Monthly Archives: June 2013

Die Vine Intervention podcast. Is sherry just for tannies?

John Fraser and Michael Olivier were joined by David Bullard and Malcolm MacDonald to taste three sherries from Monis.


Hudaco Facing Challenges, Mixed Analyst Views

Hudaco, which imports and distributes industrial products – mainly for the engineering, security and mining sectors – has produced results for the 6 months to May, announcing a 14% rise in turnover, but just a 2% increase in headline earnings a share.

Analysts were told at a presentation that the company is deeply concerned about the volatile rand. It is impacted by the woes of the mining industry, as half of its business is directly or indirectly affected by mining.

The company is in a long-running battle with the taxman, which will prove costly if SARS wins – to the tune of as much as 1.6 billion rand. It currently makes provisional payments of R20 million a quarter. It is also changing its BEE financing arrangements.

Expert comment:

Ian Cruickshanks, Independent analyst:

One can’t expect a fiery performance as this company is GDP-dependent. It is dependent on the global mining and resources cycle. Current ratios and potential tax liability render this a doubtful participant in current portfolios.

Mark Ingham, from Ingham Analytics:

A solid interim result in demanding circumstances, and in line with my forecast. The business model continues to prove its worth and resilience through business cycles. Hudaco is cautious about acquiring, but without exception acquisitions have been well integrated and have proved to be earnings accretive. I expect continued selective corporate action. The management team is motivated and focussed. Management succession is well planned and also assists investor confidence in continuity. Hudaco group financials are sound. The stock offers good value and the outstanding tax issue with respect to the BEE financing arrangements do not detract from that.

Tweets of the Day:

Bruce @BruceB555 : Dear SARS, please don’t just take 40% of my salary this month. Go and start a business and earn your own f….ing money. Thank you.

Beemerang (@ThisBikerBoy): My grade school teacher said I’d go far. My parole officer says I went too far.


SAIRR HITS OUT AT THE NDP

ZA Confidential called in this evening on an event hosted by John Kane-Berman, the CE of the South African Institute of Race Relations (SAIRR) – in which the National Development Plan (NDP) was discussed and dissected. And savaged.

Here are a few highlights…….

The NDP is, of course, the government’s current blueprint for saving us all, growing the economy and giving hope to all poor and jobless South Africans. It is the basis of government policy until 2030. But should it be?

Kane-Berman told a sold-out function in Johannesburg that the SAIRR has conducted a thorough analysis of the NDP.

So what is it seeking to achieve? Key targets are combatting poverty, inequality and unemployment. Households below poverty line should fall to zero and unemployment should fall from 25 percent to 6 percent, and inequality should also fall.

Youth unemployment poses greatest single risk to social stability.

Jobs must increase from 13m to 24m. This means that in each year to 2030, 550 000 jobs must be created each year. “We are in very ambitious territory.”

The SAIRR believes that much of this growth means reliance on lower-paid jobs, mostly from the private sector.

It warns the NDP suggests land reform will boost agriculture, with little evidence for this.

Mining: the NDP predicts high commodity prices in next few years – a rather unwise assumption.

Infrastructure will require 827bn rand over next 5 years… But spending is dependent on the state, which hasn’t always been effective in spending.

Labour market: the NDP backs regulation in the labour-broking sector, which is an important source of employment for young people?

Kane-Berman is adamant….

THIS DOCUMENT DOES NOT UNDERSTAND HOW A MARKET ECONOMY WORKS.

On healthcare ….there is mention of traditional healers but not of private hospitals. “An extraordinary omission.”

On housing, the SAIRR welcomes a suggestion of housing vouchers, which it thinks should be extended to schooling and healthcare.

On BEE, the NDP not only endorses the ANC’s policies of racial engineering, but seeks more robust enforcement, which can mean fines of 10% of turnover, or imprisonment.

Carbon taxes are likely to push up energy costs, and the NDP favours carbon taxes.

“This document is a development plan, it’s not a job creation plan.

If job creation is so important, one would have expected a more simple-minded approach to this problem.”

Conspicuous by its absence is a chapter on how all this is going to be paid for, Kane-Berman warns.

Really, to endorse the NDP, amounts to giving the government a blank cheque.

What is proposed is the nationalisation of the land under the guise of land reform.

There is no command centre to implement the NDP.

Infrastructure crumbling, or abysmal or in crisis – the NDP fails to follow through by shifting more and more of the burden on the private sector.

In the end the NDP is neither fish nor fowl. It seems to be trying to appease all sorts of constituencies.

What we need is economic liberalization… “Who was it who said the economy only grows at night when the government goes to sleep?”

We need comprehensive deregulation…wholesale privatisation.

The solution is obvious…hand over as much as possible to the private sector.

There are very slim chances government will adopt these policies.

But in the longer term, government will have no choice.

The National Party liberalised because it had no choice. The ANC will also find it has no choice….

This plan has no price tag and is bound to fail.

The overriding issue is jobs for poor people.

Our unemployment problem requires radical, not half-baked solutions.

The answers may lie in economic policy, but the issue is actually a moral one.

In answer to questions….

If job creation means more sweat shops, that is where we must go.

We should sell SAA to the highest bidder, and sell all the power stations.

You can bet all the members of the National Planning Commission are members of private medical aid schemes. Why can’t they consider extending it further?


A few thoughts from Governor Marcus

ZA Confidential listened in to Reserve Bank governor Gill Marcus at the Financial Mail Top Companies Awards in Jo’burg today.

She said that much of the economic news is gloomy, our economy faces many challenges, and the world is in its 6th year of economic crisis.

There is an employment crisis of immense proportions, especially for the young.

Meanwhile, the recent deterioration in the exchange rates of many emerging market economies could mark a new mutation of the crisis.

Marcus said that ZA’s weak Q1 growth rate has contributed towards a weak domestic exchange rate.

She also targeted instability in the mining sector and other constraints, especially electricity.

She suggested there is room for fiscal and monetary support.

But financial markets are confused by monetary policy …. low growth should signal need for more accommodation, but there is a policy dilemma, as on the other hand, there are upward pressures on inflation.

Her core mandate is to keep inflation within the target range.

She noted five strengths and opportunities in the ZA economy:

– The emerging middle class

– Proximity to high-growth African countries

– Natural resources – in the minerals sector and our natural beauty

– The financial services sector is a recognized strength

– Then there is a strong legal framework and strong accounting framework.

But she warned again of constraints which are holding us back, and noted that because of electricity constraints the economy currently can’t grow by much more than 3 percent, until there is new generating capacity.

Certain new projects do not get off the ground because of electricity constraints.

Marcus spoke of the world class road infrastructure in Gauteng with improvements to certain sectors of the NH1 highway having cut travel times by 50% – while petrol consumption has also declined as less time is spent idling on highways.

Marcus expressed the hope for more private, public partnerships, saying the role of the private sector is essential, and long-term growth requires a partnership between the public and private sectors.

And she warned of woes in mining due to short term-ism in all sectors of the industry.

And she stated a major problem in the economy, that a lack of education or poor education is the biggest form of exclusion there can be.

Oh, and Coronation was given the top award.


Naspers Continues to Impress

Media group Naspers released strong results today – for the year to March. Revenue was up by 27%, and core headline earnings a share grew 23%. Internet and pay TV are performing well, while the print media section of the business is fairly stagnant. What do our experts make of it all?

Expert Comment:

Jacques Theron from Absa Investments:

All the divisions or associates performed well, with revenue from the internet business outperforming pay TV revenue, for the first time in the company’s history. The weaker rand also contributed kindly to this outperformance of the internet business. Pay TV revenue increased by 20% to R30.3bn while Internet revenues increased by 80% to R34.6bn. Future focus will be to expand the pay TV subscriber base and growing the e-commerce offering across emerging markets. We rate the management team very highly as their track record remains impeccable, where Naspers remains a core holding in our portfolios.

Independent analyst Ian Cruickshanks:

Naspers continued lead in media/technology sector in the year to 31 March 2013 with revenue gain of 27%, core heps up 20% and 15% dividend raise. Impressive 80% rise in internet revenue on strong advances in China’s Ten Cent and Russia’s Mail.ru. Development expenditure up 80% as company seeks to continue acquisitive strategy in emerging markets. Stake in Facebook sold, realising significant capital profit – demonstrating decision not to hold onto overvalued assets. Despite permanent high stock price Naspers remains an essential core holding in long term balanced portfolios.

Duncan McLeod from Tech Central :

I think these numbers show that Naspers has really outgrown its origins as a print media business. Its Internet businesses — especially Tencent — are delivering incredible revenue growth and, with the exception of the e-commerce segment, which is still in development, in earnings growth, too. The pay-TV business continues to do well, too, thanks to its entrenched position in the South African market and its efforts to expand pay TV elsewhere in Africa, both through the DStv satellite service and through its GOtv digital terrestrial television offering.

Conclusion:

Naspers continues to be run by a dynamic, thoughtful and impressive CEO and continues to shift its focus from its traditional business into high tech products which have a more secure and lucrative future, and continue to offer exceptional growth prospects.

Tweets of the Day:

Terrible Certainty (@lord_witchking): The word politics is derived from the words "poly" meaning many and "ticks" meaning blood sucking parasites.


What do we make of Agang?

A new political force has been unleashed, with the launch at the weekend of a new political party, Agang, under the leadership of Mamphela Ramphele.Are we convinced this is a new and worthwhile addition to the political landscape, or might it just be another damp squib like Cope? Many politicians have been giving their views, but what of the wider business and economic community? ZA Confidential canvassed the views of a few of our Experts.

Expert Comment:

Author and speaker David Bullard:

The name is unfortunate – with an election we could have a-hung parliament! It is an un-catchy name, but means something to a lot of people. What Ramphele is saying appeals to the small percentage of South Africans who understand what has gone wrong under the ANC. Whether it also appeals to a large section of the traditional previously disadvantaged will be seen. The reality is that here is a 65 year old woman with enormous energy – but who else are we voting for? Is there a team in waiting?

Dawie Roodt of the Efficient Group:

Agang is a exciting development on the South African political front, especially since a reputable leader like Dr Ramphele is in charge. Real damage could be caused to the ANC’s support base.

Coenraad Bezuidenhout of the Manufacturing Circle:

As an industry lobby group, the Manufacturing Circle is apolitical, supporting policy positions that are pro-manufacturing growth, rather than specific political parties. There are vast opportunities for the relationship between business and policy makers to be enhanced, as well as for our economic, trade and industrial policies and the execution of those policies to be improved. As much as new players are welcomed, their addition will be inconsequential to us, as long as these opportunities are not seized.

Neren Rau of Sacci:

The launch of Agang is Illustrative of the strength of the South African Democracy in that new political parties are able to launch and position themselves.

Conclusion:

ZA Confidential believes that there is always room for a new voice in the political arena, and will watch with interest to see whether Agang can attract more high profile leaders, and a worthwhile support base.

Tweets of the Day:

Funny One Liners (@funnyoneliners): Of all the possible utensils that could have been invented to eat rice with… How did 2 sticks win out!? RT @newfylover1

Fake Dispatch (@Fake_Dispatch): Here’s my take on wine tasting: if it tastes good, drink it. If it tastes bad, drink it faster.

Hayden Wright (@HaydoAtHome):I think the least believable thing about Superman as a character is his steady job in print media


Die Vine Intervention Podcast Wine Tasting: Douglas Green Merlot/Malbec 2011

Michael Olivier and John Fraser are again joined by two guest tasters: Dino Fagas, owner of Pretoria restaurant Prosopa, and wine writer and branding expert Jeremy Sampson


ZA Confidential Experts Hit Out Against Proposed Booze Ban

Business organisation Sacci has hit out against plans for a ban on alcohol advertising. This would certainly hit the booze industry, but we suspect would not have much of an impact on consumption. Sacci warns that such a ban would lead to the loss “of about 12 000 jobs and a reduction in GDP of US$740 million (approximately R7.4 billion), impacts that South Africa can ill afford in the present economic circumstances.” But what do our experts make of it all?

Expert Comment:

Banker and wine estate owner Michael Jordaan:

Of course the ills associated with alcohol abuse should be fought. This can best be done by enforcing existing licensing laws which are often blatantly disregarded by informal alcohol distributors. More enforcement of drink-driving could also significantly reduce the death toll on our roads. The proposed ban on alcohol advertising unfortunately punishes the responsible producers by limiting their right to market their product, and punishes consumers by limiting their awareness of new choices. Furthermore, all alcohol is not equal. Responsible red wine drinking has been proven to enhance longevity and reduce heart disease. As a small wine producer, we at Bartinney (Wine Estate) do not have the resources to advertise, though. It is conceivable that the ban will affect larger and – in some cases – international brands more than the many small SA wineries. It would also strengthen the role of wine competitions and wine ratings as a form of promotion.

Leon Louw from the Free Market Foundation:

We should start by recognizing that alcohol consumption is a perfectly legitimate and ubiquitous thing for people to do. Overwhelmingly it accompanies congenial enjoyable and harmless socialization and relaxation. The assault – for that is what it is – on people who have a drink with friends and food is obscene. The proposed ad ban is, of course, a shameless violation of freedom of commercial expression, but even more seriously it is a violation of multiple consumer rights. As the nanny state tsunami engulfs South Africa there is never a mention of consumer rights. Even consumer activists are deafeningly silent. Every regulation of business is in fact regulation of consumers; it reduces consumer choices and sovereignty, the right of consumers to control their own lives and spending. The proposed liquor ad ban is no exception. It is effectively a ban on competition. Were the Department of Health subject to competition commission control it would be fined, like others accused of lesser violations, a billion rand, or more. Consumers have a right to competition amongst suppliers. The primary means of competition and marketing is advertising. Banning ads effectively entrenches the status quo. It also saves existing players billions in ad spending. Competitors will be muzzled from telling consumers what products, services, prices and outlets consumers are being offered. The ban will curtail the consumer’s right to new and innovative products, services and suppliers. The entrenchment of existing suppliers discriminates against emerging enterprises and innovators, especially blacks. Consumers have, or should have, a right to be offered and to get attractively and appealingly marketed products, including alcohol. Consumers have, or should have, a right to information about products and prices. Advertising bans violate that right. Consumers benefit from all media: magazines, broadcasts, newspapers, internet etc. Ad bans drive all marginal media under, and reduce resources for those that survive. Consumers as sport participants and spectators benefit from sport and recreation sponsorship. Ad bans drive marginal activities under, and diminish what survives. Ad bans not only ban essential consumer communication and vital information, but also, paradoxically, health warnings and ads that encourage responsible behaviour, including responsible driving, family life and employment. Anyone who supports this ban must realise that they condone by necessary implication and inference all other violations of rights of communication, consumer choice and lifestyle. Anything a puritanical, despotic, draconian or meddlesome politician does not like you doing, publishing or reading will be banned, which will be legitimised by precisely the same sophistry, that it is for your own good. The premise of the nanny state is that you, that’s right YOU, are too idiotic to have choices or to behave responsibly.

Mike Ratcliffe from Warwick and Vilafonte Estates:

A ban on alcohol advertising is an ill considered knee-jerk reaction. A pessimist might label it pandering to an electorate, but a well-advised observer would be very clear that this is an inefficient vote-gathering exercise. Suffice to say, the world has changed, the internet and social media are the new mediums for the communication of opinion – and governments are no longer truly able to influence these channels. Alcohol advertising will immediately go underground and social media will become the new frontier. Companies like Wine of the Month Club, www.realtimewine.com and other online sales and marketing initiatives will gain a significant boost. Online brand positioning is the future – irrespective of an alcohol advertising ban.

Michael Olivier, Wine Guru on Die Vine Intervention:

I think we are even more prohibitionist and Calvinist in our approach to alcohol now than we were pre-1994.With social media and all its aspects, I think it is too late for these bans. The producers will find a way.

Conclusion:

ZA Confidential is against the ban. And will continue to host the weekly wine tasting podcasts of Michael Olivier and John Fraser. Cheers!

Tweets of the Day:

Jay (@jaymeisterrr): Masterchef South Africa Spoiler Alert: Everything is scripted. An aspiring chef wins. They can cook. They like crying.


The Outlook for Oil and Gas in Africa. A Q&A with PwC

Financial services group PwC this week published a review of oil and gas in Africa, entitled ‘From promise to performance’. ZA Confidential caught up with PwC’s Africa Oil and Gas Advisory Leader Chris Bredenhann to discover the latest trends:

ZAC: You suggest oil and gas in Africa is moving from promise to performance. What does this mean?

CB: I believe that the promise lies in the resource riches that the African continent has been endowed with. The performance part refers to the need for the African continent to grab the opportunity presented, and ensure that the resources are developed and produced for the benefit of Africa. We should avoid exporting all of the raw resources and importing back the refined products.

ZAC: There seems to be more appetite for risk. How is this transforming the industry?

CB: The oil and gas industry has always been risky, not only from a health and safety point of view, but also from a success point of view. Generally a success rate of 1 in 10 wells is considered good. If you take that a well could cost anything from $100,000 to $100 million, the risk to the industry is enormous. The fact that the easy oil has been found, means that companies are willing to take more risk, be it in the form of moving to more difficult deepwater offshore areas, or politically unstable environments. The developments in Mozambique are an example of this – the basins where the current gas finds are being made are in very deep water, making the development technically difficult and expensive. However, oil companies are willing to take these risks because they are confident that they will pay off. PetroSA’s drilling campaign is another example of taking on risk, this time in the interest of survival. They need to replace their gas feedstock, and their current drilling program is a result of this.

ZAC: Which countries will benefit from the new risk appetite?

CB: I would suggest that the emerging countries listed in our report stand to benefit – Namibia, Mozambique, Uganda, Kenya, South Africa, Tanzania, Ghana, Cote d’Ivoire, Nigeria and Morocco. Having said this, I believe any country where there is appetite to invest may benefit.

ZAC: How important is certainty over tax rules, the regulatory environment and so on?

CB: Investments are made based on risk, and most of the large oil and gas companies take a portfolio view of their investments. If they can get a better return for less risk from another location, they will allocate their funds accordingly. There are many examples of resource nationalisation, and I would think that companies would think twice about investments in these countries (Venezuela, Bolivia, Algeria, etc.). The estimated lost investment in Nigeria is an example of how investors are voting with their money. It should also be said that investments are normally made in the context of some form of legal framework, and the option of arbitration is always available to investors. In the short term I would, however, argue that frontier states need to attract investors to get access to the funding and technical expertise to develop their industries. They will therefore carefully consider their policies to ensure that (their country) is attractive.

ZAC: Flaring of gas is wasteful, but I believe Angola has turned the corner on this?

CB: Yes, the new LNG (liquefied natural gas) export terminal at Soyo exports liquefied gas that would otherwise have been flared or re-injected into oil field for enhanced oil recovery.

ZAC: You spoke of environmental opposition to LNG terminals. Why and where?

CB: PetroSA is planning a floating LNG terminal in Vleesbaai at Mossel Bay. The residents have raised concerns as part of the EIA process.

ZAC: The Asians are playing a new investment role. How significant are they now in African oil and gas?

CB: I do not have comprehensive data to support a full response to this question. However, it has been stated that two thirds of China’s oil imports originate from Africa. Through CNOOC, CNPC and Sinopec they have significant investments in Sudan, Nigeria, Uganda, Gabon, Equatorial Guinea, Republic of Congo, Algeria, Mauritania, Tunisia, Libya, Niger, Cameroon, Angola etc. We are also seeing investments from India and Thailand in the high-profile Mozambique play.

ZAC: Describe how the piracy problem is shifting from the East Coast of Africa to the West.

CB: It seems to me that there is a lot of effort going into addressing the piracy problem in Somalia (e.g. military interventions from various foreign nations like the US, China, Europe, etc.) while there is less visibility of this in the Gulf Of Guinea. Combine this with an increase in exploration and production activity, and the stage is set for a shift.

Tweet of the Day:

matthew du plessis (@mattduplessis): When someone else’s kid asks you why zebras have stripes, it’s okay to say it’s to make them go faster. Right?


Glimmer of Hope With New Inflation Number

On first sight there was some good news this morning. No, I am not talking about the re-branding of Summit TV to a Business Day product. If that can revive a stale and dull TV offering and give it a new drive and dynamism, I will welcome it. No, the important good news I am talking about is the new CPI number. Consumer Price Inflation was at 5.6 percent in May, down from 5.9% in the previous month. So what do our experts make of it all?

Expert Comment:

George Glynos, Managing Director, ETM Analytics:

In May, consumer price growth fell to 5.6% y/y, after having remained unchanged at 5.9% y/y for the previous three months, with the reading coming in better than market expectations for a marginal decrease to 5.8% y/y. On a monthly basis, prices contracted 0.3% from 0.4% m/m growth in April. CPI has remained buoyed at close to the upper limit of the SARB’s 3-6% target range over recent months, remaining well above a low of 4.9% seen back in July 2012. Whilst a rather sharp decrease in the fuel price in May would have helped keep headline CPI contained, the likelihood of price pressures becoming more robust in the short term remains – as the lagged effect of the weaker ZAR is expected to become increasingly visible. Additionally, analysis of the Food and Agricultural Organisation food price index and wheat futures show both gradually increasing, which suggests that the risks to food inflation in the short term are tilted to the upside. That being said, it was food prices which surprised to the downside this month. What this data also does is highlight the extent to which the inflation transmission mechanism has been dulled by the weak growth backdrop. It reflects a squeeze on margins and may be an overriding negative for equities, especially in the Fast Moving Consumer Goods sector. Why do I care? Despite the softer reading, CPI remains buoyed at the upper level of the SARB’s inflation target, with upside risks to inflation remaining present as the lagged effects of a weaker ZAR are expected to become visible in the months ahead. On the back of this morning’s data, the markets will be happy to price in a reduced risk of a hike, but the ultimate direction will remain determined by direction of ZAR.

Peter Attard Montalto from Nomura:

On CPI, the surprise seems to have been driven by non-durable goods and food, and we should remember this is still too early to see the big pass-through effects of weaker foreign exchange, and we can probably still breach the (6% upper end of the band) target just in August after this number. Hence I think, given political/policy dynamic worries and worries on skew in CPI, even given this number, we can’t really point to increased chances of rate cuts.

Nedbank Economic Unit:

Despite the slowdown in the annual inflation number in May, we still foresee a breach of the 6 % upper inflation target range in the third quarter of this year, with the weak rand exerting most of the upward pressure. The latest inflation numbers do not alter our interest rate view. We believe that rates will remain at current levels for the rest of this year. The MPC will need to strike a balance between high inflation and still poor economic growth outcomes, with the current policy stance likely to remain in place well into 2014.

Dawie Roodt from the Efficient Group:

A nice surprise to see CPI coming lower than expected. However, the effect of the weaker rand is only likely to show its impact in coming months. Expected CPI to accelerate!

Conclusion:

We have been given a bit of breathing space with this latest inflation number. But the future is uncertain, and we should not forget that our inflation rate is still higher than those of many major competitor and partner countries. There is no reason to sob, but the smiles should not be too broad, either.

Tweets of the Day:

Neville Lamberti (@nandibev): Brilliant. German protester placard on Obama arrival in Berlin, ‘Yes we scan’.

Gus Silber (@gussilber): I only had small change for a guy selling ID-book covers at a robot. "That’s okay," he said. "Beggars can’t be choosers!"


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