The Ingham Analytics Weekly Letter on Sunday - 20 September 2020
Welcome to another Ingham Analytics Weekly Letter on Sunday in which we aim, inter alia, to take a step back to see the wood for trees.
Shanah Tovah. This weekend of Rosh Hashanah commemorates the creation of the world, a time for introspection and repentance concluding in the Yom Kippur holiday beginning 27 September, also known as the Day of Atonement. Rosh Hashanah and Yom Kippur are the two "High Holy Days" in the Jewish religion. Rosh Hashanah celebrates creation and thus the birthday of the world. At this time of the pandemic, it is perhaps fitting to contemplate renewal and cleansing and a new beginning.
Distell released its annual report on Friday. On the topic of reflecting on what has been, the Chairman in his statement referenced the fact that leading up to COVID-19 South Africa had in any event been in economic decline and that in the prevailing environment a reset for the business was necessary to avoid further negative earnings shocks and to position for sustainability.
Zeder continues to sow seeds for food sustainability too. A joint venture called Limagrain Zaad South Africa has been established and is controlled by French company Vilmorin & Cie, one of the top field and vegetable seed companies in the world. White and yellow corn is a focal point, but the JV also has soybean, sunflower, wheat, sorghum, and forage, as a complement to corn. Corn is a key staple in South Africa with 3m hectares grown split 50/50 white and yellow of which 96% is hybrid seeds and 90% GMO by value, over R4bn.
Results continue to be published, some a little later than in the past due to the complications around COVID-19. Notable results this past week from companies with a June year-end include Bidvest, Harmony Gold, Motus, Super Group, and Woolworths. For companies with a June year-end, COVID-19 has made this past fiscal year a tale of two halves.
Essential services businesses such as pharmacies and food retailers have fared best, but the lockdown world has been a hammer blow to most and recovery is uncertain and varies by industry. Prospects statements tend to be cautiously phrased. Earnings forecasts are almost a fool's errand currently and at Ingham Analytics we're more focused on balance sheet strength and cash liquidity.
Harmony Gold is an interesting study in hedging and for some years it's mostly been the right call. But as our note "Gold bug?" assessed, there is a relationship between the higher gold price this year and monetary and fiscal actions around the world. The rise in the gold price, more than could have been reliably predicted earlier this year, therefore hit Harmony's gold derivatives, a net realised negative cash flow of R1.8bn for the year ended June. This and forex losses were a significant feature of the income statement.
KAP is a June year-end group and the two months ending August give management cause to be cautiously optimistic. KAP's timber division has performed well with all facilities running at full capacity and although Automotive Components is subdued, and has, unfortunately, had to restructure, the bedding and polymers businesses are trading well with firm order books. In logistics, demand, and activity in the food, mining, and chemical sectors is good.
The US markets seem to be blithely indifferent about this upcoming US election and have taken on a life of their own. Political gridlock is the order of the day and Republicans and Democrats are so divided that little if any legislation gets though these days so extremes to the left or right are unlikely. The 59th US presidential election is on 3 November although a fair number of ballots have already been cast.
US Supreme Court Justice Ruth Bader Ginsburg passed away on Friday aged 87. Ginsburg was only the second woman ever to serve as justice and made an indelible mark in law, breaking the glass ceiling. 5 feet in height but a towering pillar of her profession.
Federal Reserve officials met on Tuesday and Wednesday, but nothing emerged we didn't already know. The Fed is not willing to go to zero or minus on rates so that leaves fiscal policy. On rates, our expectation is lower for longer with employment taking precedence over inflation. The South African Reserve Bank left rates unchanged this week after cutting the repo 300 basis points this year.
The pandemic is a tailwind for some. FedEx the delivery company posted the highest quarterly revenue in its history. The firm shipped 31% more packages a day through its Ground network during the northern summer which helped boost profits for the three months ended 31 August. FedEx now projects an average of 100m parcels will be shipped daily in the US across all carriers by 2023, compared with its previous forecast of hitting that in 2026. The COO said in a call that the growth they expected in three to five years happened in a matter of three to five months.
Acceleration of future trends to the present seems to be a recurring theme as we scan the business landscape internationally.
On another topic, research shows that almost 40% of the 950m iPhone customers haven't upgraded to a new device in the past 3 years. Bulls on Apple stock say they will at some point. We're not so sure.
Apple unveiled a new "smartwatch" Series 6 starting at $399 before tax in the US and it unveiled an updated iPad Air, starting at $599. The question we've always posed is how many customers can keep spending that kind of money for entry-level stuff every so often? Asian rivals are rapidly catching up, in fact jumping ahead in several instances, for much less money.
Apple has turned to services revenue as iPhone sales continue to decline with services 20% of Apple's sales, double what it was five years ago.
The stock is off the boil this month, closing at $106 on Friday and more than 20% off an intraday high of $137 at the beginning of September. But it remains way too pricey for our blood and we can't justify ever higher multiples for the same anticipated earnings stream. Our note entitled "An Apple a day...?" examines the issue around tech closely and particularly the phenomenon of share buybacks.
In "Steel yourself" this week we relooked at what's moving the iron ore and steel market, both of which have been buoyant. Premiums for higher-grade iron ore products have decreased further due to the tighter market. What is interesting to note for investors holding iron ore stocks such as Kumba on the JSE or the Australian miners on the ASX such as BHP (also JSE quoted), Rio Tinto, and Fortescue is that iron ore futures prices are also firm through 2021.
We also issued a note entitled "BA(D) 900 news?" this week which follows on from what we unpacked in "BA900 isn't a British Airways service to Jo'burg." The latest July 2020 BA900 figures paint a sobering picture for the big four South African banking stocks and for the South African economy. But we still recommend exposure to banking through Capitec, with our most recent note being "Looking for dips."
Thank you all for visiting us.