The Ingham Analytics Weekly Letter on Sunday - 6 December 2020

Sunday, 6 December 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 - with a mix of irony and humour.

Markets have been bouncing but we'd be cautious about misplaced optimism on the real economy, notably in the US and Europe. In January COVID-19 will still be a reality. The handling of it and social behaviour remain questionable. Asia by contrast appears to have dealt with the pandemic well, and the economic impact has been muted. A combination of individual responsibility, clear authoritative direction and effective track and trace have all played a role.

Cultural differences were on show this Thursday with the release of second quarter financial results from 168 years old firearm manufacturer Smith & Wesson. Revenue and profits again jumped considerably. Sales of guns in America have soared and 8m Americans are first-time buyers. A survey by Smith & Wesson shows that the average owner possesses eight firearms, presumably to "Make America Great Again."

We're not advocating you go out and by the stock but enough punters have been piling in to send Smith & Wesson up from $7 in January to $16, most of which has happened post the spread of the pandemic. The market cap of $900m still makes it small-cap company in US terms but it's been going ballistic of late reaching its highest trajectory in years.

If you can't beat them join them. Warner Bros, owned by AT&T, the telecommunications, media and entertainment giant, announced on Thursday it would release its entire 2021 slate of theatrical films simultaneously in theatres and on its HBO Max streaming service. This they term a hybrid model. The renowned Hollywood studio is acknowledging that cinema would probably have had a slow-motion decline anyway but that this has been brought forward by the pandemic, a change in viewing behaviour and the relative affordability and popularity of Netflix.

Movie production is expensive, but Netflix has shown you can produce high-quality content at lower cost without big-name actors on stratospheric salaries. Typically, a movie such as Warner's new Matrix 4 would need to gross hundreds of millions at the box-office, an almost quaint term now in this COVID-19 world. Now, Warner will look at two income streams - box-office and HBO Max subscribers with HBO Max paying a license fee for 30 days per title.

If you're looking for an offshore stock that has an interesting mix of revenue drivers, serves up a chunky profit margin and has good and reasonably predictable free cash flow then AT&T offers value at $29. It is paying an unchanged quarterly dividend of $0.52, earning a gross yield of 7.1% - not bad in US dollars and better than you'll get on the moribund JSE or on a fixed deposit in rand.

Whilst you can own the stock AT&T (with a catchy ticker symbol T on the NYSE) you can't watch HBO Max in South Africa. But then it's competitor Netflix gives you plenty of good viewing and those AT&T dividends could help pay for the Netflix subscription, fair exchange is no robbery.

Peter Thiel is what could be termed a serial entrepreneur, backing firms like PayPal and Facebook. Mr Thiel is also the person who could see potential in Austin Russell, supporting him to develop what is now Luminar Technologies back in 2012 when Mr Russell was only 17.

We mentioned last week that Elon Musk's Tesla has exceeded the market cap of Berkshire Hathaway - indeed as of Friday the market value of Tesla was 2.5x that of BMW, Daimler and VW combined. It seems the future of transportation continues to excite investors. On Thursday, Luminar, a producer of sensor technology for self-driving cars, started trading publicly on the NASDAQ under the ticker LAZR. The pro forma market cap ahead of trading was $3.4bn - as of Friday it was $10.5bn; by contrast, Renault has a market cap of $12bn. Mr Russell has 30% of the shares.

What was noteworthy about the stock market debut of Luminar is that this was not a typical IPO but rather a special purpose acquisition company or SPAC, sometimes called a blank cheque company that uses cash raised to buy assets. True to form in technology, Luminar does not make money. Arriving at a valuation requires skills in the art of voodoo or divination rather than finance and accounting. Luminar made revenue of $13m last year and lost $95m. But the company has high hopes and an order book of $1.3bn.

Back to Tesla again. When the company makes its S&P 500 index debut later this month, we calculate that half-a dozen companies or 1% of the total issuers listed will account for 35% of the market cap of the index. That makes the S&P 500 seem like a typical emerging market index it is so lopsided. It is almost like the JSE, where Prosus/Naspers have outsized influence and have nothing to do with the local economy.

This week Britain's Medicines and Healthcare Products Regulatory Agency (MHRA) became the first Western country to grant emergency-use authorization for the COVID-19 vaccine developed by Pfizer and BioNTech and it is already being shipped. This is fast and some disparaging remarks were thrown at the Brits for being quick off the mark, notably from within the EU.

There is good reason for being speedy, effective yet thorough. When it was a member of the EU the UK did most of the heavy lifting for drug approvals in the EU and the European Medicines Agency was based in London. That capacity has now been hollowed out and dispersed within the EU whilst several staff who could have gone to the new EMA HQ in Amsterdam chose to stick around in England.

The MHRA therefore retains significant world-class experience and know-how; it has 1,300 staff compared with 17,000 at the Food & Drug Administration in the US - what that number do all day is anyone's guess. Small and agile with an ability to break through red-tape and politics can achieve wonders - arguably a post-Brexit metaphor.

The Brent crude oil nudged close to $50/bbl. this week, up 25% in a month. Natural gas prices have also risen sharply. OPEC+ (+ means Russia) in a rare show of unity reached a compromise agreement on output this week but more importantly the oil futures curve is signalling tighter supply. Demand in Asia is booming. A glut earlier this year looks like it'll clear quicker than expected. Oil is in backwardation, meaning spot is higher than futures.

Speaking of oil, the share price of Sasol would historically be much firmer than it is. Whilst off the canvass the share hasn't moved to the extent that it could have given a more favourable oil price situation and a rand north of R15/$.

Sasol's earnings breakeven oil price has risen, and it has Lake Charles linked debt of around $10bn at a high rate of interest in USD. The cost of floating rate debt is partly linked to the credit rating, which has deteriorated. Even before Moody's edged South Africa further into sub-investment grade a fortnight ago finance costs had risen by $50m per annum.

The receipt of $2bn this week from LyondellBasell for the Base Chemicals JV helps but Sasol ideally needs to get debt down to about $5bn. A shareholder update on Wednesday gave little to cheer about and no clarity on a possible rights issue, which we have estimated could be significantly dilutive. We recommend staying away.

This week we issued three notes, one on Capitec entitled "Froth back?", another also banking related entitled "Neither a borrower nor a lender be" and a Mining Monitor entitled "BHP scopes up" that discusses ESG, which fund managers and even private investors are taking seriously these days when they decide to invest in a share or even remain in a share. We hope you enjoy the read. We're getting positive feedback which we really appreciate as it helps us craft our offering better.

And finally, seeing as we've mentioned Smith & Wesson, the Walther PP handgun that Sean Connery packed in his first 007 film Dr No in 1962 sold at auction on Wednesday for a fiery $256,000.

The NASDAQ debut of Luminar Technologies is the big deal for us this week


Thank you all for visiting us.

Most read
Froth back
Did your seatbelts go to waste?
US bounce
A blemished trading jewel?
Latest research notes published this week
2020 Redux?
Following on from “Wither portfolio management, or not?” in “2020 Redux?” top trader Andrew Kinsey has further valuable insights as we head into 2021. What are currency, commodity, and fixed income markets signalling?

Saxo’s outrageous predictions for 2021 and our take
“Saxo’s electrifying message” is one of the most popular Ingham Analytics downloads. They say that Saxo Bank’s inclusion of South Africa in its annual “outrageous predictions” was another timely reminder to investors to heed warning signals. Whilst this year South... Read More

Wither portfolio management, or not?
As year-end approaches it is timely to take stock of portfolio management in 2020, one of considerable upheaval and volatility. In planning your strategy for 2021, “Wither portfolio management, or not?” has a thought-provoking look at what a US-focused portfolio... Read More

Credit where credit is due?
Monday, 21 December was a big day – for Tesla, as it was included in the S&P 500 Index. In “Credit where credit is due?” Ingham Analytics unpack the quirks of this listing. Astonishingly, Toyota is now number two in... Read More

Gaming for change
For investors in Tencent (or Prosus or Naspers for that matter) Ingham Analytics latest note on Tencent entitled “Gaming for change” will be of interest. They have upped their earnings forecast and say that games revenue is a strong driver.... Read More