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 As­to­ria and Capitec.

Long wait

As­to­ria* pub­lished its re­sults to the year end­ing De­cem­ber 2015, but since it is a rel­a­tively new hold­ing com­pany, there wasn’t much to see. As­to­ria will hold US dol­lar as­sets in­vest­ing in US-listed stocks and the like, but now there’s a three-month wait for the de­tails on what it holds and the net as­set value (NAV) of the fund. At launch the fund’s NAV per share was $1 and will fluc­tu­ate in line with the as­sets it holds. It should be easy enough for the com­pany to is­sue a brief NAV up­date within a week or two of the end of the pe­riod, keep­ing in­vestors in the loop as to what it holds and the cur­rent NAV. A three-mon­thold NAV is not of much use.

Not bad, but not awe­some

The Hold­sport up­date in­di­cated good HEPS growth al­though this was in part due to gains in for­eign ex­change move­ments. The stock shot higher on the up­date and is some 20% up over the last month. But I am still not ex­cited – as I al­ways say, there are some 500 listed stocks on the JSE and I only want to own a few of the out­stand­ing ones. Hold­sport does not meet my cri­te­ria for out­stand­ing. Of course, this doesn’t mean that it is a bad com­pany or that it won’t make prof­its and see the share price mov­ing higher. It just means I don’t want to own it, along with the 488-odd other com­pa­nies I also don’t want to own as I only want around a dozen in my port­fo­lio.

Still look­ing good

Capitec* shares have been run­ning hard as it trades just be­low the all-time high, a share price that is jus­ti­fied by the re­cent re­sults. The two num­bers I al­ways check first are the cost-to-in­come ra­tio and im­pair­ments. Cost-to-in­come is sit­ting at 34% − it’s down and an im­prove­ment from the pre­vi­ous year’s 35%, and com­fort­ably bet­ter than the mid-50s we’re see­ing from the big banks. Capitec’s fig­ure will slip and likely set­tle in the mid-40s, which still puts it sig­nif­i­cantly ahead of the com­pe­ti­tion and mak­ing it a much bet­ter gen­er­a­tor of prof­its. This low cost-to-in­come ra­tio is in part be­cause of its busi­ness model but also be­cause it is a new bank that was built from the ground up us­ing tech­nol­ogy. Tak­ing a closer look at im­pair­ments, with a par­tic­u­lar fo­cus on the ar­rears cov­er­age ra­tio, it is sit­ting at 223% − in other words, more than dou­ble what its risk mod­els sug­gests. This is why even when things get tough, as they are right now, Capitec is able to man­age the process as it is very ag­gres­sive in manag­ing risk and po­ten­tial bad debts.

Bare bones

I write about Mas­ter Drilling in House View on p. 20. One ad­di­tional com­ment is that I wish it would ac­tu­ally in­clude some com­men­tary in the re­sults. It sup­plies the ab­so­lute bare min­i­mum, and share­hold­ers de­serve a lot more de­tail on the com­pany when re­sults are pub­lished.

What could have been…

Ipsa is a sad story of how even when a com­pany is in ex­actly the right space, at the right time, it may not end up be­ing suc­cess­ful. It listed in 2006 and is now sus­pended as a cash shell. Within two years of list­ing load-shed­ding started, and since it’s an elec­tric­ity-gen­er­at­ing busi­ness you’d think the com­pany had it made. But a se­ries of prob­lems – not all the com­pany’s fault – saw Ipsa barely sol­vent af­ter it sold its last re­main­ing as­set, the New­cas­tle Co­gen­er­a­tion busi­ness. A lot of what went wrong was as a re­sult of the cri­sis of 2008/09 but the les­son re­mains: even if the right com­pany is in the right space at the right time, its suc­cess is not guar­an­teed.

Tak­ing a closer look at im­pair­ments, with a par­tic­u­lar fo­cus on the ar­rears cov­er­age ra­tio, it is sit­ting at 223% − in other words, more than dou­ble what its risk mod­els sug­gests.

Danie Pre­to­rius

CEO of Mas­ter Drilling

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