The Ingham Analytics Weekly Letter on Sunday - 6 September 2020

Friday, 11 September 2020

Welcome to another Ingham Analytics weekly research summary, highlighting pertinent local and international financial newsflow, recent notes that we have published, and what has been among some of the most read notes in the past few weeks or months.

Another week with a mixed bag of results from JSE listed companies and corporate newsflow. Barloworld, through subsidiary Barloworld Mongolia, forked out $168m on Tuesday to pay for Wagner Asia Equipment LLC with up to $30m payable within four years if performance conditions are met.

We've long analysed Barloworld (going back to the days when it was Barlow Rand). Our last note was entitled Saudi Arabian stalking horse in July and referenced the fact that Zahid Tractor & Heavy Machinery Company had acquired 10% of Barloworld shares. Equipment, dominated by Caterpillar, is the foundation stone of Barloworld would doubtless be of interest to Zahid, itself a large Caterpillar dealership. No further SENS announcements in terms of Section 122(3)(a) of the Companies Act so we'll have to wait and see if anything eventuates.

COVID-19 hasn't spared hospitals in South Africa with occupancies well below levels needed for adequate profitability. Much lower acute and elective surgeries are the main culprit. At Life Healthcare for the four months to the end of July revenue fell by 22% and earnings by 63%. July does seem to have picked up from earlier lows, but revenue was nevertheless 14% lower than in July 2019.

We've been on record for a few years to stay clear of investing in the three main hospital groups Life, Mediclinic, and Netcare but over regulatory, not intrinsic business concerns, with the government's proposed NHI scheme the biggest threat to commercial sustainability. To call NHI half-baked is putting it politely.

Hospitals were once highly rated for their defensive properties, which at one point they arguably deserved. The share prices of the three are a fraction now of what they were. But cheap doesn't mean good value so were not altering our view.

Hudaco is a company we have long covered with a business model and management team we admire and rate highly. It too, being domestic-facing, has sadly been impacted by COVID-19 lockdown implications but we believe it has the resilience to recover.

We were pleased to learn this week that Hudaco has decided not to prolong long-standing litigation pertaining to the financing arrangements for the 2007 empowerment transaction. Hudaco was not only badly misadvised but prejudiced due to the mechanism. The R35m settled upon is far below the R312m it was forced to pay SARS five years ago. Only the lawyers are the real financial winners but at least the Board of Hudaco can hold its collective head high and seen to have been ethically correct.

Gaming and hotels group Sun International (best known for Sun City) reported terrible COVID-19 impacted results for the year to June. Management gave good disclosure in their presentation on the income effects compared with the prior year and how they are tackling a fiendishly difficult situation.

The R1.2bn capital raise that was 95% subscribed shows that shareholders are supportive of the plan. Two-thirds of income is now derived from South Africa with over 30% from Latin America.

On the topic of hotels, City Lodge celebrated its 35th birthday in August. The late Hans Enderle was the founder and inspiration for what at the time was a bold initiative in South Africa and financially backed by the Mines Pension Fund. Celebrations are perhaps subdued given the full-year results just reported but like Sun International shareholders are behind the management team, putting in R1.2bn through a fully subscribed rights offer.

Mining is firmly on our radar and we've recently been recommending Sydney and Toronto gold miners (see Gold bug?). With electric vehicles and mobile phones all the rage it was interesting to note that Perth, Australia based Mali Lithium is acquiring an 80% interest in Morila Gold Mine in Mali from Barrick Gold and Anglogold Ashanti for between $22m and $27m which implies around $25 per ounce of resource.

Whilst this deal is about gold, Mali Lithium is involved in the Goulamina Lithium Project. A 2018 pre-feasibility study assessed this deposit to be a 16-year operation producing 362,000 ton per annum of 6% LiO2 spodumene concentrate. The company obtained all permits for development. A resource update was issued just this last month with 109m ton at 1.45% Li2O with 1.57m ton of contained LiO2. This suggests Goulamina is one of the world's largest ready to develop lithium deposits.

We caution the Mali Lithium is a micro-cap (share code MLL on the ASX) but for those with a speculative bent and an eye on how to play lithium, this is one for your mining list.

Comair gave notice of its business rescue plan this week and a copious amount of documentation it is too. This was (and is) a great business operating without loss since 1946 until struck down by COVID-19 lockdown. Comair ranks as one the most commercially successful airlines in the world historically and it has managed to do this with one hand tied behind its back because of that state-backed bottomless pit of (taxpayer-funded) red ink SAA.

Comair was listed in July 1998 and whilst the listing was suspended on 5 May this year, the correct thing to do, it'll have many kulula.com supporters out there cheering it on to restored health and what we hope will be a relisting.

Santam reported interim results, heftily better than most of their business customers struggling to survive, not least in hospitality. For those of you who are a Santam short-term policyholder affected by COVID-19 business interruption, the recent behaviour of the insurer, legalistically refusing to acknowledge claims, will leave a sour taste. It moreover stated that whether or not claims were paid out its balance sheet was sufficiently robust regardless. Forced by the court of public opinion and a Financial Sector Conduct Authority stance that the lockdown cannot be used by any insurer as grounds to reject a claim, Santam is making some relief payments but holding out on its legal challenge.

Sea Harvest reported a good set of interim results. It's not entirely sheltered from COVID-19, but the fishing group is well-diversified by geography, product, and channel. The balance sheet is reasonably geared, interest cover is comfortable and if it can get close to the earnings it made last year then at the prevailing share price you're paying a multiple of less than 10x. The share is tightly held so trading liquidity on the JSE is on the low side but a patient retail investor should be able to build up a decent holding.

Libstar interim results was one of two quarters, with Q1 revenue up 9.7% and Q2 revenue down 4.9%.

To record an 18% decline in underlying earnings wasn't bad given the environment and COVID-19 related costs. Libstar has a good range of well-recognized food brand names and categories.

Another diversified source of revenue and earnings is Patrice Motsepe's African Rainbow Minerals which also reported good annual results this past week. Iron ore contributed 49% of EBITDA, benefitting from a favourable demand and pricing environment that we've written about in notes on Kumba and BHP. However, platinum group metals contributed 40% for the year. ARM has been a solid performer on the stock market and another miner worthy of consideration.

Talking about PGM's, Impala Platinum came in with a stonking annual result with the rand revenue basket 57% higher. The market and business outlook is favourable. There is an element of perfection pricing in the share so be cautious about chasing it.

This week we issued Gold bug and concluded that on balance we are in favour of the fundamentals underpinning gold prices and therefore the investment case. We also published a chunky Equity and Credit Markets Insight entitled Powell-ing along making a point that risk-taking in US financial markets has reached epic proportions. This note was timely in view of the rout later in the week in Tech stocks in the US, with Tesla down 20%. Other recent notes that are popular downloads are Skin on the bones and An Apple a Day, which featured Apple also down this week but still insanely valued.

We continue to prefer stocks we think we understand and which we think have a fair basis for a reasonable valuation. If not, we stay clear. Markets are not always rational and often misprice north and south. Instability and mood swings have been prevalent this year. Mayhem may yet return. As we said in March, these are emotional markets and likely to remain so for an unknown period.

Thank you all for visiting us.
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