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This is the Sharenet company blog where we will bring you the latest news and events on the go at Sharenet, together with tips on using our site and our products.

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    SABMiller Annual Results – Expanding Rapidly

    SABMiller released its annual results for the year ended 31 March 2012 last Thursday, once again reporting strong numbers and managing to grow their volumes despite economies struggling worldwide.

    SABMiller is one of the world’s largest brewers, with a global presence in more than 75 countries and a portfolio of more than 200 local and international beer brands including Aguila, Castle, Pilsner Urquell, Peroni, Miller Genuine Draft, and Grolsch. The group also bottles soft drinks, and is one of the world’s largest bottlers of Coca-Cola products.

    Group Results

    Highlights from the group’s results include a 13% increase in adjusted earnings, resulting in a healthy rise of 12% in adjusted earnings per share. Reported revenue rose by 11%, with organic, constant currency group revenue growth coming to 7%. This second figure excludes the effects of takeovers, mergers, acquisitions, and currency fluctuations and is a more accurate reflection of the revenue generated from SAB’s primary business activities.

    Dividends per share for the year grew by 12% to 91 US cents, while the group also managed to improve its free cash flow by 23% to US$ 3,048m. Free cash flow (FCF) is the result of operating cash flows exceeding capital expenditure, and a large amount of FCF will enable an expanding company such as SAB to partake in further M&A activities to the benefit of shareholders.

    SAB reported lager volumes at the group level of 229 million hectolitres, which is a 3% increase from last year’s results. The volumes of soft drinks sold grew by 7% to 49 million hectolitres.

    A Global Presence

    The group currently operates in six regions worldwide and as of late has been actively trying to expand its market share in each region. The breakdown of EBITA (Earnings Before Interest, Taxes, and Amortization) between regions indicates that SAB has managed to achieve substantial organic growth in earnings in all regions excluding Europe and North America.

    In Europe lager volumes fell by only 1%, but an increase in raw material costs saw EBITA drop by 9%. Considering the major financial turmoil in Europe, the insignificant decline in volumes emphasizes SAB’s value as a defensive company.

    A strategic alliance with the Turkish brewer, Anadolu Efes, was concluded at the start of March 2012, and should have a positive impact on this region’s results in this financial year. SAB exchanged its Russian and Ukrainian beer businesses for a 24% equity stake in the Anadolu Efes group, which will provide exposure to markets in Turkey, Russia, Central Asia, and the Middle East.

    Africa is proving to be an exceptional market, with EBITA increasing by 16% as a result of lager volumes growing by 13% and soft drink volumes by 11%. The Group attributes much of its profitability in Africa to the provision of raw materials by local agricultural programs. This includes brewing the world’s first ever cassava-based beer in Mozambique, sourcing advice and input materials from the local community and farmers. A strategic relationship forged with Castel enabled them to take over an existing Castel brewery in Onitsha, Nigeria, whilst production from a brand new brewery being built in Onitsha will start in September 2012. The company sees a lot of potential for further expansion into Nigeria and the rest of Africa, as the per capita beer consumption in Africa is still very low compared with more developed regions.

    In Asia Pacific EBITA grew by 30% owing to good growth in both Indian and Chinese markets, with lager volumes increasing by 4% for the region. SAB acquired Foster’s of Australia in December 2011, which provided a foothold in a very stable and profitable Australian beer industry. An early setback occurred when some licensed brands, including Corona, left Foster’s after SAB took over management of the company.

    Current Valuation

    The company’s shares currently trade on a PE ratio of 23 and a dividend yield of 2.2%, with the forward PE dropping slightly to 19.7. The share price has been a one-way bet since the end of the 2008 financial crisis, with an increase of about 26% in the last 12 months. The consensus view seems to be that the share is too expensive to buy at the moment, but that holders should hang on just a little bit longer to see exactly where SAB’s ambitious expansion plans will take them.

    Kind regards,

    Cor van Deventer
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Source: MoneyWeb, www.sabmiller.com

    Permalink2012-05-29, 15:14:39, by Mike Email , Leave a comment

    The Rational Investor

    I first encountered the rational investor at university introduced as the efficient-market hypothesis (EMH). Most hypothesises, theories, and models are based on the notion that everyone is a rational investor, but are we?

    In short, most of us aren’t rational investors. With the amount of information that we are bombarded with these days, through news and social media, it is difficult for investors to make unbiased and educated choices.

    The traits of a rational investor can be broken up into three factors:

  1. Investment Choice – Preferring securities in your portfolio over alternative investments, e.g. if you prefer Standard Bank you will buy Standard Bank, not ABSA because it is also a bank.

  2. Risk Aversion – If you have the choice between portfolios with the same expected return, a rational investor will take the one with the lowest risk.

  3. Rational Expectations – Incorporating all available information in an unbiased and coherent fashion. An example of this is that some investors expect 20% pa from equity markets going forward, but all evidence suggests this is way too high.

    Unfortunately the rational investor has been missing for a while. Some of the irrational behaviours to which investors can fall victim are overconfidence, loss aversion, anchoring, and herd behaviour.

    Overconfidence
    Overconfident investors/traders tend to believe they are better than others at choosing the best stocks and best times to buy or sell. Studies have shown that overconfidence leads to overtrading.

    Overtrading normally leads to the investor selling losers at low prices and buying winners at high prices. Investors tend to buy recent winners, even if they are by then significant overpriced. The increase in trading also leads to an increase in trading cost and taxes liabilities; this reduces the yield of the investor.

    Loss Aversion
    Loss aversion is part of being a rational investor, but taking this to the extreme can negatively affect an investor’s prospects. An example of this was in the credit crisis, where investors sold all of their shares after the markets crashed. They therefore locked in the losses they suffered because they didn’t give the markets time to bounce back.

    Anchoring
    Investors tend to anchor the price of a share on past experiences. An example is when a share drops significantly investors will buy the share believing that the price will rebound to historic levels without doing research to see if the drop in price is due to fundamental changes in the company.

    Herd Behaviour
    One of the most infamous financial events in recent memory would be the bursting of the internet bubble. Herd behaviour happens due to two main reasons:

  4. Investors (who are also human after all) don’t want to be outcasts so they follow others.
  5. The rationale that, “everybody is doing this and not all of them can be wrong so this should be correct.”

    Being a rational investor is extremely difficult. Investors should only invest with available information and without being biased by emotions. It is therefore imperative to have a solid process and to do research on the company or fund that you invest into.

    Kind regards,

    Gerbrandt Kruger

    info@seedinvestments.co.za
    www.seedinvestments.co.za
    (021) 914 4966

  6. Permalink2012-05-22, 11:54:06, by Mike Email , Leave a comment

    The Rational Investor

    I first encountered the rational investor at university introduced as the efficient-market hypothesis (EMH). Most hypothesises, theories, and models are based on the notion that everyone is a rational investor, but are we?

    In short, most of us aren’t rational investors. With the amount of information that we are bombarded with these days, through news and social media, it is difficult for investors to make unbiased and educated choices.

    The traits of a rational investor can be broken up into three factors:

  7. Investment Choice – Preferring securities in your portfolio over alternative investments, e.g. if you prefer Standard Bank you will buy Standard Bank, not ABSA because it is also a bank.

  8. Risk Aversion – If you have the choice between portfolios with the same expected return, a rational investor will take the one with the lowest risk.

  9. Rational Expectations – Incorporating all available information in an unbiased and coherent fashion. An example of this is that some investors expect 20% pa from equity markets going forward, but all evidence suggests this is way too high.

    Unfortunately the rational investor has been missing for a while. Some of the irrational behaviours to which investors can fall victim are overconfidence, loss aversion, anchoring, and herd behaviour.

    Overconfidence
    Overconfident investors/traders tend to believe they are better than others at choosing the best stocks and best times to buy or sell. Studies have shown that overconfidence leads to overtrading.

    Overtrading normally leads to the investor selling losers at low prices and buying winners at high prices. Investors tend to buy recent winners, even if they are by then significant overpriced. The increase in trading also leads to an increase in trading cost and taxes liabilities; this reduces the yield of the investor.

    Loss Aversion
    Loss aversion is part of being a rational investor, but taking this to the extreme can negatively affect an investor’s prospects. An example of this was in the credit crisis, where investors sold all of their shares after the markets crashed. They therefore locked in the losses they suffered because they didn’t give the markets time to bounce back.

    Anchoring
    Investors tend to anchor the price of a share on past experiences. An example is when a share drops significantly investors will buy the share believing that the price will rebound to historic levels without doing research to see if the drop in price is due to fundamental changes in the company.

    Herd Behaviour
    One of the most infamous financial events in recent memory would be the bursting of the internet bubble. Herd behaviour happens due to two main reasons:

  10. Investors (who are also human after all) don’t want to be outcasts so they follow others.
  11. The rationale that, “everybody is doing this and not all of them can be wrong so this should be correct.”

    Being a rational investor is extremely difficult. Investors should only invest with available information and without being biased by emotions. It is therefore imperative to have a solid process and to do research on the company or fund that you invest into.

    Kind regards,

    Gerbrandt Kruger

  12. Permalink2012-05-22, 11:51:16, by Mike Email , Leave a comment

    Long Term View: Regular Review

    At Seed we have an investment process that is both simple and robust. By not overly complicating the process we attempt to consistently make investment decisions that will more often than not result in investment returns in excess of the targeted benchmark. We want to get the odds in our favour as often as possible and focus on the process rather than the outcome.

    Before making any investment we ask ourselves three important questions:
    1. Are we making this investment with a long term (i.e. at least 3 – 5 years) mindset?
    2. Is there intrinsic value in this investment?
    3. Is there a risk of permanent capital destruction in this investment?
    An investment will only make its way into our portfolios if the answer is ‘Yes’ to the first two questions and ‘No’ to the third question.

    Our portfolios are generally managed within strategic and tactical asset allocation frameworks, i.e. each portfolio has a stated benchmark and then mandated weighting limits for each asset class (e.g. benchmark local equity weighting of 50% with a maximum of 70% and a minimum of 30% in local equity, etc). We then make tactical decisions away from our benchmark (underweight or overweight) based on our research.

    During a recent report back we were asked what our time horizon is for making these tactical asset allocation decisions. Referring back to the three questions we ask when making any decision it was quite simple to point out that we make all investments on a 3 – 5 year horizon. A key aspect that we had to point out was that while we make our decisions with a 3 – 5 year outlook, very few of our investments go unchanged over this period. On a monthly basis we update the valuations of each asset class, i.e. determine whether there is still intrinsic value in the investment, to determine whether we need to change the asset allocation of the underlying portfolios.

    When valuing an asset class our assumption is that fair value will be reached in a straight line over 3 – 5 years. Markets naturally don’t move in a smoothed fashion and it is interesting to note how much the expected return from each of the asset classes can change over periods less than 12 months based on market movements. We take advantage of these opportunities to increase and decrease the weightings to the various asset classes.

    The chart below is an extract of our equity valuation tool. The horizontal axis is the ALSI’s starting PE with the vertical axis the subsequent 5 year annual return. It is apparent that lower starting PE ratios equate to higher expected returns and vice versa. The red spot corresponds to the ALSI’s level in December 2010, and the yellow spot is at 30 September 2011. In the space of 9 months the market moved from being in overvalued territory to a level that was showing good signs of value.


    By updating our valuation chart on a monthly basis we were able to take advantage of the opportunity presented in early October by increasing the allocation to local equities across all of our portfolios and in the Seed Flexible Fund in particular.

    We trust that this gives some insight into the process followed at Seed. As has been discussed we also take a long term view, but ensure that we perform regular reviews.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2012-05-15, 11:22:54, by Mike Email , Leave a comment

    Is there Still Value in Local Retail Shares?

    In nominal terms on the first trading day in May, the market moved up to a new high, closing at 34,482. New highs make many investors nervous, but typically they are bullish indicators. It is also interesting to note that this market high was made despite the fact that a large portion of the market – the resource sector – is still down over 35% from their 2008 recent highs. In other words the new market high has been driven by the financial and industrial sectors.

    Ultimately business value is dependent on earnings growth, and as a sub sector certain of the general retailers have been exceptionally good at growing their earnings over the last 10 years. The sub-category of general retailer includes well known retail stores such as Cashbuild, Mr Price, Massmart, The Foschini Group, Truworths, Woolies, and Holdsport etc.

    The chart below reflects the General Retail index relative to the earnings of this sub sector from 2000, both indexed to 100. Over this period, these companies have managed to grow their earnings by over 13.2% pa compounded. This compares reasonably well to the earnings on the overall market, which over the same time period have grown by a compounded 15%. From this starting point, the share prices have actually lagged earnings growth. However the starting valuations in January 2000 for this sector were expensive with the average PE at around 20.


    At times investors become very enthusiastic about certain businesses and are willing to place higher and higher multiples on earnings. This was the case in January 2000 with these shares, and again from around March 2010 as prices relative to historical earnings moved through the 18 time level (i.e. PE above 18). Continuing growth in underlying earnings have, however, been supportive of the higher prices and the February official retail sales growth rate moved up firmly to an annual 7.2%.

    While there may be some concern that this rate of retail growth, especially when combined with the high levels of unsecured debt, is not sustainable, a cursory view of some of this sector’s recent results and trading updates, gives a sense of generally firm growth:
    • Mr Price, in its trading update for the year to March expects headline EPS to increase by between 18% and 23%.
    • The Foschini Group will release its annual results to March at the end of May. It is expecting headline earnings per share to be up between 20% and 23%.
    • Truworth’s interims reflected a 14% gain in headline earnings and it is planning 6% growth in trading space.
    • Holdsport, the owner of Sportsman’s Warehouse and Outdoor Warehouse announced that its earnings for the year to February should be up around 20%.
    • Massmart announced a 44 week sale update to the end of April with total sales growing by 14.7% and comparable store sales growth up 8.9%.

    For a number of reasons, this sector continues to attract foreign investors, aided in no small measure by Wal-Mart’s acquisition of Massmart. These businesses have proven track records, good management, relatively low levels of government intervention, and a definite emerging market growth theme, making them attractive long term investments.

    But as the historical PE moves back again to the 18 times level, more and more investors are pricing in strong growth over the next few years in order to justify these more steamier valuations. Investors should show some restraint.

    Kind regards,

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2012-05-09, 16:45:54, by Mike Email , Leave a comment

    Relative Valuation Methods

    Anyone who has spent any time valuing a business, or its indivisible unit, a share in a business, knows that there is not one specific method, but rather a range of valuations methodologies that can be applied when formulating the valuation.

    At its most basic level, the value of a share today is the discounted value of all future cash flows that will be generated from the share. While simple in theory, in order to try and determine a theoretical value, investment analysts spend a lot of time on forecasting a company’s future income stream. However, even armed with accurate information on future earnings for a specific company, because we live in a world with extensive investment choice, the investment process often comes down to making an assessment of one investment option relative to another.

    This so called relative valuation methodology is widely used and in many respects is simpler than making an assessment of the value on an absolute basis. Ultimately investors have choice and so even after performing a thorough valuation, an investor will produce a ranking table in order to compare one investment option against other competing investments.

    As with all investment tools there is not one method that is infallible so when adopting a relative valuation methodology, an investor is looking for certain relationship patterns that tend to hold over time.

    A few examples of relative valuation techniques that investors use include the following:
    • The earnings yield or dividend on shares relative to the current yield on money market or yield on property shares.
    • The price of one share relative to another share – usually, but not necessarily, in the same sector.
    • The price of one sector relative to another – or an index in one country relative to another country.
    • The price of a share relative to its underlying book value over time to determine if relatively cheap or expensive.
    • One currency relative to another currency.

    Even one of the most common valuation methods used – the price to earnings – or PE method is in essence a relative valuation method, when extended to comparing a company’s PE to the market average PE. With this method, company’s actual earnings are defined as a ratio to the number of shares in issue to arrive at earnings per share (EPS). Once the common yardstick has been obtained in the form of the PE, then it becomes easy to compare one traded share price to another in a relative format.

    Look at the chart below, which compares the PE ratio of Anglo American relative to the PE ratio of Massmart over a 10 year period. This so called PE relative chart is a common tool used by analysts to gauge where value is appearing. This chart does not imply that either share is attractive or unattractive in its own right, but it gives a clear sense of the relative outperformance of Massmart against Anglo American over 10 years.

    PE relative of Anglo American to Massmart

    Source: I-Net and Seed Investments

    Ten years ago, Anglo American had a PE ratio of 18 compared to Massmart’s 8. While the PE ratios have, on average, been almost equal over the past 10 years Anglo American’s PE has declined to 8 compared to Massmart’s 34 – i.e. one quarter of Massmart’s PE and a deterioration of some 90% over this time frame.

    Analysts will say things like Anglo American looks cheap relative to the market or relative to consumer shares. There may be very valid reasons why one company’s valuation has deteriorated on a relative basis over time, but this is where an analyst should do additional work in order to make an assessment of the fundamental reasons. So by all means, make use of relative valuation techniques. They can be very powerful, but in and by themselves they will not tell the full story.

    Kind regards,

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2012-05-02, 14:10:13, by Mike Email , Leave a comment