active in all areas of Information, Communication and Technology hardware, software and services. The group offers a world-class selection of branded products including Microsoft, VMWare, Apacer, Dell, Hewlett-Packard, Sun, Intel and IBM. The group reported a pleasing set of results for the interim to December 2010. Revenue increased by 43% to R2.1bn attributable to a 25% organic growth as well as the acquisitions of Axiz and CentraFin. Gross profit was 35% higher at R300.6m but the gross margin decreased from 15.2% to 14.3%. This was partly attributable to an unfavourable product mix and the group will focus on higher margin products going forward. Some of the divisions were placed under pressure due to a stronger Rand and as the government's IT investment remaining below expectations. As a result, operating margin was relatively unchanged at 5.6%. Headline earnings rose by 39% to R86.9m, positively impacted by the acquisition of Axiz. Dividend Cash generation was poor as working capital increased significantly to R144m due to higher trade debtors and CentraFin's term loans. No interim dividend was declared for the period under review. Prospects Pinnacle continues to diversity its revenue stream with the addition of international brands which includes hardware, software and infrastructure technologies and the group boasts a high ROE that is consistently ahead of 30%. The acquisition of Axiz provides Pinnacle the opportunity to expand or develop its footprint in large and medium corporate market segments. In addition, the vertical integration of CentraFin should enhance sales in Explix Business Solutions, Pinnacle Africa, WorkGroup, DataNet and Infrasol through financial services rendered to customers. This should support further improvement in sales and earnings in the period ahead. Whilst the economic outlook appears positive, uncertainty remains in the forthcoming period regarding the retail market and government forecast. Large swings in foreign exchange profits/losses also add a level of volatility to its earnings. Back
Snippets Local vs offshore equities – Trevor Garvin and Matthew de Wet, Nedgroup Investments Over the past year there has been much talk about the strength of the rand and the performance of local stock markets. The fact is that for the last decade the local stock market has been the place to be, having produced a return of over 400% over the period. This equates to a return of inflation + 12% pa, well in excess of the long-run average return of inflation + 8% pa. Compare this to an investment in the US stock market which is close to flat in dollars and negative in rands because the rand has been stronger than the dollar over the past decade. Let‟s explore now the sources of return from equity markets as well as current valuations versus valuations a decade ago, to help understand this positioning. The sources of return: The 8% pa real return that local equities have delivered over the past 50 years is made up of the following three drivers of equity returns: • Earnings growth: This is largely dependent on a country‟s economic growth over the very long term as well as changes in corporate profit margins over the shorter term. Over the past 50 years earnings growth has averaged 3.5% pa in real terms (after inflation). • Dividends: The average dividend yield over the past 50 years has been 4.5%. • Price to Earnings re-rating: Changes in investor sentiment – either positive or negative – cause a share‟s P/E ratio (the price investors are prepared to pay for the earnings of the companies that make up the market) to re-rate, driving share prices up or down. Over the long term this tends to mean revert or revert to its long-run average (which means it has little impact), but in the short and medium term these fluctuations may significantly add to or detract from total returns. The average P/E for the JSE All Share Index over the past 20 years has been around 14.5. The current P/E of the market is over 17, which in statistical terms is more than one standard deviation above the long term average. Simplistically, this would indicate that the market is now showing signs of being expensive. This wasn‟t the case 10 years ago when the P/E was 12. This was more than one standard deviation below the long term average which indicated a cheaper than average market and possibly a good time to invest. The current P/E of 17 is 45% higher than it was 10 years ago, which equates to a 4% pa expansion in the rating of the market. Add this 4% pa „re-rating‟ to our long-run average annual return of inflation + 8% and we get close to our actual 10-year annual return of Inflation + 12%. In other words, the great 10-year period that we have just experienced in South Africa is largely due to an upward re-rating of the market. It is unlikely that the next five to 10 years will be as good. If the P/E reverts to average levels over the next five to 10 years, it will reduce „average‟ equity returns by 2% to 4% pa over the period. Furthermore, because the dividend yield is currently 2% lower than the long-run average, the contribution to total returns from dividends is also likely to be lower. A more likely scenario over the next five to 10 years is for local equity markets to produce returns in the region of inflation +2% to 4% pa, which is lower than what we have become accustomed to over the last decade. Offshore market P/Es, bond yields and cash rates are close to 20-year lows Using the S&P 500 as a proxy for global equities, as oppose to our local JSE, its current P/E of 17 (well below the 20-year average) is close to the lowest point it‟s been in the past 20 years. Although 17 is not low in absolute terms, bond yields and cash rates in the US are at historic lows, a situation that has historically supported higher valuations due to the increased relative value of equity earnings compared to bond and cash yields. Furthermore, corporate balance sheets in the US are cash-laden which could induce share-buybacks or increase dividend payouts. A reducing US P/E over the last decade has reduced returns The long run average return from the US market has been inflation + 6% pa (in dollars) but over the past decade, returns have been close to zero. This is because ten years ago, valuations were sky high at 30x earnings. The reduction of the P/E from 30 to 17 over the past decade has had the impact of reducing returns by about 6% pa. Because inflation has been very low over the past 10 years in the US, one can see that this P/E reversion has accounted for the bulk of the low returns that investors have experienced. [Note: the upward spike in 2009 was as a result of company earnings falling to extremely low levels in the aftermath of the credit crisis, distorting the average upwards.] Currency movements have reduced returns for rand investors over the past decade For South African (SA) investors in offshore assets, currency movements can also play a material role in their total rand return. Large movements in the rand relative to the US dollar, pound sterling or euro can add to or detract from total returns to SA investors. Over the past 10 years, currency fluctuations have reduced returns to SA investors in offshore markets by 2% pa. We think that over the next five to 10 years it is likely to add significantly to returns SA investors will receive by investing offshore. A well-known indicator of how one currency should behave relative to another is the Purchasing Power of Parity (PPP), which expects one country‟s currency to weaken relative to another by the inflation differential between the two countries over time. The graph below plots the rand/dollar exchange rate over the past 40 years and shows how one country‟s currency may remain over - or under-valued relative to the other over extended periods of time. It also shows that it does tend to return to PPP (the solid grey line in the centre).
Investing offshore while the rand is strong may enhance future returns Investing offshore while the rand is strong may enhance future returns The graph further indicates that the rand is currently in over-valued (strong) territory, with its „fair‟ value being around R8.50 to the US dollar. We do not necessarily anticipate a quick, short term correction, but investing offshore at these levels is likely to enhance returns when the rand reverts to more normal levels. The graph below shows the percentage over- or under-valuation of the rand against the US dollar over the past 40 years, as per the PPP model above. The graph illustrates that the rand is approximately 30% over-valued at present, which is at it‟s most expensive level since the early 1980‟s. Should this revert over the next five to 10 years, it could add 3%-5% pa to SA investors‟ returns.
The analysis tells us that offshore equities offer better value than local equities The analysis illustrates two key points: • Offshore equities are currently demonstrating better value than domestic equities. • The rand is currently overvalued on a PPP basis. The easing of restrictions on international exposure for retirement funds has come at a good time, with retirement funds now able to have an exposure of up to 25% of their total asset base. Trustees who increase their offshore equity allocation at this time (at the expense of local equities), will be well positioned to benefit from both the expected re-rating of offshore stocks relative to SA stocks and the reversion of the local currency to more normal levels. * The opinion and comment in this newsletter is opinion and comment only and does not in any way constitute financial advice. For any financial decision please consult one of our PCH professional financial advisers.
Corporate Cash Manager Rates FUND CALL ACCOUNT
CALL MONEY FUND
Cash Manager Rates at 01 April 2011 BALANCE RATE 0.00 - 9.999.99 5.00 10.000 - 24.999.99 5.00 25.000 - 49.999.99 5.00 50.000 - 99.999.99 5.00 100.000 - 249.999.99 5.00 250.000 - 499.999.99 5.57 500.000 - 999.999.99 5.57 1.000.000 - 9.999.999.99 5.57 10.000.000 upwards 5.57
FEE 1.60 1.10 0.85 0.60 0.45 0.35 0.25 0.15 0.10
NET RATE 3.40 3.90 4.15 4.40 4.55 5.22 5.32 5.42 5.47
Dividends payable Dividends in LDT order Company AECI Ltd (AECI)
Decl 22-Feb
LDT 08-Apr
Pay 18-Apr
Amt 135
Curr ZARc
Capital & Counties Properties PLC (CAPCO)
02-Mar
08-Apr
19-May
1
GBPp
Group Five Ltd (GROUP 5)
14-Feb
08-Apr
18-Apr
52
ZARc
Marshall Monteagle PLC (MARSHALL)
29-Mar
08-Apr
29-Apr
1.5
USDc
Mondi Ltd (MONDILTD)
21-Feb
08-Apr
12-May
16.5
EURc
Mondi plc (MONDIPLC)
21-Feb
08-Apr
12-May
16.5
EURc
Old Mutual plc (OLDMUTUAL)
08-Mar
08-Apr
31-May
2.9
GBPp
Steinhoff International Holdings Ltd (SHFINV-PREF)
01-Mar
08-Apr
18-Apr
362
ZARc
Wilson Bayly Holmes - Ovcon Ltd (WBHO)
21-Feb
08-Apr
18-Apr
110
ZARc
African Oxygen Ltd (AFROX)
16-Feb
14-Apr
26-Apr
8
ZARc
Cashbuild Ltd (CASHBIL)
29-Mar
14-Apr
26-Apr
157
ZARc
Netcare Ltd (NTC PREF)
01-Apr
19-Apr
03-May
341.6
ZARc
Sanlam Ltd (SANLAM)
10-Mar
19-Apr
10-May
115
ZARc
TeleMasters Holdings Ltd (TELEMASTR)
01-Apr
19-Apr
03-May
4
ZARc
Country Bird Holdings Ltd (CBH)
27-Jan
06-May
16-May
11.1
ZARc
Cipla Medpro South Africa Ltd (CIPLAMED)
17-Mar
06-May
16-May
6
ZARc
AFGRI Ltd (AFGRI)
02-Mar
12-May
23-May
24.15
ZARc
JSE Ltd (JSE)
15-Mar
20-May
30-May
210
ZARc
Spanjaard Ltd (SPANJAARD)
28-Feb
20-May
30-May
16
ZARc
Basil Read Holdings Ltd (BASREAD)
24-Mar
27-May
06-Jun
30
ZARc
Capital Shopping Centres Group PLC (CAPSHOP)
23-Feb
27-May
21-Jun
10
GBPp
Capitec Bank Holdings Ltd (CAPITEC)
30-Mar
17-Jun
27-Jun
205
ZARc
FULL CONTACT DETAILS CAPE TOWN 46 Main Road Claremont 7708 Tel: +27 21 671 1220
PO Box 24033 Claremont 7735 Fax: +27 21 671 1149
E-MAIL: [email protected]
PRETORIA 142 Gillies Road, Glenwood Village Lynnwood Glen 0081 Tel: +27 12 361 1929
WEB:
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www.privateclient.co.za
Disclaimer This document does not constitute an offer or the solicitation of an offer for the sale or purchase of any security. While every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given and neither responsibility nor liability is accepted by any member of the Private Client Group (PCH), its employees and agents, as to the accuracy of the information contained herein. Any member of PCH cannot be held liable for the use of and reliance on the opinions, estimates and findings. All opinions, estimates and findings contained in this document may be changed after distribution at any time without notice. This document has been prepared by PCH from resources believed reliable. PCH is an Investment Manager registered with the Financial Services Board. The company is a Licensed Financial Services Provider in terms of FAIS (registration number 613). The recipients of this document are urged to seek independent advice from their Private Client Holdings Wealth Manager or other independent advice with regard to the securities and investments referred to in this document. AS MEMBERS OF:
