Si­mon’s stock tips

Founder and di­rec­tor of in­vest­ment web­site, Si­mon Brown is fin­week’s res­i­dent ex­pert on the stock mar­kets. In this col­umn, he pro­vides in­sight into the week’s main mar­ket news.

Finweek English Edition - - MARKETPLACE - By Si­mon Brown ed­i­to­rial@fin­ *The writer owns shares in Richemont.

In­cred­i­bly cheap

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

Jaeger-LeCoultre watch

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