Hello Voornaam,
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.
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Our Sunday Weekly gives us an opportunity to engage on a more personal level with our growing community of interested readers and investors. We take a worldwide perspective. The investment universe goes well beyond the relatively small and shrinking local options in South Africa.
In the past few weeks, we've covered topics as varied as Berkshire Hathaway, Hong Kong, Capitec, Tech stocks such as Amazon, Apple, Microsoft and Tencent, gold (the price inched past $1,900/oz this week), US banking shares, interesting data out of the US economy (detail in "US data provides a chink of light in COVID-19 gloom") and more besides.
This week we issued "Saudi Arabian stalking horse", which highlighted that Zahid Tractor & Heavy Machinery Co had built up a 10% stake in Barloworld. This to us is the stealthy beginning of a potential future takeover bid for Barloworld. Our suggestion for opportunists is that it is not a bad idea to accumulating the stock - its trading at a discount to net asset value and if Zahid gets to a level where a possible bid it forthcoming they'll have to may rather more than around R70 per share to make any deal worthwhile for shareholders.
On a more macro level, we issued "Tech and the Treasury 10s" - which highlighted a dichotomy between equity and fixed income markets that is rarely witnessed and which spells danger for investors riding the Tech boom post-March this year. The S&P 500 and the Nasdaq have soared, powered by a handful of stocks, whilst the ten-year US Treasury has snoozed and barely budged. Typically, when equity markets go up bond prices decline, and yields rise - which is not happening.
There is a plethora of results coming out of the US currently with more this coming week.
American Express has been hit by COVID-19 and its share price is down 30% since February. Q2 results show how COVID-19 is impacting its traditional business customers. Profits fell by 85%, with revenues down 29%. Provisions for credit losses were up by $1.6 billion, including a $628 million reserve increase based upon outlook. On the other hand, Visa and MasterCard have fared better.
Netflix reported a pleasing Q2 result, exceeding both their own and analysts' expectations. We discussed US banking results in our previous Weekly and this past week we had Microsoft Q4 and thus annual earnings whilst Tesla reported Q2 earnings. AT&T, another stock we favour, also released a reasonable set of Q2 figures despite COVID-19. On 30 July Amazon reports Q2 results at 17H30 Eastern whilst Alphabet reports Q2 results an hour earlier at 16H30 Eastern.
Tesla came off the boil on its Q2 results, but volatility remains off the charts. To our point above, perfection pricing means you have to get a stellar result just for the share price to stand still.
Tesla is an extraordinary company doing extraordinary things. Elon Musk has a passion for manufacturing and pushing the envelope of technology. Tesla's market capitalisation is now twice the market capitalisation of Daimler, BMW and Volkswagen combined.
The perennial question remains, how does one fairly value a stock with so much riding on the future, the extent to which production and sales could ramp up, and the present value of which is unknown. The stock price of Tesla slipped on the results. Having said that, it is still 3x higher than the start of the year. Short sellers have been burned and we note that at 8.6% the percentage of float shorted is the lowest its been in months.
We'd estimate that Tesla would have to increase production and sales by 10x to over 3m cars to justify the current market value and even then you'd have a hefty forward PE ratio of 37x.
Amazon, Apple, Google, and Tesla.
South African investors shouldn't discount Tech in China. Ant Group, the Chinese technology and financial-services giant that owns popular mobile-payments network Alipay, is planning initial public offerings in Hong Kong and Shanghai, bypassing New York as it seeks to accelerate its growth in China and abroad.
Ant is targeting concurrent listings on China's year-old, Nasdaq-like STAR market for homegrown technology companies and Hong Kong's stock exchange. Ant is a spinoff from Alibaba.
Ant's Chairman said the listing would also help the development of Shanghai's STAR market as well as the stock exchange of Hong Kong by drawing global investors to companies listed on those bourses. Ant is profitable and the listing should attract more global investors to Hong Kong and make mainland Chinese companies an even larger part of the city's $5 trillion stock market. Last year, Alibaba added a secondary listing in Hong Kong and raised $13bn from investors.
The Chinese Composite Index has fallen back this month to close 3,196 on Friday but has had nowhere near the rise we've seen on the Nasdaq since the bottom in March. As we've pointed out before, this is driven not by accelerating earnings but price-earnings ratio inflation. As an example, Microsoft we calculate has seen its PE inflate by 40% to 35x from less than 25x since this time last year. Even having fallen back by 5% since results this week it is still 25% more expensive than our fair value level.
Nasdaq Composite Index
This past week Chevron agreed to a deal to buy Noble Energy for $5bn ($13bn adding in debt). Noble, based in Houston, is an independent oil-and-gas producer with US and international operations. This follows on from Berkshire Hathaway recently agreeing to buy Dominion Energy natural-gas storage and transmission network for $4bn ($10bn including debt). So, despite the hype around electric vehicles old fashioned energy isn't dead, yet.
On an energy theme, for investors in Sasol, which (as we've described in various notes) has had its fair share of challenges, patience, for now, is the watchword given material uncertainty. We'd not be buyers at R137 despite the share price having recovered from an intraday low of R20 in March. We anticipate not much better than an adjusted breakeven earnings position for the year to June 2020. Given the right constellation of factors, Sasol is intrinsically worth much more but now is not the time to second guess the future.
A disposal process is underway of various assets but given that Sasol has boxed itself into being a forced seller to extinguish borrowings, it'll potentially end up selling its more valuable assets, possibly at a discount. Even if Sasol does get a co-investor in Lake Charles it is doubtful that the proportionate value would mirror the $13 billion expended. The group is well hedged to underpin cash flow at this time of peaking borrowings amounting to $10 billion. Even if Lake Charles does generate $100 million in EBITDA this next year higher interest costs caused by the two-notch credit rating downgrade will swallow 40% of that alone.
Sasol released production figures for Q4 and full-year this week, a mixed bag. Total production volumes at Secunda Synfuels has been hit by the COVID-19 lockdown which has led to reduced liquid fuels demand.
Natref production for the year was 22% lower than in 2019 due to the suspension of production with effect from 9 April 2020. Production volumes from North American were better but only because the Lake Charles Chemicals Project ethylene cracker achieved beneficial operation in August 2019, the ethoxylates units reached beneficial operation in January 2020 and the Ziegler unit and the Guerbet alcohols unit reached beneficial operation in June 2020.
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