The Ingham Analytics Weekly Letter on Sunday - 25 October 2020
Sunday, 25 October 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 -
not too seriously, there is enough of that about.
First off, three cheers to
Brian Joffe and his team at Long4Life for ploughing through an unenviable
six months bearing the brunt of various levels of lockdown. With names
like Sportsmans Warehouse, Outdoor Warehouse, Chill and Inhle beverages,
and Sorbet the Group has been at the sharp end of COVID-19.
But true to form, Brian has
prevailed in circumstances without precedent in his outstanding business
career. He is an inspirational leader and inspires confidence, a precious
intangible asset for any business. Long4Life has emerged stronger and in
the lifestyle, category will be a survivor and a thriver too. The name of
the Group says it all and is apt at a time when spirits are low.
The stock market cheered the
message from the interim result on Wednesday, which Brian delivered in
his common-sensical way devoid of corporate-speak.
At R3 per share, Long4Life
deserves a far chunkier rating but that should come once sentiment turns
for the better - this is one stock you want to be exposed to. Tim Martin
of J D Wetherspoon in England, whom we referenced last week, and Brian
Joffe have much in common in their business philosophies.
Our note last week
"Nickel for Elon?" also acknowledges another rare leader and
entrepreneur Elon Musk, who seemingly singlehandedly is pushing the
proverbial envelope in automotive propulsion and related energies. If his
electric vehicle aspirations are to be realised Tesla will be needing a
lot more nickel, a metal which BHP refers to as a
"future-facing" commodity and in which it sees big promise. Our
Sunday letter last weekend delved deeper into this topic.
Tesla reported Q3 results on
Wednesday too and there are signs that sustainable profitability could be
in sight, making the company potentially eligible for S&P 500
inclusion. With a market cap of around $400bn not being in the S&P
500 may seem like an anomaly but the deciding committee have various
criteria for inclusion that Tesla hasn't hurdled yet. Zero-emission
credits seem to be one of those hurdles, the company has earned $1.2bn in
credits over three quarters and will likely generate $1.6bn for the
Netflix reported good Q3
results on Tuesday. With cinema's shut around the world the traditional
Hollywood model, which was being slowly being disrupted anyway, is up the
creek without a paddle. Meantime, Netflix keeps churning out appealing
and more cost-effective streaming entertainment - no million-dollar
salaries for big-name actors here. AT&T, which reported pleasing Q3
numbers this week, is also doing quite well with its WarnerMedia entertainment
offering and HBO continues to gain subscribers. The HBO Max premium
service, which only launched in late May, doubled its activations in the
Our note "Road to
nowhere?" this week made the point that the current polarisation in
politics is obvious to see all over the world. Attitudes are hardening
and realities are not that encouraging. South African domiciled investors
have seen local options narrow considerably and this means casting the
net far wider than used to be the case, but with caution.
We've discussed the rising
appeal of gold in various letters and notes and we see that gold-backed
ETFs recorded their tenth consecutive month of net inflows during
September. Global net inflows of 1,003t (worth $55.7bn) in 2020 have led
overall gold investment demand and taken the gold ETF holdings to a fresh
new all-time high of 3,880t and $235bn in assets under management.
With interest rates low, and
even the ECB along with the Fed saying it'll tolerate higher inflation,
the opportunity cost of gold continues to improve and boost investment
demand, outweighing lower jewellery and central bank demand of late.
China alone accounts for over
20% of annual gold demand. The gold price ended the week firm at just
This week we introduced a
Banks Monitor to add to the Energy Monitor and Mining Monitor. The note
is entitled "Irish eyes aren't smiling." Banks around the world
have been reporting large impairments but we caution that whilst banks
may think they have been conservative in fact they may not have been
conservative enough. Moody's the ratings agency is of the view that
internationally, the loan default rate is expected to exceed the bond
If you want to see how bad
things can get for banks in a COVID-19 world look at Ireland. Banking
shares generally in the EU zone, especially the Club Med countries, have
been hammered but the Irish banks probably rank the worst.
shareholders were presented with a 146-page circular on Thursday relating
to the sale of a 50% interest in what's termed the Louisiana Integrated
Polyethylene JV LLC in Lake Charles to LyondellBasell.
As we previously pointed out
in our Sunday Letter dated 11 October, LyondellBasell is paying what we
estimate is a discount of at least 30% to what it has cost.
LyondellBasell has admitted they are buying in at the bottom of the cycle
whilst on the other hand, Sasol is a forced seller of assets at the
Sasol has sunk so far that
this constitutes a Category 1 transaction in the JSE Listings
Requirements, requiring more than 50% approval by shareholders and a
bulging circular. Sasol shareholders vote on 20 November.
A transaction is categorised
by assessing its size relative to that of the issuer. A Category 1
transaction is 30% or more of market capitalisation. With LyondellBasell
buying for $2bn or over R32bn that is half of the R63bn market capitalisation
of Sasol. Not that long ago the deal would have been a Category 2
transaction, around 10% of market cap, requiring an announcement not a
The cost of this exercise? An
estimated R557m or about $34m before VAT goes to bankers, accountants,
lawyers, and sundry other service providers. These costs are about 2% of
the proceeds to be paid, after which Sasol will still be lumbered with
$8bn in borrowings.
To add insult to injury, which
includes R140bn in write-offs over three years that are more than double
the market value of the equity, this does nothing to remove an overhang
concern around a possible $2bn rights issue and potentially huge dilution
to shareholders. A rights issue would also constitute a Category 1
transaction and require pro forma estimates of the impact on the balance
sheet and earnings per share.
By our calculations, a $2bn
rights issue even at R100 per share, which is generous, would require the
issue of around 350m new Sasol shares to add to the 620m currently
outstanding. This takes pro forma shares in issue to 970m, an increase of
56%. Let's further assume Sasol gets back to profitability and makes
R15bn in 2022. That would be R24 per share on current shares in issue. If
we assume a rights issue EPS falls to R16, dilution of 33%. And that is
not where it ends. Sasol still has $6bn in borrowings or R100bn, more
than its market cap today.
Sasol shareholders are stuck
between the devil and the deep blue sea; to mix metaphors, damned if they
do support this deal and damned if they don't.
If you're a Sasol shareholder
and want to get your own back, then you may want to consider
The company has been a
consistent dividend payer and currently paying $1.05 per quarter or $4.20
per annum. The company paid dividends of $350m alone during Q2 this year
on 340m common shares. The most recent dividend declared was also $1.05
per share, paid on 8 September. At $77 per share on the NYSE (code LYB)
you're earning a gross yield of over 5% in USD, not bad - not least if
you're making nothing on Sasol because it can no longer afford to pay a
dividend and which runs a high risk of further capital depreciation.
On a cheerful Irish note to
end with, we were pleased to see that UK drinks giant Diageo (share code
DGE in London) launched an alcohol-free Guinness stout on Thursday.
Initially, this is for the British and Irish market but given the
popularity of the stout worldwide it'll probably be a matter of time
before it's exported internationally.
Guinness 0.0 took four years
of laboratory experimentation to get right. A 440ml can contains 70
calories compared with 177 for regular Guinness which has 4.2% alcohol by
volume. Apparently, you cannot tell any taste and flavour difference
between the two. Guinness stout, a hero zero. We'll raise a glass to
that. Slinte is tinte!
Cheers to Guinness 0.0, the
new alcohol-free stout launched on Thursday.