Vary­ing prospects

Which Ven­ter brother is the win­ner?

Finweek English Edition - - Companies & Markets - VIC DE KLERK vicd@fin­week.co.za

CRAIG IS DO­ING WELL at Al­tech; Rob­bie is suf­fer­ing at Al­tron. For its fi­nan­cial year to 28 Fe­bru­ary 2009 the profit of one could rise by 19% while the other is ex­pect­ing a fall of as much as 35%. The two Ven­ter broth­ers – sons of Bill Ven­ter, founder of the group – had to stand by and watch over the past four years as the smaller Al­tron’s share price fared bet­ter than the group’s flag­ship Al­tech year af­ter year. Ev­ery R1 in­vested in Al­tron in Fe­bru­ary 2005 was worth more than R3 at the peak of the prop­erty boom at end-2007. That was more than dou­ble the value of a sim­i­lar in­vest­ment in Al­tech.

How­ever, the wheel has turned and an in­vest­ment of R1 each in the shares of both com­pa­nies is each only worth a mod­est R1,25 af­ter four years. For both shares, that’s a pretty poor per­for­mance – which just shows again how weak the re­turn is/was even on se­lect shares that should de­rive enor­mous ben­e­fit from the cur­rent ex­ces­sively high spending on in­fra­struc­ture de­vel­op­ment.

Al­tron CEO Rob­bie shocked in­vestors with a trad­ing up­date early in Fe­bru­ary in which he warned: “Share­hold­ers are ad­vised that a rea­son­able de­gree of cer­tainty ex­ists that the com­pany’s ba­sic earn­ings per share for the year end­ing 28 Fe­bru­ary 2009 are ex­pected to be be­tween 18% and 30% lower as against the pre­vi­ous cor­re­spond­ing pe­riod, while head­line earn­ings for the year are ex­pected to be be­tween 25% and 35% lower.”

Ouch. And that’s af­ter Al­tron recorded an 11% profit in­crease for the first half of its fi­nan­cial year to Au­gust 2008. The sin­gle an­a­lyst that still does a thor­ough anal­y­sis of Al­tron es­ti­mates the group’s profit for the year to 28 Fe­bru­ary 2009 could be 272c/ share as against 375c in the pre­vi­ous year. That’s a fall of 27%. If his cal­cu­la­tions are cor­rect the two half-years of its cur­rent fi­nan­cial year to 28 Fe­bru­ary 2009 com­pared with 2008’s re­sults look as shown on the ta­ble on the right.

Thank you, Rob­bie, for warn­ing share­hold­ers that Al­tron’s profit per share for the full year would be be­tween 25% and 35% lower. But you didn’t tell us the profit in the sec­ond six months of the cur­rent fi­nan­cial year – that is, the pe­riod be­tween Au­gust 2008 and Fe­bru­ary this year – could have weak­ened by as much as 60%. It’s that 60% weak­en­ing that in­vestors must look at if they want to judge the mer­its of an in­vest­ment in Al­tron.

At first, it doesn’t look as if busi­ness prospects for the rest of 2009 and even early 2010 will im­prove much from what Al­tron has al­ready ex­pe­ri­enced in the six months to Fe­bru­ary. The sole an­a­lyst on McGre­gor BFA cur­rently pre­dict­ing Al­tron’s profit for the fi­nan­cial year to Fe­bru­ary 2010 is go­ing to re­cover to 322c from the cur­rent ex­pected 272c/share for Fe­bru­ary 2009 may be too op­ti­mistic, too early.

On the other hand, Al­tech CEO Craig Ven­ter sur­prised in­vestors early in Fe­bru­ary with a trad­ing up­date re­port­ing: “Al­tech is cur­rently op­er­at­ing well de­spite the ad­verse gen­eral eco­nomic cli­mate and has ex­pe­ri­enced good growth in rev­enue and prof­its, as­sisted by both its high level of re­cur­ring (an­nu­ity) in­come and its strong fi­nan­cial po­si­tion [also called “cash” – VdK]. Share­hold­ers are ad­vised the com­pany’s ad­justed head­line earn­ings per share are ex­pected to be be­tween 10% and 19% higher than that of the pre­vi­ous cor­re­spond­ing year.”

That’s in­di­rectly good news for Rob­bie, even though it’s Craig’s Al­tech that says so. Af­ter all, Al­tron has a more than 50%

in­ter­est in Al­tech and the good profit and healthy fi­nan­cial po­si­tion re­ferred to by Craig must nat­u­rally fil­ter through to Al­tron’s in­come and bal­ance sheet.

In­vestors may rightly won­der why Al­tech is do­ing well but Al­tron isn’t. Or, in other words, why Al­tron is do­ing so badly and may even be caus­ing a loss for some of its sub­sidiaries. The an­swer lies in one word: Pow­ertech.

The con­tri­bu­tion to turnover and profit by each of Al­tron’s in­vest­ments is shown in the ta­ble on p.23.

Al­tech is do­ing well. Af­ter all, profit is up by be­tween 10% and 19% and Bytes is show­ing re­mark­able re­silience. How­ever, in its Fe­bru­ary trad­ing up­date Rob­bie says: “Pow­ertech has ex­pe­ri­enced a dif­fi­cult trad­ing pe­riod as a re­sult of the slow­down in the build­ing and construction sec­tor, which has im­pacted pri­mar­ily on the en­ergy ca­bles busi­ness. This, com­bined with the im­pact of the rapid and un­prece­dented fall in com­mod­ity prices, par­tic­u­larly cop­per from ap­prox­i­mately US$9 000/t to ap­prox­i­mately $3 000/t, has re­quired in­ven­tory write­downs in line with ac­count­ing stan­dards.

“As de­mand is ex­pected to re­main weak un­til the build­ing and construction sec­tors re­cover, man­age­ment is con­sid­er­ing moth­balling cer­tain man­u­fac­tur­ing fa­cil­i­ties in the en­ergy and ca­ble busi­ness.”

That’s just about ex­actly the op­po­site of the av­er­age in­vestor’s and an­a­lyst’s per­cep­tions are and were. It was be­lieved the than com­pen­sate for the lev­el­ling off in the build­ing of res­i­den­tial prop­erty.

That’s ap­par­ently not the case. That’s per­haps a warn­ing for in­vestors in com­pa­nies such as PPCe­ment. Rather than a fall in the cop­per price (one of Pow­ertech’s main in­put costs) be­ing good for the com­pany’s prof­its the “mark to mar­ket” ad­just­ments in the value of stocks ap­par­ently de­stroy all the com­pany’s profit.

But how does Craig man­age to make money while Rob­bie is strug­gling?

The com­po­si­tion of the com­pa­nies ex­plains why and also some­thing called an­nu­ity in­come, or reg­u­lar in­come, that’s de­pen­dent on cycli­cal move­ments in the econ­omy. In­vestors would be well ad­vised to pay a lot more at­ten­tion to that kind of in­come.

There’s clearly much less cycli­cal risk in the tele­coms in­dus­try than in the sup­ply­ing of es­pe­cially cop­per ca­bles to the construction in­dus­try. But at the same time the graph show­ing Al­tron’s and Al­tech’s share prices over the years show Al­tech’s can some­times be very un­in­ter­est­ing. If you read the cy­cles cor­rectly – and es­pe­cially can pre­dict the cop­per price ac­cu­rately – Al­tron is a much more ad­ven­tur­ous in­vest­ment.

Game, set and match. Craig Ven­ter and Rob­bie Ven­ter

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