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.
This is our first Weekly of August - over four months of lockdown and much economic disruption, as newsflow from JSE listed companies attests. As we have mentioned previously, much of the JSE has become steadily uninvestable over the years, not least domestic-facing companies.
Our universe though covers a far wider remit given our management and investment of funds globally (Mark's speciality) and teaching and giving lectures with a practical orientation at international commercial and central banks (Andrew's speciality).
When seen from an international perspective things don't seem as dire as they do from the prism of the JSE goldfish bowel - indeed we've seen a clutch of remarkably encouraging financial results this past week or two from several international listed firms - in Tech, firms such as Netflix, Amazon and Alphabet, in energy Enbridge and Iberdrola, REITs such as Industrial Logistics Property Trust Blackstone Mortgage Trust, and telco and entertainment group AT&T. There is a world of investment opportunities out there provided investors do the necessary due diligence. We'll gradually add coverage of international stocks we are familiar.
Here is an interesting bit of information for those who think that COVID-19 will result in everyone working from home. A REIT in the US called Office Properties Income Trust reported results. Now you'd think it would be fall off a cliff. Quite the contrary. For Q2, OPI collected 98% of rents and only 1% is rent deferral with 1% not yet collected. The earnings metrics were within expected ranges and the dividend is unchanged at $0.55 per share. The stock is at a discount to net asset value and you get a nice gross yield of 8.8%. Look around and nuggets can be found.
If you're keen on real estate have a look at Digital Realty, another US REIT. It's largely a data centre business and a differentiated play on Tech. It reported Q2 results - EBITDA is up 16%, net debt to EBITDA has fallen, interest cover has improved earnings per share is up 4.2%and the dividend is constant with a conservative payout ratio. At a gross yield of 2.8%, it is not as attractive as Office Properties Income Trust but in USD that's not bad and you're not subject to the wild gyrations we've seen in some other stocks. On Monday we issued "Tencent on top of its games", in which Prosus (in turn owned by Naspers) has a 31.2% shareholding. Tencent is in exclusive talks to acquire Leyou Technologies, the Nasdaq, and Hong Kong listed games developer. Acquiring Leyou would square with Tencent's strategy to increase its games portfolio to combat Chinese competitors such as NetEase. Also, Tencent announced it is looking to buyout NYSE-listed search operator Sogou, proposing to take it private and buy the 36% it doesn't already own. The search fight continues - as does gaming rivalry.
Meantime, Prosus is currently valued at a 23% discount to the see-through value of its shareholding in Tencent whilst Naspers is at an even greater discount. If you'd have bought one share of Prosus on the Amsterdam exchange at the beginning of January, in US dollar terms your share would be worth 17% more whilst if you'd have bought Tencent only it would be worth 40% more I USD as of Friday. We've taken profits on Tencent lately because of substantial growth in the share price beyond growth in expected earnings but we'd buyback on weakness.
AT&T is a solid performer for us, today including WarnerMedia. If you are looking for a differentiated investment in the media and entertainment theme, with cash flows from its traditional telco operations, this is one to go for. There was a successful launch of HBO Max. The COVID-19 pandemic impacted revenues across all segments but nonetheless the Group came through with respectable results and an unchanged quarterly dividend of $0.52 per share. With the share price at $29.58 the annualised gross dividend yield is 7.3% before 30% US withholding tax.
In "Forever blowing bubbles..." this week we took a tongue in cheek reference to West Ham United. The hammers anthem is analogous but there is a serious point we make - currency volatility has risen, the dollar and other major units of account are vulnerable, and the financialization of world equity markets has reached extremes unrecorded in modern financial history. The ratio of debt-to-GDP for private non-financial parties in the United States is 1.5x compared to 0.53x in 1952.
Cheap money, asset price inflation (not least in Tech stocks), and enormous imbalances in the Eurozone are a cause for concern. This will not end happily. Post results of Alphabet, Amazon, and Tesla we see share price struggling to maintain momentum - in fact, we've taken money off the table.
The previous week we predicted that the 10-year Treasury note would fall below 0.6% - indeed, this Friday it was 0.535%. Gold meantime is nudging $2,000 per ounce.
It's not just the rand that is weak - the IMF temporary stopgap loan this week and an appalling in-depth indictment by the OECD on mismanagement will only keep bond and equity investors at arms' length. The difference the IMF has taken relative to Chile is striking. But the dollar has been under pressure although not to the same degree. The Swiss franc is now 0.9137 or put another way it's costing almost $1.10 for a franc. Other than a brief flight to "safety" in the dollar in March the USD has lost almost 10% since the start of the year.
In "Kumba, qaphela!" on 15 June we recommended that above R500 per share traders should take money off the table or go short whilst long-only investors should not buy new stock at these elevated levels. The Kumba interim results this week underscored our caution that the stock is elevated.
Thank you all for visiting us.
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