Which Venter brother is the winner?
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