The Ingham Analytics Weekly Letter on Sunday - 22 November 2020

Sunday, 22 November 2020

Welcome to another Ingham Analytics Weekly Letter on Sunday in which we aim, inter alia, to take a step back to see wood for trees, in South Africa and around the world. And with a bit of irony thrown in for good measure.

The word vaccine seems to be the driver of markets, if only sentiment, with Moderna the latest drug company to throw its hat in the COVID-19 ring. There's an element of competitive one-upmanship creeping in - we're 95% effective and you're only 90%, so yah boo to you. Pfizer and its partner BioNTech filed for Emergency Use Authorization at the FDA late this week.

There are logistical challenges associated with storage and transport of vaccines, including the so-called last mile, but these and other innovative pharma companies have applied their minds to this along with the drug development. The rapidity with which drug companies have brought virus vaccines on stream is testament to the power of free markets and private enterprise - left to governments we'd still be talking about it.

On the subject of COVID-19, it seems as if the virus is having a positive effect on US housing with demand for single-family homes rising and with sales of existing homes at a 14-year high in October. Not only are low interest rates boosting demand and prices for homes, but rents are also up. There is concern around future office demand but REITs internationally that have good exposure to logistics, multi-use, strip-mall suburban retail and residential are coming though relatively unscathed.

For those investors still keen on the concept of a REIT but who want more selective exposure than is typically available through the JSE, where the big names have been clobbered, there are several choices listed in the US, Canada, Germany, Asia and elsewhere to consider and at surprisingly decent yields in hard currency. But homework and discernment are necessary, not all REITs are equal.

Safe as houses is an expression but not one to be applied to the Government of South Africa. Moody's on Friday lowered the long-term foreign-currency and local-currency issuer ratings to Ba2 from Ba1 and maintained a negative outlook. Moody's now rate South Africa two notches below investment grade which in Moody's parlance means speculative, subject to substantial credit risk. This will have a knock-on effect to local corporates and the banking sector.

A story that gave us a chuckle this week was on wine - or more precisely tariffs on wine. The US government slapped import duties on several European countries last year in retaliation for what they say is subsidies for Airbus that prejudiced Boeing. Here's the catch though - wine at 14% alcohol by volume gets hit 25% but above 14% it doesn't apply. So, what happens? European producers have simply exported higher alcohol wine to the US with the value of that jumping by 200% or close to $300m in twelve months. Whilst exports have been hit, including on whisky, it does show that tariff wars often have unintended consequences.

Tesla continues to grab headlines with the big news this week it'll be included in the S&P 500 next month. The electric vehicle maker gets into the index because it has had five successive quarters of net profit. But there is a catch - in Q3 for example green tax credits contributed 120% of net profit so the company is not strictly sustainably profitable on a stand-alone basis. But this mere detail hasn't stopped the market from valuing Tesla at 5x the value of Volkswagen and 2.5x Toyota.

Britannia hasn't ruled the waves for several decades, but it still packs a punch around the world and this week announced it'll boost military spending. Threats posed by China and Russia make this timely. In addition to two enormous new British-built aircraft carriers currently entering service the UK has also ordered stealth jet fighters and is building state-of-the-art nuclear-powered ballistic submarines to add to an already impressive fleet. This extra investment in defence is on top of additional spending already pledged and will go to equipment in the navy, air force and army and R&D, artificial intelligence, cyber and space.

Britain has always been the one ally that America can rely on to pull its weight so this new money commitment on defence won't go unnoticed by the President-elect (even if the outgoing President hasn't quite acknowledged that).

Prosus and Naspers report results for the six months ended 30 September 2020 tomorrow and we issued "What a drag" this week to give context to the trading statements issued in terms of JSE listing requirements.

Whilst a 27% rise in US dollar earnings seems good on the surface, we pointed out that it hides an enormous and widening loss from assets that management have control over within the ecommerce segment. Assets other than Tencent also absorb cash. We can estimate what Tencent contributes to Prosus in advance as it issues quarterly results. Tencent is a December year end fiscal and reported Q3 numbers on 12 November.

Prosus, in which Naspers has a 72.5% shareholding, will report earnings of about $2,344 million which translates to 133 cents per share. However, we estimate that the rump could lose $240m, up $98m compared with the first six months of 2019, which is a 69% increase.

Therefore Tencent, in which Prosus has a passive 31.2% shareholding, could contribute 110% of Prosus adjusted core earnings, up from 108%. For the full year to March 2020 Tencent contributed 112% of Prosus earnings, up from 107%. Cash flow from operating activities for the year ending March 2020 was negative $591m excluding the dividends from Tencent of $382m. And that includes interest income of $224m. This is before they have bought or sold anything. For the six months ended September 2019 the cash outflow from operating activities was $255m with only the dividends from Tencent making the number positive.

Whilst Prosus may seem like a big deal with a market cap of "140bn that is entirely thanks to Tencent - the stock trades at a 25% discount to the see-through value of the Tencent stake whilst Naspers is at a 45% discount. The announcement three weeks ago of a combined share repurchase worth $5bn makes no financial sense to us and will not prop up an ailing share price, they'd do well to give that cash to shareholders through a dividend. You're better off in Tencent directly.

In "Did your seatbelts go to waste?" this week our conclusion was that volatile times persist under the shadow of COVID-19 and we see little sign of that changing through to the end of the year so remain buckled up. Markets, particularly in the US, have staged a comeback since March but the pattern is erratic and has been tech-centric, although of late rotation toward underpriced value has emerged. We also pointed out that December trading conditions have historically been binary affairs- either absolutely nothing happens, and you can enjoy a holiday on the beach, or there is complete chaos.

And finally, hoping that a laze on the beach makes the cut, for football fans the new autobiography from Arsne Wenger titled Wenger: My Life and Lessons in Red and White will be a stocking filler this December. Jrgen Klopp has served, by football standards, an already quite lengthy five years as Liverpool manager but Mr Wenger was manager at Arsenal for an amazing 22 years and 1,236 matches, only stepping down in 2018. The philosophical take away is that Wenger believed it wasn't just about results but that the real measure of success was how you played the game. Now that's a lesson we can all apply in daily life.

Britain boosts military spending is the big deal for us this week.


The newly commissioned HMS Queen Elizabeth.

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