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    Quarter ends on a positive note

    The JSE ends the third quarter on a high note. Touching 30 204 in late trading. This last quarter was very volatile, but investors have forgotten what they were nervous off in mid August. The market breadth was positive and over 10 shares trading at a new high or 12 month high.

    AGI Industries was previously known as Africa Glass Industries. It’s a large producer and supplier of glass and aluminium products used in construction industry for houses and skyscrapers.

    It operates from over 50 manufacturing and distribution centres around the country. The majority 71% of its products are beneficiated, with 29% of sales unbeneficiated (i.e. bulk and cut to size glass).

    One would have thought that a company such as this, with a majority of its sales as value added and especially in the building industry would have performed very well, but this was not to be for the last year.

    Today it released results for the year to June. It’s not too impressive when a company takes 3 months to release its annual numbers. Most large multinationals take 4 – 6 weeks.

    On the 21 September the company issued a trading statement saying that its basic earnings per share would be lower by 15% to 20% and that headline EPS would be down 70% to 75%. The market was clearly not expecting such a large decline and the price fell sharply from around 500c to 350c on large volumes.

    Today the actual results were released and basic EPS was down 18% to 33,5c while headline EPS fell 73% to 10,9c from 41,1c. Clearly there is a big difference between basic EPS and headline EPS in this case.

    Well the big swing factor was the profit on sale of its Roodekop property for a profit of R67m.

    When added to property from operations of R46m, the full after tax profit for the year does not look too bad at R69m from R83,3m, but clearly the profit on sale of the property is a once off and must therefore be excluded.

    The biggest problem cited was the aluminium division, which was impacted by operating problems.

    The company’s gearing raced up from 64% to 81% due to capex and problems at Roodekop. With the sale and leaseback of this property to Pangbourne Properties, gearing will reduce to a more manageable 40%.

    With the new production facility, reduced gearing and ongoing boom in construction, the company is positive for the year ahead. It’s looking for a significant improvement in profitability in the first half of 2008.

    So despite the negative results the price jumped up 4,5% in late trading to 392c. At this price on a 10,9c EPS its expensive, but if earnings can normalise at much higher levels back to 41c, then its not expensive.

    Have a great weekend

    Ian de Lange

    Permalink2007-09-28, 16:30:27, by ian Email , Leave a comment

    How High (or Low) Can You Go?

    After seeing the JSE ALSI break through the 30 000 level earlier today, and even reach 30 178 at one stage (hence trading at new highs), I decided to have a look at some of the underlying stocks, and where they were trading relative to their highs. It makes for some interesting reading!

    Out of the largest 10 shares on the JSE (which account for approximately 50% of the total market capitalisation) there were shares as far as 18.9% and 14.6% off their highs (Anglo Platinum and Firstrand respectively), while others were much closer to all time highs, with Richemont, BHPBilliton, and MTN all within 2.5% of their all time highs.

    Taking a look at some other selected large cap shares we can see some common themes emerging.

    Gold shares are still way off their highs, which were generally reached more than a year ago. Anglo Gold is off 16.80%, Goldfields 28.40%, and Harmony a whopping 55.50%. Even before it’s recent drop off (when it was trading at R 100) Goldfields was 46.60% off its all time high reached in May 2002! This kind of underperformance will test even the most hardened of long term investors! Make no mistake, there have been periods (over this time) where gold shares all performed well, but a buy and hold strategy over the last 5 years or so has not been a winning strategy!

    Financials, owing mainly to the sub-prime contagion, are also generally well off their highs (although thankfully their performance over the last 5 years has been good) with Investec down nearly 30%. Standard Bank is doing well, but is still off 12.50%.

    Resources and Industrials are generally nearer their all time highs, but even there we have cases like Imperial (which is down 25.90% since its high) which are still relatively depressed.

    What does all this tell us? And how can we use this information to our advantage?

    Firstly, the misnomer of the ALSI: The ALSI is an average, which results many shares performing differently from it (one just needs to look at the Gold Index). Just because the ‘market’ is at all time highs, doesn’t mean that your portfolio is as well. You need to understand where you are invested and what variables will affect your portfolio.

    Secondly, it doesn’t take a rocket scientist to be able to appreciate the importance of diversification. Sure putting all your eggs in the construction basket over the last few years has paid off handsomely, but investing everything in gold shares would’ve hurt! Uncorrelated assets will provide equal returns to highly correlated assets over the very long run, but over shorter period help to make the returns smoother.

    Finally, with different sectors (and companies within the various sectors) performing well at different stages there is opportunity for those investors who have time and expertise to identify these areas and outperform the ALSI. Active asset management can provide excess returns. It is not an easy feat (confirmed by the fact that over the long run most asset managers will underperform the market) but those who have a consistent robust process should be able to add value.

    Hopefully this has provided you with some insight into the market, and will assist you in getting superior performance (whether it is in your own share portfolio, by selecting the best fund managers, or teaming up with a consultant who will be able to give you personalised recommendations).

    Our simple website is now up and running and can be viewed at www.seedinvestments.co.za. Have a good day!

    Kind regards,

    Mike Browne

    Permalink2007-09-27, 18:01:03, by Mike Email , Leave a comment

    Should investors be concerned about inflation?

    Inflation numbers for August had no real impact on the market today. Cpi-x came in at 6,3% year on year, slightly down from the 6,5% in July. Most consumers disagree with the inflation number, especially when doing grocery shopping, but as investors should we even be concerned about this release?

    Its true, food prices have been pushing up the inflation numbers and in August the annual rate of increase for food was running at 11,1% up from 10,2% in July. A range of foodstuffs such as meat, grain products, milk, cheese, eggs, coffee, fish, tea, sugar etc were cited as culprits.

    This is not a local phenomena. Looking at some of the charts of soft commodities such as wheat,

    But coming back to the question of inflation and whether we should elevate its status when making investment decisions? The answer is probably not? Looking back at inflation over SA history, it picked up from single digits to double digits in the mid 70’s and then sharply up again from the turbulent mid 80’s, until Chris Stals broke the back of it with high interest rates in the early 1990’s.

    It officially moved back into single digits in 1992 and has for the most part been there except for an upward spike in 2002.

    But over the high inflationary period how did equities react. Well looking back over that time the JSE All Share index performed very strongly. Yes it came with lots of volatility, but clearly owners of real assets were not too concerned with the inflation.

    In a high inflationary period an investor wants to hold real assets. These naturally include ownership stakes in businesses because for the most part a business as an ability to pass on inflation pressures to their customers and so over time increase earnings in line with or slightly ahead of inflation.

    With the US dropping interest rates for the first time in 4 years by the 50 points, they are signalling that they are not concerned about inflation. That is tomorrow’s problem. Today’s problem is providing liquidity to prop up financial markets. There is now a stronger possibility of inflationary pressures picking up, but I believe that this is net net positive for owners of real assets.

    Today global markets ended up. This despite all the negative news. I was asked last night on CNBC Africa whether negative economic news means a change in strategy on asset allocation. The answer is no – its important to look at valuations of assets in absolute and relative terms as a more important method t determine the appropriate asset allocation.

    That’s all for today. Have a look at our one page website. www.seedinvestments.co.za.


    Ian de Lange

    Permalink2007-09-26, 21:45:37, by ian Email , Leave a comment

    Lots of economic data - what strategy to adopt?

    Spending some time looking at the raft of economic data released, I now know why economists can get so bogged down. On any given day around the world there are weekly, monthly and quarterly releases, and then revisions. Economists also spend time thinking up new ways of looking at data.

    All the economic data I looked at over the last 2 days appears negative.

    Confidence indicators are designed as a leading indicator to try and assess how confident consumers and businesses are at any point in time and how this confidence changes

    In Germany the monthly IFO business climate index was released. It is a survey of 7000 businesses. It weakened today for the 4th time in a row and a 19 month low. The big concerns for German business are the strength of the Euro and increasing cost of credit.

    The important US consumer confidence index was released, falling to below expectations. The outlook was for a decline to around 104, from 105,6 but it dipped to 99,8 – its lowest level in 2 years.

    Linked to consumer and business confidence and central to the credit crisis is the US home sales. Large US homebuilder, Lennar Corp reported big losses. And the S&P Case Shiller home price index came out today with home prices falling by biggest margin 3,9%, started in 2001, up every month except from Jan this year, down each month.

    So there is lots of bad economic data coming out, supporting general more accommodative central bank policies, led by the US.

    The amount of data released is mind-numbing and in many cases serves to scare investors. Often they fall back to the default position – “Its just too volatile out there, I think I will wait a bit until things get a bit clearer.”

    But if you spend your time looking at the data and getting caught up in the noise of economic releases, it will always appears too volatile to do anything. And just when the economic data starts to clear and look positive, that is when assets are fully priced.

    Investors should be asking themselves 2 questions:

    . In a global economy that is devaluing currency, where is the value?

    . What type of asset allocation model should I then adopt?

    I have been asked to be on CNBC Africa this evening (channel 54) at 8:00pm. I hope to cover some of these topics.

    Kind regards

    Ian de Lange

    Permalink2007-09-25, 17:01:11, by ian Email , Leave a comment

    The Importance of Staying the Path

    There’s nothing like a bit of volatility (read pull back) in the market to shake out some of the cobwebs, and focus one’s mind!

    Investors have experienced one of the strongest bull markets experienced in South Africa, and complacency can often creep into the investment decision process. Extrapolating recent periods into perpetuity is often a dangerous game, as the market is hardly ever in equilibrium. Doing this will result in investors generally being too pessimistic when there’s value around, and being too optimistic when values are stretched.

    By sitting down and constructing a plan (and then importantly sticking to it) an investor can hopefully avoid the emotional pitfalls, and use the market’s volatility to their favour. And when the market drops by more than 13% and then rises over 15.5% in a matter of 2 months (as the ALSE has) you can be sure that your emotions will be tested.

    By consistently rebalancing your portfolio’s asset allocation to predefined levels you are able to take advantage of the old adage of buying low and selling high. Using a simple two asset class example is probably the best way to illustrate the effect:

    Investor A’s optimal asset mix is 50% equity and 50% bonds. If the equities outperform bonds, then the portfolio will be overweight equities. At the rebalancing date (for example half yearly) the investor would reduce his equity holdings, and by doing so sell the more expensive asset, and purchase bonds which will be more attractive on a relative basis.

    This is an excellent risk strategy, which can be employed across a wide range of asset classes as well as among your shares in your share portfolio among other uses. In this way your exposure to each asset isn’t allowed to go over predetermined limits. Part of a successful strategy is ensuring that your risk levels are always at acceptable levels, by managing your risk; you are indirectly managing your returns.

    For those investors who have been caught in the headlights by the increase in market volatility over the last few months, be warned. There is a good chance that volatility will be here to stay for the foreseeable future, and this means that having a plan (and sticking to it) is all the more important to those investors who want to achieve their financial goals.

    Have a good long weekend and good luck to the Springboks tomorrow!

    Kind regards,

    Mike Browne

    Permalink2007-09-21, 14:32:59, by Mike Email , Leave a comment

    Investors short the US dollar

    The weak US dollar makes internationally traded commodities possibly appear more attractive than they currently are. Gold is slowly heading back to its 1980 highs of $850/oz. But wait this is only in nominal terms. Adjusting for inflation, the price should be around $2400/oz.

    The US dollar index has weakened steadily since having a 10 year peak in 2002/2003 at 120. This index has been steadily declining to now below the crucial 80 level. This index measures the trade weighted exchange rates of the US dollar against a basket of 6 currencies, the Euro (57,6%), the Japanese Yen (13,6%), GBP (11,9%), Canadian Dollar (9,1%), Swedish Kronor (4,2%) and the Swiss Franc (3,6%).

    The sharp drop of 0,5% by the US Federal reserve this week has pushed the US dollar weaker and some are looking for a level of 75 on the index.

    At an international investment presentation yesterday, Piet Viljoen from RECM showed a chart of the US dollar index and commented that they believe the currency appears relatively cheap and is providing an opportunity for value investors.

    The dollar weakened this week trading at parity to the Canadian dollar for the first time since the 1970’s.

    Gold was testing multi decade highs at $736/oz.

    Energy shares have galloped up on the back of the firm crude oil price. Locally Sasol moved up firmly and closed at R329 after trading at a new high of R331.

    A big day on the local market with the third quarter futures close out. Almost R19 billion was traded with over 83500 trades.

    Anglo had the largest value traded at over R2,2 billion

    Billiton traded almost R2 billion today.

    The spurt provided by the surprise interest rate drop on late Tuesday was short lived and US markets were trading down around 0,5% late afternoon Thursday.

    Alan Greenspan, was reported on Bloomberg as saying that there is a one third possibility of a recession even with the latest fed rate cut. He has just released his book titled, “The Age of Turbulence: Adventures in a New World.”

    Kind regards

    Ian de Lange

    Permalink2007-09-20, 19:59:50, by ian Email , Leave a comment

    Global liquidity boost

    As expected global markets received a solid boost today. The JSE top 40 index jumped 4% to 27116 and the JSE All Share index up 3,6% to 29808, so very close back up to its new highs. Gold up 3% as bullion traded at $722/oz.

    Europe markets moved up between 2,3% and 3,3%

    Asian markets were generally strong, except for Shanghai down 0,55%

    The more relevant Nikkei and Hang Seng indices gained 3,7% and 3,98% respectively.

    Very big gains on the top 40 index with Billiton at a new high in rands at 23174c, up 6,7%

    Anglos gained 7,6% to 44625c, with R1,5 trillion traded.

    Sasol up 4,85% to 32399c

    So central bankers have once again given global markets the necessary underpin that they require. Confidence for the time being is back and short anyone with any short positions at the end of yesterday ahead of the rate cut were covering quickly today.

    The US markets are now up around 0,8%.

    That’s all for today – short and sweet

    Don’t hesitate to drop me a mail with any questions that you have on investments and your planning and I will spend some time over the coming weekend answering any pertinent emails.


    Ian de Lange

    Permalink2007-09-19, 18:42:25, by ian Email , Leave a comment

    US Federal Reserve drops interest rates by 0,5%

    Market participants were all eyes on the US Federal Reserve today. The anticipation was for a drop of 0,25%, but they came along with a 0,5% drop, giving shares a big boost. Late in the day the Dow was up almost 2%, the S&P 500 up 2,2% and the NASDAQ index up 2%.

    Bloomberg reported that US producer price inflation dropped by 1,4% in August, the biggest drop since last October and more than forecasted. Investors took this as positive news and some confirmation that the US Federal Reserve would have enough ammunition to drop interest rates.

    This was the first time in four years now that the world’s largest economy has cut their interest rate. The official announcment said, “Developments in financial markets since the committee's last regular meeting have increased the uncertainty surrounding the economic outlook.”

    Clearly the US central bank does not want the property debt problems escalating into even bigger problems, and saw fit to cut its core rate to 4,75%. Unlike the local central bank, the US Federal Reserve has a mandate of both price stability and economic growth – it’s a tough mandate.

    Today it spoke about disruptions in the financial market and this has the possibility of “restrain economic growth more generally.” The decision to cut back by 0,5% was unanimous.

    The US Fed took rates down to 1% following 2001 into 2003 and this has been at the centre of blame for the global glut of liquidity. They steadily took it back up to 5,25% in June 2006 and now the cycle is turning again. This time with a new chairman at the helm – Ben Bernanke who replaced Greenspan.

    This move allows US banks to lower their prime lending rates from 8,25%. It gives banks and borrowers some breathing space. While the consensus expected a drop, most thought it would be 0,25%. This bigger drop gives an indication of the seriousness of the lending environment in the US.

    Other central banks are nearing the end of their tightening and so the US has now taken the lead down again. It’s going to be interesting to see how things develop from here.

    The US dollar declined against some currencies on the announcement of the drop. Gold trades at $719,50/oz and the price of oil in US dollars increased to just below $80/barrel.

    Kind regards

    Ian de Lange

    Permalink2007-09-18, 21:40:02, by ian Email , Leave a comment

    Know the difference between trading and investing in shares

    There is a difference. A trader is no different from any other, buying something at a certain price and trying to sell at a slightly higher price - he hopes to make a quick buck. Some call it speculating. An investor however, while also having a profit motive, has a totally different approach. A trader will hold shares as his stock in trade, while an investor is more interested in the long term price appreciation and the cash that the asset will generate.

    Because of the relative ease that anyone can set up a brokerage account and start trading, the assumption is made that it’s all too easy. This was brought home again this weekend, when someone who has been trading asked me, what actually happens when he “invests” his R50 000 in a share – how does it actually reach the company in question for them to benefit?

    When I explained to him that the trading or speculating he had been doing over the past few years (i.e. not investing) was not directly benefiting the company’s coffers, but rather that he was buying and selling in the secondary market, he seemed rather surprised. As I say the mechanics of trading are extremely simple when it comes to shares. Contrast this perhaps with trading a commodity such as coal, oil or fruit for example. The ease of trading when combined with a bull market in prices suddenly makes everyone a stock market trader.

    Benjamin Graham, author of Security Analysis and The Intelligent Investor proposed a definition of investing as, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

    A speculator can easily buy something without having the faintest idea of its value, in the hope of on selling at a greater profit. An investor however is interested in the security of the capital that he sets aside and then looks at the cash generation of the asset that he is buying. He knows that on balance if he gets this right, the price will take care of itself.

    There is absolutely nothing wrong with trading or speculating – it’s just that so many participants believe that they are investing when in fact they are speculating.

    Speculating has some downside - profits are taxed at much higher marginal tax rates, which at a maximum is 40%. This has a big negative drag on a portfolio return. Capital gains on an investment portfolio are taxed at much lower rates of tax – a maximum of 10% if the investment is owned by a natural person. The 30% differential is reason enough to have the bulk of your wealth on longer term investing.

    It’s also interesting to note how the activity of portfolio managers differs from one to another. Some turn over their portfolio twice a year, while others have a turnover of less than 15% per annum.

    I think it’s appropriate to distinguish your longer term portfolio from shorter term trading.


    Ian de Lange

    Permalink2007-09-17, 19:32:09, by ian Email , Leave a comment

    JSE falls slightly

    While the JSE closed down 0.54% at 28928, it was a big day on the volume front with over R13 billion trading. But also negative breadth as declines led advances 261 to 176 with 90 shares unchanged. Mining shares fell 0.77% at 37050, while Industrials were down 0.56% at 24745 and financials ended the day down 0.74% at 22964. Gold shares put on 0,2% as bullion moved through $715.oz.

    The best performing sectors of the day were Non-life Insurance Index up 3.5% at 22180, Automobiles & Parts Index up 2.5% at 2477 and Oil & Gas Producers Index up 2.3% at 12433.

    While the market was down, there are still companies trading up to new highs.
    Somme of these today included:

    Rex Trueform up 35% for the N shares to 950c. Fin24 carried the news that Cape based Brimstone had acquired a large stake in the company from Old Mutual.
    Panprop gained 3,2% to 1780c.

    Sasol moved up R300, closing up 2,3% to R305

    MTN, WBHO and Aveng ended down, but all traded at a new high.

    Anglo lost 0.55% at 41820, Billiton was down 1.16% at 21330, Investecp fell 4.26% at 7514.

    The best performing larger cap gold company was Simmers, up 1,9% to 532c

    The Dow was down 0.2% at 13395.94 and the S&P 500 down 0.3% at 1479.47 a few moments ago.

    Gold was up 1.6% at $ 715.75/oz

    The rand was last trading at R 7.15 to the dollar, R 14.37 to the pound and R 9.92 to the Euro.

    That’s all for today

    Have a great weekend


    Ian de Lange


    Permalink2007-09-14, 17:30:53, by ian Email , Leave a comment

    Investors should avoid Information bias

    I spoke yesterday about some of the questions that investors should ask. Its interesting to note that so many people place greater emphasis on information that is easy to remember and more readily available and far less emphasis on tougher to find information that indeed may be more useful for longer term investing. It’s something that the behavioural studies call the “availability error”.

    Easier to recall stories and information which is more current at any one point in time and perhaps dominating the popular press, gets a higher weighting from investors looking for prospective investments. A classic example would have been technology shares in the late 1990’s. Currently it may be junior miners, construction shares and the number of new shares coming to the market.

    As these companies have become more profitable, so they have attracted sellers looking at selling good chunks at attractive prices to eager investors with money.

    Then you have the JSE starting up an alternative board for smaller companies a few years back - the AltX. It was good timing on their part, slow to start off with but picking up as many companies started to find the JSE an attractive environment to raise capital.

    Naturally the JSE wants to showcase these new listings to the investing community at large, both private and institutional and so starts to run presentations. I received an invitation today for an AltX presentation by the following companies marketing their wares to investors. These are all new companies listed on the JSE.

    Rare Holdings – a distributor and manufacturer of piping and related products.

    Esor – engineering company in the construction industry.

    WG Wearne – supplier of aggregates to construction industry.

    Others include telecoms companies, Vox Telecom, One Logix, Silverbridge, Huge Group (least cost routing), Telemasters (least cost routing)

    Financial services industry, Kagisano, Blue Financial Services, African Dawn

    Then Ansys – control systems for transport and defence and Safic as manufacturer of chemicals for various industries.

    So plenty of new names coming to the market. Some have already performed very well, and some will continue to do well, but most new listings won’t. While some investors love the news flow, placing a lot of weight thereon, studies have indicated that generally the insiders have better insight than the buyers.

    So readily available information will no doubt have a higher weighting than tougher information to find. What about companies such as:

    Mobile – not widely held but listed since 1998.
    KAP – not widely held but listed since 1994.
    UCS – not widely held but listed since 1968

    These companies are not in the news, are not marketing their stories to hungry investors, and information is less readily available. I am not saying that they are superior investments – just that as an investor one needs to always look at the total universe of available options.

    Ask the right questions.


    Ian de Lange


    Permalink2007-09-13, 17:31:42, by ian Email , Leave a comment

    What should an investor be paying attention to?

    The biggest control that an investor has over his investments is the price he pays for a particular share in a business. The return equation is a function of price paid, proceeds received (dividends and final price) and time. Unfortunately an investor has no control over the eventual price and time will take care of itself, so he should be spending a lot of time asking questions about the price he is paying.

    What I am noticing however is that too many investors are not asking enough questions about the price that they are paying for an asset.

    I think one of the reasons for this is that there has been no real necessity over the last few years. The thinking goes something like this. “whatever price I pay, it’s going to be lower than the price in 6 months, one year, or 3 years, so why bother worrying about it.”

    The argument has indeed been true over a few years. Prices of most assets have moved up strongly and so fewer and fewer questions are being asked about the price paid for an investment.

    But you may be thinking, “well what about the price. What do I need to determine, or assess or ask?”

    Well good investors ask good questions. They ask these before they make an investment, knowing that time spent on the determining a good price is time well spent.

    Remember as Buffett says, “price is what you pay, value is what you get”. An investor does not automatically get value - overpaying for an asset will result in little or no value being received.

    Some of the questions an investor should ask may include:

    • Does the price compare well with the intrinsic value?

    • How does the price compare to the current, future and normalised earnings?

    • How has this relationship moved over time. i.e. has the multiple increased or decreased?

    • How does the price compare to the underlying net asset value of the business and how has this relationship moved over time?

    • What is the balance sheet structure of the company. i.e. is it under or over geared and what is the general trend over the years for the particular company?

    • In relation to the gearing, what is the company’s return on assets and return on equity?

    • Is the company issuing new shares or is it buying back shares with excess profits?

    • What is the trend of its dividend payout and what is likely payout in the next few years?

    • Is the company retaining sufficient earnings to grow the future earnings?

    • Has the company reached maturity stage with higher dividend payout ratio, but lower growth prospects?

    Investing in a limited universe of shares is both an absolute and relative process. i.e. An investor must develop some process to assess the price to determined value on an absolute basis and then rank them according to the most attractive to least attractive.

    Over time an investor will succeed where he has a process, continually asks the right questions, and has a well defined consistent process.

    Kind Regards

    Ian de Lange

    Permalink2007-09-12, 17:27:56, by ian Email , Leave a comment

    Construction companies making new highs

    Construction companies have powered ahead, typically generating profits ahead of forecasts and so supporting prices. Today’s new highs were littered with construction related shares.

    One analyst from Imara SP Reid has the forward PE on Aveng dropping from a trailing 18,7 times to 13,4 times and Murray and Roberts from 27,5 times to 19,3 times. Naturally as earnings come in stronger than the general forecasts then valuations appear more attractive helping to push up prices even more.

    WBHO drops from close to a 22 times PE to 14,5 times. These companies are benefiting from large government spend on big projects, but also increase in spending by mines.

    Ceramic Industries produced annual results to the end of July. These give some indication of the strength of the home building and improvement market. This company’s 2 main sales categories are tiles and sanitary ware. Sales of tile increased 21%, but sanitary ware up a massive 57%, albeit it a much smaller base.

    Margins came under some pressure however and the sales increase of 26,7% only translated into operating profit up 13,1% to just shy of R400m. Headline EPS increased15,7% to 1250c per share.

    The dividend was raised 25,9% to 340c. The one aspect about this company is that its shares in issue have actually declined slightly from 18,2m to its current 17,28m shares in issue.

    The share price remained unchanged at 17399c. It’s a tightly held share

    Cashbuild came out with a trading update today saying that it expects its headline earnings per share to increase some 40% to 46% based on 53 trading weeks against 52. Stripping out the 53rd week, this drops to 30% to 36%, so still not bad. These shares ended flat at R64.

    Casbuild shares remained flat at R64.

    Buildmax made a new high at 290c, up 10,2%

    Murray and Roberts up a further 3,99% to 8950c, now with a market cap of R29,7 billion.

    Basil Read up a further 3,2% to 3180c

    WBHO up 2,3% to 11150c

    Esor up 6c to 660c. This has been an excellent new listing, coming onto the market at just below 200c in March 2006. The market is expecting excellent results as its trading on a trailing PE of 29 times. At the beginning of the month it issued a trading update saying that interim period to August should see earnings up between 21c and 25c compared to 8,4c for prior six month period.

    US markets are trading up at this time.

    That’s all for today

    Kind regards

    Ian de Lange

    Permalink2007-09-11, 20:07:42, by ian Email , Leave a comment

    Chasing yesterday's winners

    It’s a well known fact that investors chase yesterday’s winner, which more often than not results in lower than expected returns. This goes for allocating money to specific asset classes that have produced excellent immediate past returns.

    It’s interesting when speaking to investors how many want for example want to allocate a large portion of their available funds to residential property. With local investments having performed so strongly few want to place funds offshore, which for many years now have also produced relatively low returns.

    Because many investors have no real consistent investment process when making investments, except using past information, this is where the emphasis is placed.

    In 2005 US based Morningstar published a report on the consequences of chasing winners (Mind the Gap, How Good Funds can yield Bad results). This report was highlighted again by Rob Arnott more recently. He compared the average dollar weighted returns with time weighted returns over the past decade to 2005 for 17 categories of investment funds.

    The time weighted return measures the actual fund performance for all investors in that fund over that period of time. Example if a fund produces a 21% return in one year and 0% in the second year, its annual time weighted return is 10% per annum. I.e. two consecutive 10% gains equals 21% cumulative return.

    But Arnott pointed out that if that same fund has $100m in the first year, but jumps to $1billion in the second year (because of its excellent first year performance), then the dollar weighted average return reduces to only 1,9%. This is a massive shortfall of 8,1% per annum. In other words some of the investors received the full return, but far more received very poor returns.

    Similar studies have been performed over various periods and for various investments and the results come to the same conclusion – it’s merely the quantum that varies slightly. The report found that over various types of funds, i.e. specialist and more conservative, the average shortfall of dollar returns against time weighted returns was 2,8% per annum.

    Any investor without a consistent process has a high probability of slippage against its relevant benchmark.

    Today the market ended mixed with gold shares coming back slightly even as the gold price ended up at $703/oz.

    Three companies in building and construction ended up at new highs. Murray and Roberts at 8607 up 3%.

    Masonite up 4,65% at R45 and Esor at 654c up 6,3%.

    Kind regards

    Ian de Lange

    Permalink2007-09-10, 20:02:57, by ian Email , Leave a comment

    Gold up

    The gold price in USD moved up today through the $700/oz level. It has not been here since April 2006. This had an immediate impact on local gold shares, where in late afternoon trading the market was down. Across most sectors.

    When one talks about operational leverage, there are few as geared to slightly higher prices than gold companies. Gold mining in South Africa has been described as a sunset industry. Its way past its prime, in terms of volumes coming out of the ground. But there is still money to be made, albeit at higher business risk and a much higher business cost.

    Mines, like most businesses, have had to improve efficiencies, by keep costs as low as possible, aggregating and achieving increased economies of scale to counter the slowing sales per ounce of gold produced.

    So while mines can’t control their revenues, they place a lot of emphasis on the actual volumes production and the cost per ounce of that production. For example Goldfields, in the quarter to end of June, had a production cash cost running at R92 273 per KG. Revenues. Sales came in at R152 825.

    Goldfields actually had a good year to June 2007 with earnings up 53% from R1,5 billion to R2,36 billion. The market cap of the company is R77,4 billion and at this price trades on a trailing PE of 31 times. A year ago the price traded above R150, but has underperformed for the last year back to R118, where it traded today.

    Anglogold is slightly bigger with a market cap of R84,8 billion. The price of this company has not gone anywhere for a long time. It trades on a historical PE of 36 times. The consensus forecast PE however comes down to 18,3 times and then 14,4 times.

    Harmony had a major price decline from R120 to around R70 after the resignation of CEO and then CFO of the company. It has a current market cap of just less than R30 billion trading on a trailing PE of a massive 172 times.

    Simmer and Jack Mines has been a very volatile company, trading up from R1 in 2005 to over R7 this year, only to decline to 450c. Now steadily moving up and today gained over 6% to 550c late in the afternoon. Outside of the gold funds, the biggest holder is Hermes equity fund.

    Late afternoon the price had climbed to $703/oz and the gold shares were up 5%.

    That’s all for now. Have a great weekend


    Ian de Lange

    Permalink2007-09-07, 15:30:37, by ian Email , Leave a comment

    Interesting data on the JSE

    Each week the JSE releases some interesting data on turnover numbers going through the bourse. It’s always good to get an idea of the top down or overall framework, before drilling down to the company detail. In and by itself, much of the information is not that useful for long term investors concentrating on stock selection, but it’s important to have an overall view.

    The reserve bank obviously also releases a lot of statistics on the market. Clearly unless one is an economist, I don’t believe that it’s worth getting too carried away with a lot of the detail.

    The total market capitalisation of all companies on the JSE is now at R5604 billion. i.e. R5,6 trillion. This has moved up from R4,5 trillion one year ago. In terms of volumes and values traded, this has escalated steadily but strongly over the year. One of the reasons is the greater emphasis on a company’s share liquidity.

    The 5 largest companies by market cap, Anglos, Billiton, SAB Miller, Richemont and Angloplat, make up R1,8 billion of the R5,6 billion. While Billiton has a market cap of R514 billion on the JSE, its total global market cap is around R1 trillion. In others words bigger than Anglo American.

    The number of trades for the year to date came in at 7,1m up from 5,3m in the same period for last year, a jump of 33%. Corresponding value traded increased from R1,4 trillion to R1,89 trillion, up 31%.

    Foreigners were net buyers of shares to the value of R65billion up from R54 billion in 2006 period. The last week in August it was fairly low, with buyers matching sellers.

    Increased activity in the form of trades and listings on the JSE is all positive for the JSE as a company

    Business Day reported today how the JSE Ltd has ambitions to expand into the rest of Africa in an attempt to consolidate and grow its position. While there are definite risks, stock exchanges are classic “moat” businesses. I.e. in each country or region, there is a dominant player, almost a monopoly, or euphemistically, temporary position of exclusivity.

    High barriers to entry is not necessarily always a given in this type of environment, because stock exchanges act as an intermediary business and there has been some moves by dominant clients to bypass, but again some efficient transparent pricing and administration system will be required.

    The company reported interim results to June 2007 with a number of positives. It’s growing its single stock futures market. While volumes increase and reached new record highs in August, it has not had any failed trades.

    Around the world exchanges such as LSE, NASDAQ, NYSE etc trade on very high multiples of profits. Locally the JSE has been the same, trading on a price earnings ratio of a massive 78 times. Normalised this should be around 30 times historical. The market is looking for stronger growth from this company over the next 2 years and cost efficiencies.

    The JSE has a high cost base, but this is largely a fixed cost base and with greater volumes through a fixed cost base, it has excellent scale economies.

    It’s been a fairly tightly held share and not widely owned amongst the local unit trusts. A couple of the Coronation funds held it at the end of June quarter.

    That’s all for today


    Ian de Lange

    Permalink2007-09-06, 18:29:02, by ian Email , Leave a comment

    Some corporate activity on the JSE

    Global markets were negative today. The JSE All Share index fell 1,22%. Gold was up 0,5%. Financials shed 2,1% and Industrials 0,8%. Today we look at some of the corporate news that was released.

    This morning Abil and Ellerines announced that following its due diligences, Abil has now submitted to Ellerines a notice of its firm intention to make an offer to acquire entire issued share capital at a price of R85 per Ellerines shares. Abil will settle by way of a share issue at R32,10 per Abil shares.

    This is an exchange ratio of 265Abil shares for every 100 Ellerine ordinary share, but after accounting for the BEE deal, the ratio falls to 255 per 100

    Abil shares fell 28c to 3172c. Ellerines shares gained 10c to R76.

    Foschini had their AGM today, the company’s 70th. This is a business that puts a lot of emphasis on number of years. The CEO Denis Polak has been with the company for 39 years, spending the last ten as CEO. CEO designate, Doug Murray, has been with the group for 22 years.

    The historical numbers are impressive. Profits of R1,78 billion on turnover of R7,2 billion, with an expansion of operating margins to the highest ever at 26,1%. Comparable headline EPS grew by 18,5% to 534c. Total dividends increased by 22,7% to 270c per share. Return on average equity came in at a very high 32,5%.

    These type of results are why the share price has traded from R10 in 2002 to a peak of R78. Now it’s fallen back to R56 and on a historical PE of 10,5 times and DY of 4,8% perhaps the market is pricing in too much of the bad news coming its way.

    The CEO reiterated that their view is that next year will be one of the most difficult that the group has experienced for many years. However they go on to say that this will probably be short-lived. Some of the reasons for their concerns included, 6 interest rate increases since June 2006, petrol price hikes, and the National Credit Act.

    The share price fell 2,6% to 5591c.

    AECI announced that all conditions have been met for the sale of its Dulux business to ICO Plc. AECI will generate R745m for this business. AECI trades on an historical PE of 11,3. The price closed at 8185c

    Anglo American announced that it had placed 19 million Exxaro shares at R73 per ordinary share by way of an accelerated book building placing. This raised R1,387 billion. Exxaro shares fell 4,5% to 7450c, while Anglo fell just 259c to 41601c.

    US markets are under some pressure and this may set the mood again for tomorrow. Still there are always opportunities in the market, and increasingly so when prices come under pressure due to forced sellers.

    All investors should be working to a longer term strategic investment plan, and trying to avoid getting caught up in the noise, to the detriment of long term wealth creation - sound easy? actually not that difficult with some discipline.


    Ian de Lange

    Permalink2007-09-05, 17:59:30, by ian Email , Leave a comment


    PSG is a company that has produced a total compounded return since 1995 of 66,6%. This is an exceptional return and comes from their presentation to shareholders off the JSE website. The company started off as a placement company, PAG, used by Jannie Mouton as a vehicle to list his PSG business.

    Some of the smaller businesses have posted their presentations. An interesting business with some bigger ambitions is PSG.

    Over the year, it has developed businesses and used the JSE to full advantage, listing businesses when there was demand and delisting and acquiring when there was apathy. In this way the shareholders in the business have benefited from the astute deal making ability of the management.

    Now its looking for a main board listing on the LSE and looking to raise a further R300m to R400m.

    Its also looking at listing Paladin Capital. PSG owns 90% of this company, which is their private equity investment holding company. This has investments in Algoa Insurance Company, which is a small life company.

    Paladin has a 49,9% stake in Thembeka, which is a black owned and controlled investment company with KK Combi as its executive chairman.

    It also owns 58% stake in fast moving consumer goods business CIC Holdings.

    Headline earnings of the business have grown from R85m in 2004 to R651m in 2007. There have been some bigger once off windfalls, such as the sale of its 15% stake in JSE Ltd, which generated a large profit of R425m of the R651 in 2007.

    Over the same period the market cap of PSG grew from R443m to R4,7 billion

    Still the PSG Group has proved adept and growing businesses from small bases to large entities in a relatively short period of time and in so doing generating wealth for shareholders. One business is PSG Konsult, in which it owns 74%. Profit was R0,3m in 2001 and this has grown to R51m in 2007.

    PSG has recently started Quince Capital with Reunert in which it owns 39,8%. This company is looking at niche asset backed finance deals. It started with the Nashua book as the core of its business.

    Besides these, PSG has a number of other stakes in various businesses. It owns 34,9% in Capitec Bank and 34,4% in Channel Life, a life business controlled by Sanlam.

    PSG shares fell 25c to R25 today, off its highs around R30. This trades above net asset value of 1585c, but management has proved very efficient at generating superior results off low asset bases.

    That’s all for now


    Ian de Lange

    Permalink2007-09-04, 19:42:01, by ian Email , Leave a comment

    Telecommunications saw JSE off to good start

    Late afternoon saw MTN and Telkom issue simultaneous cautionary announcements. This helped boost a market in terms of activity on a day which was otherwise slow with the US markets closed. Value traded came in at over R9 billion thanks to MTN and Telkom.

    Telkom owns 50% of Vodacom. There have been rumours for some time that Telkom would disinvest given the growing competition between the activities of Vodacom and its subsidiary Vodacom.

    UK based Vodafone Group Plc owns the other 50% of Vodacom having bought out the 15% minority stake from Venfin a couple of years ago. At that stage Vodacom was valued had an implied value of over R100 billion with the buyout of Venfin by Vodafone.

    It was a massive implied price at the time and Venfin shareholders did very nicely out of the deal.

    Now there is a possibility of MTN buying the fixed line business and Vodafone buying the remaining 50% and taking its stake up to 100%. Telkom has a market cap of R101,8 billion after today’s big price rise to 19099c.

    MTN has a market cap of R197 billion. It fell 2,5% on the day. MTN’s profit for 6 months to end of June was R5,5 billion on revenue of R34,2 billion.

    Full year was R10,6 on revenue of R51,6 billion. MTN shares fell on the day, but trade on a PE ratio of 17 times

    Vodacom generated revenue of R41,1bn for the 12 months to March 2007 and net attributable profit of R6,3 billion. Very simplistically on a similar rating of 17 times a value of R110m is again achieved for 100% of Vodacom, valuing the 50% held by Telkom at around R50bn to R55bn, possible more for outright control.

    The fixed line business within Telkom would then be the balance, currently valued by the market at around R50bn.

    MTN may be looking at some of the assets that Telkom owns via Vodacom or it could look at buying out the actual fixed line business. Any acquisition by MTN will have the potential to grow this into a very big business. It is already heavily invested across Africa and into the Middle East. In terms of market cap size, it’s the 6th biggest on the JSE.

    Telkom shares have gained from around R125 eight months ago to a new high at current levels, now at R190,99. It is widely owned by many of the unit trust funds. Some of the ones buying into Telkom in the last quarter included:

    Future growth funds, Prudential equity, Sanlam Balanced and Fraters Earth Equity.

    It’s an interesting story and will be closely followed.


    Ian de Lange

    Permalink2007-09-03, 21:16:29, by ian Email , Leave a comment