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    Due Diligence

    Any investor owes it to themselves to perform some form of due diligence before making any investment decision. You may be wondering what constitutes due diligence, and what constitutes an investment decision.

    The amount of due diligence necessary is proportionate to the investment, (i.e. the greater the investment, the more thorough one needs to be in one’s due diligence). If, for example, you want to purchase a bedside lamp you would conceivably buy the first decent looking lamp that’s in your price range. If, on the other hand, you are planning on buying a house you will possibly take months searching the market, make numerous visits to places that you are interested in, take friends and family along to give advice, and negotiate with the seller until you feel you are paying a reasonable price.

    The same principles apply to financial products (shares, unit trusts, etc.). If you are making a speculative investment with a small portion of your net wealth, then your research isn’t as important as when you’re making a sizable investment.

    Seed makes it our business to research those investments where we place our clients’ money. In particular we visit and meet with the various asset managers, attend their presentations, and analyse their returns. We get a firm grasp on their thinking, and approach to managing money, and if their methods are agreeable with us, and their credentials are sound, we contemplate investing some of our clients’ money with them.

    In the last week and a half Seed has had meetings with four different asset managers, some one-on-one meetings with the managers, and others with a larger audience. In these meetings we pick the asset managers’ brains as to why they are buying certain shares, or positioning their portfolios in certain sectors, or reducing their equity exposure, or any other questions that are pertinent to that particular manager’s funds. We enquire as to the companies’ ownership structure (generally preferring owner managed firms compared to the larger institutions), staff changes (and reasons why there were additions or departures), size of assets under management, among other relevant questions. These all help us get a better feel as to how they manage money, and where their incentives are, etc.

    We look to include managers that will outperform, and discard those laggards. We combine these factors with our broader market overview, and then make decisions on whether we need to switch any of the investments based on the due diligence process.

    I trust this will also help you when you do your own due diligence on asset managers before making decisions.

    Seed Investment Consultants is holding a presentation on Investment Strategy and planning for private investors in Cape Town and Somerset West at the beginning of July. Please mail helena@seedinvestments.co.za for further details if you would like to attend.

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za

    Permalink2007-06-29, 16:48:25, by Mike Email , Leave a comment

    JSE up fractionally at the close

    The JSE closed up 0.42% at 28403 with value traded at R 10.29 billion. Advances led declines 225 to 162 with 77 shares unchanged out of 464 active. Mining closed up 0.26% at 36504, while Industrials were up 0.46% at 23987 and financials ended the day up 0.62% at 23669.

    The best performing sectors of the day were Venture Capital up 9.4% at 190, General Industrials Index up 2.3% at 54063 and Mobile Telecommunications up 2.1% at 156, while the worst were Leisure Goods Index down 2.8% at 1970, Automobiles & Parts Index down 1.3% at 2485 and Forestry & Paper Index down 1.3% at 26952.

    There were 6 new 12 month highs today, including Gooderson which closed up 3.8% at 110, Yorkcor up 2.2% at 3450 and Didata up 1.3% at 810 while there were 4 new lows of which Gfields topped the list, down 1.3% at 11000, Anggold down 0.8% at 26585 and Delta down 0.1% at 1700.

    Of the major stocks Anglo moved down 0.48% at 41299, Mtn ended up 2.16% at 9695, Stanbank was off 0.72% at 9978, Gfields ended down 1.35% at 11000, Telkom ended down 0.55% at 17702.

    Biggest gainers of the day where Hwange up 50% at 225 , Wesizwe up 12.65% at 1015 , some of the losing shares included Quyn down 15.09% at 270 and Monyetla off 13.79% at 250

    The Dow was up 0.1% at 13442.52 and the S&P 500 up 0.2% at 1509.81 a few moments ago.

    Gold was up 1.1% at $ 649.25/oz

    The rand was last trading at R 7.08 to the dollar, R 14.18 to the pound and R 9.54 to the Euro.

    Permalink2007-06-28, 18:10:55, by admin Email , Leave a comment

    Market Wrap

    The JSE closed down 1.6% at 28285 with value traded at around R13 billion. Declines led advances 322 to 112. Mining shares closed off 2.45% at 36409, while Industrials were down 0.95% at 23877 and financials ended the day off 1.26% at 23524.

    The best performing sectors of the day were Leisure Goods Index up 4% at 2027, Mobile Telecommunications up 2.5% at 152 and Telecommunications Index up 1.9%.

    MTN bounced up 2,6% to 9490c. Reuters reported that MTN may build its own fixed line network.

    Vodacom is also looking to expand on the fixed line side, competing head on head in certain aspects with its 50% shareholder, Telkom.

    Telkom shares fell just 80c to R178.

    On a negative day the more speculative shares fell the hardest. New platinum entrants, Wesizwe and Eland were down sharply, at 901c and R83 respectively. Down 12,5% and 11,2%.

    Some of the larger cap shares also came down fairly sharply. Anglo fell 2,5% to R415

    Billiton off 3,3% to 19319c

    SAB Miller down 3% to 17940c

    Despite the negative day, 3 shares managed to trade up to a new 12 month high. This included ERM which closed up 12.2% at 220, Yorkcor up 1.5% at 3375 and Datapro up 1 c to 350c.

    The Dow was off 0.1% at 13329.77 and the S&P 500 up 0.1% at 1494.13 a few moments ago.

    Gold was off 0.6% at $ 643.05/oz

    The rand gained some ground last trading at R7.15 to the dollar, R14.29 to the pound and R9.61 to the Euro.

    Its on days like this, where global markets are under pressure, that investors often realise that they need an investment plan, and in some cases managers that can actually take advantage of these down days.

    Seed Investment Consultants is holding a presentation on Investment Strategy and planning for private investors in Cape Town and Somerset West at the beginning of July. Please mail helena@seedinvestments.co.za for further details if you would like to attend.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Seed Investment Consultants is an authorised discretionary financial services provider to high net worth clients.

    Permalink2007-06-27, 17:58:20, by ian Email , Leave a comment

    Currency Futures Launched by the JSE

    Last Monday (21 June) saw the launch, by the JSE Ltd, of currency futures, enabling the average South African, for the first time, to trade rand futures, and thus take a position on which direction they think the currency will move in. For the uninitiated futures are sophisticated instruments that trade on most major exchanges around the world. Futures allow participants to take a position on the price they think that a particular asset will trade at a pre-determined future date. They are regulated contracts with performance guaranteed by the clearing house.

    The JSE has had a futures exchange for sometime, but they have only recently been given permission to set up a currency futures platform. This occurred at this year’s budget presentation by Finance Minister Trevor Manuel, as part of the process of relaxing foreign exchange restrictions.

    Futures, as mentioned, are sophisticated products, and you should therefore only trade in them if you are properly educated in the mechanics of how they work.

    Who would want to trade in currency futures?

    Futures can be a useful tool both in hedging risk, or speculating about price movements.

    A South African who is committed to purchasing a yacht from the USA in 3 months time that costs US$ 100 000 would be one such person who may want to hedge out their currency exposure. They have a future liability that is denominated in US$, but their wealth is more than likely stored in Rand, thus exposing them to exchange rate fluctuations. For example, by entering into a 3 month, $ 100 000 futures positions at R 7.25/US$, the person purchasing the yacht would guarantee that he pays R 725 000 for the yacht. Had he not taken the position, and the Rand ended up trading at R 7.50/US$ at delivery of the yacht, then he would have to pay R 750 000, but if the Rand strengthened over the period to R7.00/US$, then his bill would only have been R 700 000. There is the chance of ‘winning’ or ‘losing’, but at least there is certainty.

    Speculators would enter the market purely to attempt to profit from short term movements. As all futures trading is ‘zero sum’ for every trade that ends in profit there will be a corresponding trade ending in a loss.

    Currency futures don’t form part of your R 2 million offshore allowance, so those high net worth individuals who have exhausted this allowance will be able to increase their offshore exposure by entering into a futures position. Individuals are able to enter into whatever size position that they can afford, but corporations need special permission from the Reserve Bank to participate. Contracts size start at a minimum of US$ 1 000, and participants are required to mark to market daily. The Yield-X is currently only offering ZAR/US$ contracts, but more currency offerings are in the pipeline.

    Currencies often act like wild of animals, with movements over the short to medium term being notoriously difficult to predict by even the ‘smartest’ of investors. It is therefore only recommended to those sophisticated investors who have a specific purpose for the future contract.

    For more information on currency futures try their website www.yieldx.co.za or contact your stock broker.

    Seed Investments tends to steer clear from overly complicated financial products. While futures contracts definitely have their place in the financial markets we at Seed Investments prefer to offer advice that looks at simplifying one’s investments, which will result in wealth creation over the long term.

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za

    Permalink2007-06-26, 16:26:33, by Mike Email , Leave a comment

    What are CDO's?

    Some news on international markets is the concerns about growing delinquencies in the CDO market. To a large extent the issues raised are a function of the world’s quest for higher yields. So just what ate CDO’s?

    CDO stands for Collateralised debt obligations, largely a US based phenomenon, and thought to exceed $1 trillion.

    Essentially higher risk debt of all sorts is aggregated, packaged into special purposes vehicles and then sold off as higher yielding debt obligations. These are essentially sold as higher yielding corporate bonds.

    Bloomberg reported that because there is little trading in these securities, an auction, which Merrill Lynch and Co is threatening, may confirm that these securities have been trading at expensive prices.

    The CDO market was created in 1987 by junk bond king, Michael Milken at US firm Drexel Burnham.

    They have exploded in recent years as higher risk debt is packaged and then parcelled off.

    In a post 2000 world, where markets peaked and then collapsed, investors have been on an ongoing search for yields. As the cost of debt reduced to their lowest ever level, large investors could essentially gear up and invest into higher yield, generating positive returns.

    Now as the cost of debt has increased, its starting to expose the weaknesses in the financial system.

    We will keep an eye on developments.

    That’s all for today

    Seed Investment Consultants is holding a presentation on Investment Strategy and planning for private investors in Cape Town and Somerset West at the beginning of July. Please mail helena@seedinvestments.co.za for further details if you would like to attend.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-25, 20:57:30, by ian Email , Leave a comment

    A top down investment approach

    Many investors adopt a combination of top down and bottom up investment approach.

    A bottom up investment approach is essentially taking the time out to kick the tyres of a company, run the numbers through the models, meet management, discuss with competitors and decide whether the company or more specifically the share has sufficient value in which to invest.

    A top down or macro approach looks at the bigger picture. Assuming a global mandate, an investor would first spend more time looking at broader macro economic issues such as:

    • Global interest rate directions and then down to a country level;

    • Relative growth rates of geographic regions;

    • Global themes such as a move to environmental friendly products;

    • Other themes such as an ongoing increase in telecommunications;

    • Movement of commodity prices;

    • Demographic changes in various countries;

    • Political themes. i.e. moves away from communism to democracy

    Many investment managers have an approach of marrying a top down approach to their bottom up approach. This week we spent time with at least 2 local fund managers who adopted this style.

    While in theory investing into companies that meet both the bottom up and top down criteria sounds excellent, in practice it’s often not that clear cut.

    Investment managers can spend a lot of time poring over data, theory etc and come up with a top down view of where the value should be, and still find that very little overlap with their bottom up analysis.

    Some managers are more diligent and place a lot of emphasis on their top down approach, while others concede that many shares in which they invest meet their bottom up criteria, but not necessarily their top down criteria.

    Many would also agree that their top down approach is more art than science.

    The managers that do have a good feel for the top down, combined with excellent stockpicking ability can produce very good results. Our view would be that the stockpicking ability would supersede top down edibility.

    Global markets came under pressure on Friday. Later Friday afternoon the screens showed only red.

    In the US private equity company Blackstone listed as the biggest IPS (Initial Public Offer) in five years, raising $4,1 billion. The demand has been big and the current owners of these companies are capitalising.

    That’s all for now

    Have a great weekend and enjoy the rugby.

    Seed Investment Consultants is holding a presentation on Investment Strategy and planning for private investors in Cape Town and Somerset West at the beginning of July. Please mail helena@seedinvestments.co.za for further details if you would like to attend.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-22, 17:19:29, by ian Email , Leave a comment

    Market musings

    The JSE failed to breach the 30 000 level – at least for now. On Thursday it fell back 200 points to 29309. Financials came back 1,3% and Industrials 0,7%. One day's movement does not a trend make. Especially when its quarter futures close out with R19 billion traded.

    The US markets are trading up, while Europe and UK markets also fell back on the day.

    The quarterly futures close out is the date that the futures prices are marketed to the underlying “physical” or spot market. The actual share prices – or various baskets – are known as the physical. The final value of the futures will depend on how the physical closes at the quarter ends.

    Participants in the futures market trade in the underlying physical to try and minimise the close out losses or maximise the profits on their combined futures positions.


    Scharrig Mining is involved in the mining industry. Today it reported results for the year to March with revenue more than doubling to R1,3 billion from R616m and operating profit up 96% to R297m from R151m

    Core EPS gained 49% to 103,9c from 69,3c

    The net asset value per share increased 95% to 468c

    These are big increases and give an indication of the current mining boom. The company also announced a joint venture with Merafe Resource, which will be known as Merafe Coal a 50/50 joint venture.

    The share price fell 12 cents to 2248, but has been on a tear in recent years from 250

    This has been a company with a strong owner managed culture.

    Some more large single stock futures after the massive Steinhoff director’s dealings. Today Digicore director, Esterhuyzen purchased 5373 contracts with a value of R3,9m in the Digicore shares.

    Alignment of interests with investing is very important.

    That’s all for now.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Seed Investment Consultants is holding a presentation on sound Investment Strategy and planning for private investors in Cape Town and Somerset West at the beginning of July. Please mail helena@seedinvestments.co.za for further details.

    Permalink2007-06-21, 20:49:53, by ian Email , Leave a comment

    no BEAR markets

    I came across US money manager Ken Fisher’s latest report today. He has been bullish for some time, and for a variety of reasons, he is optimistic that this trend is likely to continue. Interestingly he gives the 2 main ingredients why he believes there will no bear market in shares at this point in time.

    He kicks off with a forecast saying if the cautious sentiment continues, then the MSCI World index is likely to return 10% plus.

    If however sentiment improves the upwards of 40% is possible.

    He says that bear markets require 2 main ingredients. The first is euphoric sentiment.

    The second is major negative fundamentals that emerge largely ignored.

    Both of these are absent. There is little euphoria and they assert that investors are not fully appreciating the numerous positive fundamentals in the global economy.

    In other words the market valuations are pricing in a lot of the negatives, but little of the positive news.

    He goes on to say that global shares are cheap. It’s a relative argument, but valid. Globally investors look at the forward yields on shares relative to a base case investment, normally bonds. Currently the forward yields on many stockmarkets are running much higher than the 10 year government bonds.

    Remember the yield is the inverse of the PE ratio, and often is easier to understand. The US markets are priced on a forward yield of 6,9% (PE of 14,5 times). Bonds are yielding around 5% and so the spread is around 2% positive for shares.

    This yield spread rises to 4% in Japan, France and Germany.

    This gap can narrow on 4 things. Share prices rise, interest rates rise or corporate earnings fall, or some combination of all 3. If the view is that globally interest rates are peaking, and corporate profits are not about to fall out of bed, then he calculates that share prices can rise some 70% before reaching parity with bond yields.

    Fisher is also a big proponent of supply and demand fundamentals for share prices. Supply of shares versus demand for shares is a major driving force. On balance supply of shares is shrinking and this is positive for share prices.

    2 main drivers of reducing liquidity are global merger and acquisition activity and continued share buyback programs.

    Some good points made.

    That’s all for now.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Seed Investments provides investment management to high net worth clients. E-Mail ian@seedinvestments.co.za for a value proposition document.

    Permalink2007-06-20, 20:52:18, by ian Email , Leave a comment

    What is Your Number?

    A book written by Lee Eisenberg, called The Number, was published in 2006. It talks about what size cash an investor needs in order to retire. It’s getting to be very topical in the US, where baby boomers are heading into retirement years.

    Some of the stats presented are quite frightening, but not unexpected. He points out that millions are headed for retirement, but 40% have no retirement plan.

    25% of all workers aged 55 upwards have no more than $100 000 in invested assets.

    By drawing down around 4% of capital, an investor requiring an annual income of $50 000 to $100 000 will require $1m to $2m.

    The fact is that many investors have not been investors in the true sense, but savers. And while many have been good savers, the majority have been poor at it.

    Now wanting to retire at age 55 or 60, with another 30 years ahead, having only saved for 30 years, they are coming up short.

    One of the rules highlighted in the book from one observer is:

    " • To be “comfortable” – Living nicely though not flashily takes an annual retirement income of $50,000 to $100,000, which requires a nest egg of $1 to $2 million.

    • To be “comfortable+” – Having some frills, like a vacation cottage, requires an annual income of $175,000 to $250,000, or a $2 to $5 million nest egg.

    • To be “kind of rich” – Enjoying upscale trips and deluxe living takes $350,000 to $500,000 annually or a nest egg of $7 to $10 million.

    • To be “rich” – Living the glossy high life with resort homes and seats on corporate boards takes more than $1 million a year, or more than $20 million in the bank."

    Similar rules apply for the local market, but there is not one size fits all. Investors need to look at their current asset allocation, valuation of investments, strategy, retirement date, required retirement income etc and then do some modelling to ensure an optimal scenario.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-19, 21:05:14, by ian Email , Leave a comment

    Remgro

    At the market close, JSE stalwart, Remgro reported annual results to March. This is the form of the original Rupert controlled company, Rembrandt. It’s a holding company of many interests, and generated an increase in headline EPS of 37,4%.

    The company reports net asset value on a book value basis and intrinsic value, which includes assets at valuations. The latter rose from R157 per share to R221 per share. The actual share price closed at R187,60, and so still trades at a discount to director’s value of 15%.

    The company attached an annexure detailing the breakdown of the intrinsic value.

    The company owns listed investments with a market value of R35 billion and unlisted investments with value of R63 billion.

    Remgro owns an effective 10,4% stake in British American Tobacco, via its 1/3 holding in R&R. Remgro’s share of this company’s profit was R2,9 billion up from R2,3 billion in 2006.

    The BAT interests account for R52billion out of the R104 billion total intrinsic value.

    Firstrand and RMB another R22 billion.

    Rainbow Chicken, R2,8 billion.

    Implats R6 billion.

    Cash R4,4 billion

    It deducts a potential capital gains tax liability, assuming all the investments were to be realised of R2,7 billion.

    The company appointed Miss Maria Ramos as an independent non executive director on 26 March 2007. Mr Morobe was also appointed in this capacity today.

    Remgro owns 21,3% of Business Partners and is now an associated company.

    It also spent a further R197million to take up its stake in RMB Holdings to 23,7% from 23,1%.

    The share price closed up 110c to 18760c. This gives this company a market cap of R84 billion.

    It’s a widely held share, that has performed very steadily over the last few years.

    That’s all for today.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-18, 19:30:29, by ian Email , Leave a comment

    Market Reaches New Highs

    The market today reached new highs yet again. This was on the back of the large cap shares posting strong gains. During the day Anglos, SABMiller, and BHPBilliton made new highs. Anglos (up 2.8%) and BHPBilliton (up 0.4%) are the two largest shares in the market, and dominate the market weighted index. SABMiller (up 2.4%) is the fourth largest company, behind Angloplat (which was up 1.5% for the day).

    Other Top 40 shares to post decent sized gains were Harmony, Implats, Investec (LTD and Plc), Liberty International, Lonmin, Mittal, Naspers, Netcare, Old Mutual, RMB, Sappi, Steinhoff, Sasol and Telkom. This represents nearly half of the Top 40 stocks. Woolies was the only share down by over 1%, ending the day at R20.60, off 3.7%.

    The market is currently in a sweet spot, and investors are undoubtedly filling their boots. Would it not make more sense to be slightly more cautious during this frenzy? Perhaps. But, like anything ‘cool’ no-one wants to miss out, especially when Mr Jones from next door just bought a new holiday house on the coast for his family, after his speculative investment paid off handsomely. How many times of late have you heard someone standing around the braai saying that they lost money in an investment? Not many I presume.

    All these pressures lead to one eventually jumping into the market. Now the market is generally a good place to invest, but note the word generally! We all know how dangerous it is to generalise. Generally applies to those who know how to invest, and those who know when to invest. If you have no idea what the market is or whether you should be buying or selling Sasol, then you have two options. Firstly you can educate yourself, and secondly you can pay someone else to invest for you.

    Many successful people will specialize in those activities that they are good at, and pay others to do those tasks that they don’t have as much ability in. I, for one, would never try and service my car, or build that swimming pool at my house. I curse when I have to pay hard earned money over to the people who do the job, but realize that if I did the job myself, it would a) take me away from making money doing my own job, and b) may end up in me having to pay more as I didn’t do a proper job, and the pool springs a leak. Get it done properly, first time!

    As sure as night follows day, there will be a time where the markets will turn, and this is the time where those investors who have a plan (and who have probably been ridiculed for being conservative) will be the ones coming out smiling. Compounding is a powerful force, but it works on the way down as well as the way up. Remember, if your investment loses 50%, you need to gain 100% just to get back to square 1. The investor, who has cash at the ready to take advantage of the 50% fall, will get a double whammy on the way back up.

    It pays to have a sound plan when it comes to investing. This plan should be robust enough to last through both up and down cycles. Seed makes it our job to look at investments day and night; we don’t spend time fixing cars, or trying to build our own swimming pools.

    If you happen to spend your time fixing people (doctors), or building houses (property developer) and don’t have time, or inclination, to draft a robust investment plan, stick to it, and monitor it regularly, but still want your investments to do well, then email Ian de Lange, ian@seedinvestments.co.za, and we’ll hopefully be able to steer you in the right direction.

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za

    Permalink2007-06-15, 17:21:07, by Mike Email , Leave a comment

    Why rational investing does not come easily

    Looking back today at some of the many papers that I accumulate, I came across a brief report on US fund manager Davis Funds, called The Successful Investor, in which they expand on Why rational investing does not come naturally.

    Some investors, private and professional, may be offended by this statement. But the reality is that for most investors, especially private their behavioural biases often negate the results of the actual investments.

    The rational approach to making money is very self evident – buy at low prices and sell at more expensive prices. Because it’s so simple and because EVERYONE employs this when buying their groceries, buying a car, selling a house, etc, they automatically assume that this methodology will come naturally to their investing process.

    Because very little thought is put into this, the reality is that when it comes to investing, and especially investing funds into listed equities, the reverse is often true. Investors tend to sell out at lower prices and buy at higher prices.

    What causes this irrational approach? Quite simply the emotions. Because investing is an emotional experience, most private investors invest more when they feel more confident.

    As prices in general fall, the emotions move from apprehension, to fear and then to panic. Maximum selling always occurs as the emotional panic is running high.

    Conversely as prices in general start to move up, the apathy turns to increasing excitement, then exhilaration, then euphoria. Again as the confidence level increases purely on the emotional impact, investors invest more.

    The cycle repeats constantly and will always continue to do so. The smart investors will take full advantage of the cycle. What will these investors have in common?

    1. a counter emotional discipline to investing, i.e. a process to remove emotions from the investment process

    2. A framework or overriding investment strategy and then an investment philosophy. i.e. not swayed by the hype of the moment

    3. A disciplined investment process. i.e. analysing intrinsic value and comparing to market prices. Rules for buying and rules for selling.

    Yes in boom markets, investors can jump onto the bus for a ride. There will always be wonderful stories of investors that put in R20 000 into Eland at R20 and watched it go to over R100 in a few months. I always say limit your speculation to 10% or 15% of your capital base.

    But some fun speculation aside, most investors want to compound up their capital wealth to the point where it is of a sufficient size from which to draw down a sustainable income stream in their retirement years.

    This does not happen by chance. Make sure that you have a plan to compound up your 85% - 90% as a rational and successful investor.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Seed Investments advises and manages high net worth client’s wealth in a structured way for the long term. Mail me on ian@seedinvestments.co.za to get more information.

    Permalink2007-06-14, 17:22:24, by ian Email , Leave a comment

    Telkom announces results

    Telkom announced results for its 50% held subsidiary, Vodacom and then also its own results for the year to March. These are big businesses in SA and globally. 12-15 years ago, the mobile businesses were only starting in SA. Now Telkom is a R92 billion company.

    At Vodacom total customers increased 20,1% to R23. Most of these are on the pre-paid packages with contract subscribers up 27,6% to 3 million subscribers.

    Traffic on the network increased 19,4% to 20,4 billion minutes!

    Revenue increased from R34 billion to R41,1 billion in 2007. Profit from operations at R10,8 billion up from R8,8 billion.

    Attributable profit rose from R5 billion to R6,3 billion. It’s a strong cash generating business and all profits are realised as cash flows.

    Telkom then reported its numbers for the year to March 2007.Total revenue was up from R48bn to R52,1bn. Operating profit of R14,4bn was flat and profit for the year down slightly to R8,8bn from R9,3bn.

    An ordinary dividend of R6 ordinary dividend and a special dividend of R5 per share was declared.

    On the back of these results, Telkom also announced price reductions across some of its service offerings as a marketing exercise. The strong demand for their broadband offerings has allowed Telkom to propose a reduced pricing in this area.

    Telkom now has over 250 000 ADSL customers. Clearly as the sole provider of fixed lines, with a combination of high volumes they can cut their margins slowly and still generate excellent profits.

    Telkom shares lost 1,9% to 17260c, making a recent high at R186,35c

    MTN shares gained 2,3% to R98. This company has a market cap of R182 billion. The 6th largest listed company on the JSE by market cap size.

    Didata has a market cap of R11,6 billion.

    Datatec at R6,9 billion.

    The JSE gained steady ground today after a slow start, ending up 1% at 28602. value was over R11 billion with 184 shares up against 217 shares down.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-13, 17:55:19, by ian Email , Leave a comment

    News headlines can cause investment problems

    There is so much information floating around today that it gets more and more difficult to make decisions. You may say the contrary is true, and it should be, but the reality is that investors are often paralysed by information overload.

    Part of the problem is really the noise factor, where the financial media is to blame. I have discussed this noise factor before, but its worth looking at from a different angle.


    Just a snippet of headlines today included:

    . Dow little changed versus the euro and the yen.

    . Bank of England’s (Mervyn) King boosts sterling – talking about the possibility of higher interest rates

    . US – China tension – talking about China as a currency manipulator.

    . Energy stocks weaken at open

    . Bond prices continue to fall

    . Gold futures edge lower in early trade

    Unfortunately headlines are like averages – they can have the effect of hiding the detail. The best investment decisions are made at the detail level.

    What do you mean by this? Well speak to an astute property investor, and he will tell you that while interest rates are up slightly and demand is down, he will continue to look for properties that he can buy at lower than generally going prices.

    A value investor will say the same thing. Prices tend to move with far more volatility than their underlying values. Price volatility around a truer valuation of a company allows investors to buy assets when they are cheap and sell when they are more expensive.

    Hedge fund managers will even combine this action in one fund, always trying to generate a positive return irrespective of market direction. Locally, they will spend the bulk of their time looking at assessing company valuations, working their models and then comparing to prevailing prices.

    An investor need not get every single investment 100% correct in order to generate wealth over time. Rather an investor needs to have a defined process to ensure that the odds are stilted in his favour. Then if practised consistently, the investment process will be rewarding.

    Don’t ignore headlines, merely discount them. Like astute investors, rather spend your time making sure that you have an investment strategy.

    Seed Investments works with high net worth investors on their overall investment strategy. Mail me if you would like to discuss further.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-12, 17:10:02, by ian Email , Leave a comment

    Investment Due Diligence

    An article in this week’s Saturday Argus Personal Finance spoke about the due diligence that could have saved many from the Fidentia disaster. So what is this due diligence and does it have any relevance when it comes to investments? The answer is a definite yes.

    Its surprising how many people who would ordinarily take a lot of time to make a decision that has any financial implication, very often perform little or no due diligence whatsoever when investing hundreds of thousands or millions.

    The are various reasons for this including;

    1. the investment idea comes from a friend, and they therefore see no reason to question any further
    2. the salesman has such a good story, they an investor questions the necessity of asking any more questions.
    3. it’s a time consuming process and investors are busy.

    Despite, the many regulatory bodies, there are still far too many incidents of financial disaster. The introduction in recent years of legislation under the auspices of the Financial Services Board seems to have done very little for investor protection.

    My view has always been that investors must do their own due diligence. So exactly what does this mean.

    . it’s about asking questions.
    . it’s about getting accurate answers that corroborates with other evidence.
    . it’s about checking some or all of the information provided.

    This must occur before any capital is parted with.

    If you are using an advisor or manager of your investments, then it’s vital that they have a process to select and check on underlying investments or fund managers:

    As an investor you need to ensure that they have:

    . a process to evaluate the quality of the fund manager
    . a process to review and benchmark long term performance.
    . have regular meetings with managers or management
    . a process to review the structure of the investment.
    . a ranking process for the universe of investment options.


    As an investor you would expect your advisor to perform initial and ongoing due diligence, but this is unfortunately seldom the case. Often it’s a hit and miss affair. In times where asset prices have moved up dramatically many omissions are hidden, but this will not always be the case.

    Do your own due diligence and get the best available

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za

    Seed Investments is a registered financial services provider to high net worth investors.

    Permalink2007-06-11, 20:11:28, by ian Email , Leave a comment

    Market Wrap

    Higher interests rates around the world hit global markets on Friday. The local JSE was no exception with the JSE All Share index falling 1,35% to 28169. Gold shed 2,8%, Financials down 1,79% and Industrials down 1,27%. Value traded remained high at over R13 billion.

    Market sentiment turned negative on global worries as bond yields in the US spiked up above the 5% level. This was their biggest spike up in 3 years and was due to concerns on rising global inflation.

    The local rise in the repo rate on Thursday by 0,5% which pushed up prime rate to 12,5%.

    The market was decidedly negative with only 99 shares trading up against 341 shares down on the day.

    Tiger Wheels came out with a very negative trading update. After separating this business now owns 74% of the ATS Group, which is the global alloy wheel manufacturing business. The loss for the year to end of June is expected to be in the region of 235 c per share at the headline level. The share price has been under some pressure and lost 12% to 800c.

    This gives the company a market cap of just R05 billion.

    AME - African Media Entertainment reported interims to 30 April with headline EPS up 35% to 121c per share. The share price raced up 5,4% to 2699c

    Sappi fell 3,6% to 12099c

    CMH share price fell 2,6% to 1850c

    Asian shares fell back on overnight US markets. On Friday however the US markets bounced up and in the afternoon were trading up into positive territory.

    Regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-08, 20:06:41, by ian Email , Leave a comment

    Another Rate Increase!

    Following market consensus, the SARB increased interest rates by 0.50%. Tito Mboweni, the Reserve Bank Governor started off his statement by indicating that CPI-X had breached the upper end of the inflation target for the first time. This was mainly a result of fuel and food price inflation, but was also buoyed on by generalised increases in other categories.

    As I mentioned in my previous report, there is nothing that The Governor can do now that inflation has gone above the targeted band, but he must still keep an eye on the outlook for the medium term, making decisions now to influence inflation in the future.

    Petrol inflation was at 15.5% year on year, and food at 8.6% year on year in April, with grain and meat inflation both over 10% for the year. Household consumables were also above the 6% level, coming in at 8% for the year.

    Mr Mboweni then moved on to the outlook for inflation, which has deteriorated when compared to the previous forecast. The model that the Reserve Bank uses takes into account current trends in the prices of goods, forecasts of some of the inputs (exchange rate, price of oil, etc) and possible shock events. CPI-X is expected to dip below 6% in the third quarter of this year (as a result of the high base from August last year that I mentioned previously), this is the only respite, as the SARB is predicting that CPI-X will be above their mandated range for three of the coming four quarters.

    With most people are following the public sector strike, the impacts of a final decision will have an impact on inflation. If the unions settle for a wage increase close to 6%, then the effect will be minimal (and may actually be negative as a result of increased productivity). If, however, the unions get their way, and wage settlements are closer to 12% then this will have a knock on effect onto inflation. Wage settlements averaged 6.5% in 2006 and remained at this level in the first quarter of this year.

    The current account is still at a high level, but has narrowed as a result of the country needing to import less oil in the first quarter of 2007. While the exchange rate is trading at similar levels to the last couple meetings.

    South Africa’s decision is in line with the European Central Bank’s ( ECB ) decision taken yesterday. The ECB increased rates by 0.25%. As of writing the Bank of England (BoE) hadn’t come out of their meeting. They are currently meeting to decide what to do with UK rates, but consensus is for them to also raise rates by 25bps. The first world countries (US, UK, Euro and Japan) tend to change rates by 0.25%, whilst emerging markets are usually required to make larger 0.5% or 1% decisions.

    That is all for this evening. I hope that the increased rates don’t put too much of a pinch on your home and other loan repayments.

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za

    Permalink2007-06-07, 17:27:12, by Mike Email , Leave a comment

    What Decision is the Best One?

    Yesterday I looked at some of the factors affecting the decision making process going on at the current MPC meeting, I also looked at what the Reserve Bank is mandated to target, and some of the pitfalls that face them.

    Coupled with the problems that Tito Mboweni faces (only having power to affect South African interest rates and demand, whilst the demand dynamics are global) is the timing issue. Any decent economist will tell you that there is a lag from when data suggests that policy (interest rates in this case) should be changed, to when it is actually changed, and finally when the changes are ultimately felt by the general public. This is often where consensus ends, however. There are many theories on how long the time period is from when data shows that changes should be made, and when the changes are actually felt. There are also widely varying views on how much government intervention helps the economy, in what ways it helps the economy, and even whether it does help the economy! There is research that shows that government policy actually has a detrimental effect (although these days there is research to prove anything!)

    In practical terms, if you are currently struggling to meet your bond repayments, and interest rates go up a couple of times, you will try and make a plan to find the extra money to cover your payments rather than sell your house, and buy something slightly cheaper. You may be successful in squeezing savings out for a year, but there may come a point when you can’t manage anymore and are forced to sell, and buy something cheaper, only to see rates begin to stabilize or fall the following quarter. Your actions will thus be out of kilter with policy, which isn't optimal.

    Many economists feel that the inflation threat first appeared a couple years ago, and that steps taken then are starting to be felt only now, and only over the next few months. They point to the fact that from August CPI-X will fall significantly due to the high price-index base from the previous year. The impact of the four interest rate increases in 2006 are now being felt with car sales slowing (although there is the argument that the implementation of governments eNatis system had a significant effect on car sales). Car sales is generally a leading economic indicator, meaning that the effects of the rates hikes have made enough of an impact.

    There is a school of thought that with the SARB mandated to keep CPI-X between 3 and 6%, coupled with the fact the CPI-X broke the upper band meaning that the Reserve Bank will be under pressure to be seen to be doing something about it, with a resultant 0.5% rate increase. With eleven out of eighteen economists polled by Reuters believing that rates will increase at this meeting, with five of them expecting another increase in August. Economists are often wrong with their predictions, and so not too much should be read into these numbers.

    The current account deficit also poses a risk to inflation. The fact that we are heavily reliant on foreign capital inflows to fund our expenditure, means that we are precariously position should that capital flow dry up. If the flow does slow, the exchange rate will weaken, which brings on its own inflation pressures.

    As can be seen the decision isn’t an easy one to make, and even when a decision is made the success or failure of that decision could very well be out of the Reserve Bank’s powers. This is where it becomes important to analyse and measure the likely ‘shock events’ that will have exogenous effects on inflation.

    That’s all for today. We wait in anticipation for Tito’s decision and speech tomorrow. Let’s see what decision he makes, and the reasoning behind that decision.

    Kind regards,

    Mike
    mike@seedinvestments.co.za

    Permalink2007-06-06, 16:51:53, by Mike Email , Leave a comment

    MPC in a Quandary

    The Monetary Policy Committee (MPC), headed by our Reserve Bank Governor Tito Mboweni, will be heading into their two day meeting tomorrow where they will, among other things, decide on whether they should hike interest rates, or leave them at current levels. They face, as usual, some tough questions, and will incur the wrath of certain parties no matter what they decide to do. Tito Mboweni is, in some ways, in a similar position to Jake White. Damned if he selects Luke Watson and damned if he doesn’t. There are always going to be parties out there with their own vested interests.

    Exporters favour a weaker rand, while importers prefer the rand to be strong. It is impossible to please both parties.

    As with any economic decision there are MANY variables that need to be analysed. The SARB needs to decide whether they should be targeting growth or inflation, which factors have an impact on growth and inflation, how important those factors are, whether their decision will make an impact on growth/inflation, and the list goes on…

    The first question is whether growth should be targeted or whether inflation should be monitored. A subtle mixture of both can also be targeted. China is a country who has been targeting growth, but is now worried about the consequent effects it has had on prices (inflation). They are thus trying to balance the effects of growth and inflation.

    There are commentators out there who have been calling for the SARB not to worry too much about inflation, that they should rather make the aim GDP growth. These pundits argue that by raising rates the Reserve Bank is stifling growth, and preventing job creation, they argue that a little inflation never hurt anyone… (Extending the Jake White analogy, most people think they can choose a better Springbok team than Jake). It is worth noting that no-one else has the authority that Jake and Tito have in calling the shots. They live and die by their decisions, and will thus put their all into making the correct decisions.

    The MPC has been clearly mandated to keep CPI-X (a measure of inflation that excludes mortgage payments) in a range of 3 – 6%. They have been successful in keeping within this range for what seems an eternity, but the latest data to come from Stats SA indicated that the upper level (6%) was broken in April. The higher CPIX is a result of higher prices, and in order to get it under control convention states that you should raise interest rates, thereby ‘forcing’ the population to spend more money paying off their debt (which we know South Africans’ have in ample supply), and consequently resulting in the average Joe have less money in his pocket at the end of the day to spend on other consumables. This lower demand on goods results in prices stabilising (or not increasing as quickly), and inflation falling back into the targeted range!

    The problem arises when demand for products isn’t local demand, but in fact global demand, as is the case with agricultural and oil prices. If Tito raises interest rates, we may have less to spend on food and petrol, but in the greater scheme of things how important is South Africa’s demand for these products? When the US is using their maize to make fuel, and sugar being used in other parts of the world to make ethanol, the fact that we’re shopping for food at Pick n Pay instead of Woolies, doesn’t make much of a difference to the price of bread. In this scenario if the SARB raises rates, people spend less on food and petrol, but the price of food and petrol carries on going up. If they leave rates unchanged, people will have more money to spend on food and petrol, but they will have to pay more for these items as well. In both circumstances nobody wins.

    As one can see these decisions are often more about damage limitation than gambling on getting the best result, but risking a massive fall out.

    I will look more at the MPC meeting in tomorrow’s report, and then we will try and analyse their decision on Thursday, and how it affects the man in the street.

    Have a good day.

    Kind regards

    Mike Browne
    mike@seedinvestments.co.za

    Permalink2007-06-05, 18:08:43, by Mike Email , Leave a comment

    Soggy start to the week

    The JSE closed down 0.36% at 28838 with value traded at R 9.59 billion. Declines led advances 262 to 150 with 69 shares unchanged out of 481 active. Mining closed up 0.71% at 36960, while Industrials were off 1.08% at 24244 and financials ended the day down 0.97% at 24536.

    The best performing sectors of the day were Leisure Goods Index up 2.7% at 1992, Travel & Leisure Index up 1.7% at 5275 and Platinum Mining up 1.3% at 107, while the worst were Venture Capital down 5.3% at 176, Household Goods down 4.9% at 121 and General Retailers Index down 2.9% at 35010.

    There were 26 new 12 month highs today, including Teal which closed up 25% at 3500 on very small volume and 2 trades, Sabvest up 12.5% at 900, Sable up 11.1% at 3999 and Palamin up 5,3% to 8640c.

    Of the major stocks Anglos gained a further 185c to R437, Billiton put on 1% to 17820c, Implats up 2,2% to 22595c, while JD Group shed 5,1% to R78.

    Some of the top gainers included Teal up 25% at 3500 , Monyetla up 18.33% at 355 , while the major losers were Village off 17.95% at 160 and Tawana off 15.15% at 140

    The Dow was down 0.2% at 13644.22 and the S&P 500 down 0.1% at 1535.13 a few moments ago.

    Gold was up 1.1% at $ 673.75/oz

    The rand was last trading at R 7.11 to the dollar, R 14.16 to the pound and R 9.58 to the Euro.

    Regards

    Sharenet

    Permalink2007-06-04, 17:26:42, by ian Email , Leave a comment

    Market Wrap

    The local JSE started the new month on a solid footing, up 1,1% for the JSE All Share index. Gold gained 2,1% as global markets all gained ground. Volumes were high at almost R11 billion with 251 advances against 149 decliners. Again lots of shares at new highs, including heavyweight Anglos.

    Anglo announced today that it is mailing details of its demerger and public listing of its paper and packaging subsidiary, Mondi. This will be in the form of a dual listed company, Mondi Limited a South African company and Mondi plc, a UK incorporated business.

    This has potentially been on the cards for some time, but with new management at Anglo, it is speeding up the focus on core mining. The strategic review of Anglo was announced in October 2005. Plans were then put in place for the demerger.

    The company was founded by Anglo American in 1967 and expended into Europe in the 1990’s.

    Anglo shares remain on the up, gaining 2,5% to 43650c

    Mr Price came out with very good numbers for its year to the end of March on Thursday. The market loved them, taking the price up 4,99% to R32.

    The company has increased trading space by 19% in the last year. It has however been increasing the size of its stores. Sales were up by 24% to R6,1 billion. The chain owns Mr Price, Mr Price Home, Miladys, Sheet Street and in the last year opened Mr Price Sport and the franchise division.

    Diluted headline EPS increased 19% to 183,6c per share. The distributions were increased 25% to 101c for the year.

    Alexander Forbes released its annual results to March. These were surprisingly strong. The business has been under some pressure and is the subject of a private equity buyout at a price of R17,26 per share. Shareholders approval is still required, which will take place in mid June.

    The price closed unchanged at 1675c

    Metropolitan announced that Prof Wiseman Nkuhlu has been appointed as chairman effective 1 June. The share price gained 4c to 1629c

    That’s all for today

    Have a great weekend and enjoy the rugby

    Regards

    Ian de Lange
    ian@seedinvestments.co.za

    Permalink2007-06-01, 17:44:40, by ian Email , Leave a comment