Simon’s stock tips
Founder and director of investment website JustOneLap.com, Simon Brown is finweek’s resident expert on the stock markets. In this column, he provides insight into the week’s main market news.
We wrote last week that if Kumba could keep its headline earnings per share (HEPS) flat for the second half of the year, the stock would be on a price-to-earnings multiple (P/E) of around 4 times. Well, an early trading update – it is early for the year ending December – shows that the second half will actually be better than the first half, putting the stock on a P/E of some 2 times. On every level this is crazy cheap unless one thinks the company may go bust. As I have written before, I don’t see Kumba entering bankruptcy but I still can’t buy it – I first want to see some real signs of a recovery. Sure, I will miss the first part of the eventual move higher, but I expect the tough times aren’t over for local mining companies.
Scrambling for capital
ArcelorMittal South Africa (Amsa) joins Lonmin in that it is also planning a rights issue that is larger than its current market cap – Amsa plans a rights issue of $323m, versus a market cap of around $225.8m; Lonmin announced a rights issue of $407m compared with a market cap of $161m – showing just how close to the edge both are. In its results, Amsa also commented on the new supply terms for iron ore from Kumba. Going forward, the net deal will see Amsa saving some R450m; great for Amsa but not so good for Kumba.
Property saves the day
The company’s update shows very tough conditions for sugar-growing as a result of a drought and weaker sugar prices. But property is keeping Tongaat going with HEPS expected to be 13.6% lower while the property operating profit was up almost a third. This property division is a nice cushion for the business as it generated almost half the operating profit for the period. I would like Tongaat to spin off the property separately but, as much as I think the market would like that, I can’t see the company ever doing it. Tongaat benefits from the property division as it smooths out the sugar section’s volatility.
Watching that margin
As a Richemont* shareholder, I thought its results for the six months ending September were good. The only real issue is reducing margins, but when your gross margin was 66%, a drop of one percentage point to 65% hardly seems bad enough to push the share down over 6% on the day. Sure, the stock had been trading at all-time highs, but I remain a happy shareholder. While we’ll likely see more margin shrinkage and continued concerns around the Chinese consumer, as a long-term holder, I am not concerned.
Gas prices a concern
When HCI unbundled Montauk to its shareholders I was not impressed. It seemed like a bad asset that HCI was essentially ditching onto shareholders. This is often the case with shares that are being unbundled – they can’t be sold so the company just passes the buck.
But Montauk’s results show that the company may be worth a closer look. It made a modest profit although the HEPS was negative due to accounting processes, but the real kicker is the comment that “performance is heavily influenced by natural gas pricing”. The concern here is simple: while a natural gas operation in the US is a very different investment for South African investors, what is the longer-term future for natural gas prices in the US? A lot of natural gas comes from fracking operations and that adds an important consideration. The natural gas supply from fracking can be turned on or off very easily and a lot more supply can enter the market if natural gas prices rise. This could well keep a lid on prices of natural gas and hence on future profits from Montauk. So this is an interesting investment option, but not one I am considering.
But property is keeping Tongaat going with headline earnings per share expected to be 13.6% lower while the property operating profit was up almost a third.
Kumba’s Kolomela iron ore mine in the Northern Cape