Finweek English Edition – August 15, 2019

Simon’s

stock tips

Founder and director of investment

website JustOneLap.com, Simon

Brown, is finweek’s resident exper t

on the stock markets. In this column

he provides insight into recent

market developments.

marketplace Simon says

By Simon Brown

36 finweek 15 August 2019 http://www.fin24.com/finweek

Jump in

local sales

SHOPRITE

Shoprite’s* 30 July trading update was not

great, but it did indicate a better second half

to the year. This would suggest, in part, better

trading conditions, but also that management

is fixing the own goals around the fumbled IT

rollout and strike action at their distribution

centres. Over the six months to June, local

supermarket sales increased by 7.4%

and 9.4% in the last quarter alone, showing

positive turnaround and momentum. They

still face hyperinflation in Angola and internal

inflation is at 1.2%, with 9 679 products still

showing deflation. This is hurting margins as

costs are increasing, but they’re not able to

increase prices on the deflation products as

they’ll then lose customers.

Over the six months to June,

local supermarket sales increased by

7.4%

and

9.4%

in the last quarter alone.

ANGLO AMERICAN

Buyback not

the best route

With Kumba Iron Ore and Anglo American

Platinum both delivering knockout interim

results for the year ending 30 June, it was no

surprise that parent company Anglo American

did the same. But I am not convinced that the

share buyback of roughly R25bn announced in

the wake of these results is the right response

from cash-flush Anglo American. Sure, the

balance sheet is very strong, with plenty of cash,

and a buyback is often preferred over a dividend

as it escapes the 20% dividend withholding tax

locally. But I prefer buybacks when valuations

are cheap and commodities are at the bottom of

the cycle. I’d rather not buy at the top at a price

that, in the next few years, may seem overly high

for a cyclical business. As a side note, the large

diversified commodity stocks probably have

the strongest balance sheets in their histories,

with pretty much no debt and great cash

generation. My concern is that they may rush off

and attempt a major deal at a time that is likely

to be the top (or very close to the top) of the

commodity cycle – once again destroying value.

So far they’ve resisted that capital destruction

route. But share buybacks at these levels are

not much better. Rather give the money to

shareholders, we’ll pay dividend tax and decide

what to do with the money.

A waiting game

MilCo deal in

the offing

Vivo’s half-year results for the year ending

30 June were decent, but we’ve still not had

an update on potential fuel price regulation

in their largest market, Morocco. They are

seeing margin squeeze already in this market,

but this still remains the risk in the business.

Finalisation is out of the company’s control as

they wait for the king to rule on the issue. I'm

waiting for finality before taking any position

because this is a massive unknown. It’s

unfortunate as I like the investment case here

for increasing African GDP, which will lead

to higher fuel sales; and Vivo’s ability to add

further forecourt services such as fast food,

which will also boost profits.

The MilCo takeover of Clover received

Competition Commission approval. They also

managed to replace Brimstone, which was

to be the B-BBEE partner. While the tribunal

hearing is still to happen, it does seem that

the deal will go through. That said, one caveat

remains: If Clover’s performance drops, MilCo

could walk away from the deal, but I suspect

that’s unlikely. When Clover was around

2 000c I wrote that this was an attractive

punt for the deal being approved and the

stock has jumped to 2 350c at the time of

writing, and I would be taking profit here. The

deal price is at 2 600c per share.

VIVO ENERGY

CLOVER

AB INBEV

Too much debt

Anheuser-Busch InBev had some decent

half-year results with margin expansion, but

it suffers from the same problem as British

American Tobacco – too much debt after recent

large deals. AB InBev bought SABMiller for

an eye-watering valuation, considering this is

an industry struggling to grow, while BAT did

the same with its purchase of Reynolds for

an equally eye-watering valuation of $49bn.

Both companies now have large debt piles in

low-growth industries and are under pressure

as a result. They need to reduce the debt as the

merger savings are never going to be enough

in the short term. AB InBev is selling assets to

manage the debt, while BAT looks content, for

now, to trade that debt pile lower. Either way,

large deals are expensive.

Pho

to:^

Shu

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