Rand gold price attracts

Gold’s erstwhile safety-net status, a store of wealth when everything else goes wrong, has significantly dimmed in the past eight months despite the growing intensity of the Greek tragedy. As the dollar gold price dipped, the greenback climbed onto the throne, subjugating other currencies, particularly those of countries sharing our emerging market status. In the past 4 months both the rand and the dollar gold price have dipped 8% against the dollar which, as its value depends on this combination, have lifted the rand gold price by almost 4%.

Assisted by calls for the nationalisation of mines reducing to a whisper, the gold share index has risen by 15% in the past six-weeks but has a good way to go before it moves back into its long-lost bull trend. However, Krugerrands and Newgold, which accurately dog the rand gold price, are both a whisker away from new bull trends. Both have given buy signals with strong upward breaks through signal lines by their moving average convergence/divergence MACD plotting. There have been three similar upward breaks so for this year but lacked the thrust of this latest one.

In the right circumstances, mining shares can be good to investors, but what they are buying is gold that has yet to be mined. Mining is a risky and costly business with expenses rocketing as the energy needed for extraction zooms in price. Alternatively investors can buy Krugerrands fabricated in already mined gold, or Newgold EFTs each one equalling one-hundredth of an ounce of mined gold.

For the chart I have used candlesticks to indicate the dollar gold price’s movements over the past year. It shows that the price is back to where it was a year ago. However, because of the rand’s declining value the rand gold price, the red solid line plotting, has gained 29%. For all if this year, the third plotting, the MACD, has been moving upwards as it attempts to move back into positive territory above the horizontal line.

Technicals indicate that the rand gold price is likely to continue hardening, as the rand loses further ground and gold regains its hedging role as currencies other than the dollar, are undermined by a possible Greek departure from the Eurozone.

Jean Temkin

(Click on the chart to see it more clearly)

Comfortable with Famous Brands

This morning Famous Brands, the fast-foods restaurant group reported its results for the financial year ended February 29 2012. The company reported year-on-year improvement of 15% in bottom-line diluted headline earnings per share to 272c per share from 237c.

This result was no surprise as a fortnight ago the company issued a positive trading update in line with today’s report, and, had I not been diverted from other activities, I would have written on the update on this website. I’ve resolved to be more pro-active in future.

Jean and I bought our holding in Fambrands between June and December last year in a share price between R42 and R44 last year. This holding was part of a portfolio selected for our High Yield portfolio which formed part of the narrative for the now defunct Private Investor Portfolio in Business Day. Readers of that column may recall the share was on our wish-list for several years before we finally invested, but, sometimes we dither. Had we not dithered we could, perhaps, have bought the around R30 a share two years ago. But then the cash kitty was then only large enough for entry into Spar, which was higher on the wish-list.

With our website still in infancy its readership is miniscule. Gradually, therefore, I’ll try to highlight the essentials we use in selecting shares for our portfolio.

The main investment fundamental is how well a company managed its return on the assets it manages – its return on assets managed. The drivers of ROAM is asset turn (the ratio of turnover to assets) and operating margin (the percentage return operating margin). The product of these two drivers is the ROAM.

In the latest 2012 financial year, for example, Fambrands’ turnover was R2,15bn and its assets at year-end amounted to R1,22bn. The asset turn was 1,76. The operating profit was R413m and, on turnover of R2,15bn, the operating margin was, therefore, 19,2%. Multiplying asset turn to margin, the ROAM was 34%. The ROAM in 2011 was 31%.

Consequently Fambrands has managed its assets better year-on-year and, the report tells us, one of the reasons was what it calls a ‘stellar’ performance in its logistics division in which the operating margin was a record of 3,5% (3,1% in 2011). This is small beer relative to the overall supply chain division as a whole which had a margin improvement to 21% from 17% the previous year, but logistics forms a big lump of revenue (R1,52bn) and is a costly exercise.

Eating out is not a necessity for most people and Fambrands has to get customers in to supply franchisees and its own outlets, the latter of which have been making losses. The company has also not been doing well in Wimpey in Britain. Here and elsewhere the market will be tough for a while yet, but Fambrands’ ROAM record underlines management strength.

Our holding of Fambrands has, based on Friday’s closing price, had an annual compound internal rate of return of 25% over the investment. The company has reduced the dividend cover, and the increased 120c final dividend (2011: 85c) will after withholding tax, be 102c. Total dividends, net, for 2012 were, therefore, 182c, a yield of 3,43% at the current share price of around R52 and 4,1% on our own investment. We’re not complaining.

Ben Temkin

(Click on the chart to see it more clearly)

Chart Comment: Charts of Fambrands warn that the price could come lower in the short term, which is good news for longer-term investors aiming to or top-up current holdings. Based on technicals, my faith in the share is illustrated by this simple two-and-a-bit year weekly chart. Using moving averages, red for short-term, green for medium-term and blue for long-term you can see the 237% price increase it has experienced since the start of 2009.

It was in May 2009 that Fambrands confirmed its bull trend as the share recovered from the 2008 crash. A bull trend is identified when the stacking order of moving averages is short-term above medium term above long-term. On this chart the stacking order remained intact until the start of 2011, when the short-term moving average (red) dipped through the medium term (green) and actually nudged at the long term (blue) moving averages, warning that a bear trend may be in the making. In March the price dropped to R35. However, with a burst of volume as buyers snapped up shares at bargain prices, the recovery back into a bull trend was swift.

Fambrands’ price then rose steadily until March this year before it became highly volatile, with keen buyers well outnumbering sellers and willing to bid ever higher for the stock. This can be seen by the extended length of the bar plottings and the shorter length of the upright volume plottings at the foot of the chart. An ever-increasing price hike is what’s called a ‘blow-off’ (well overbought) phase similar to the one seen at the end of 2010 before that price fall. We are now experiencing a similar price fall during which short-term holders will likely cash in, so allowing serious investors to gather stock.

I would advise chart watchers to place a moving average convergence/divergence (MACD) plotting over their Fambrand chart and wait for the plotting to penetrate upwards through the signal line. Also watch volumes as in Fambrands’ case they accurately reflect accumulation and distribution.

Jean Temkin

Time to hedge the rand

The currency market is again in turmoil and lacking a miracle will remain so until a solution to Europe’s debt problems is finally found. Could that solution be the demise of the euro and a reversion back into the old currencies? Rumour has it that even Germany, the most stable country in the Eurozone, has printed deutschmarks ahead of that possible event. This, unlikely as it is, would be thrown all markets into chaos and the rumour adds to acute nervousness in the currency market.

While South Africa is not involved in overseas debt problem and still has better interest rates than most, foreigners are no longer piling into rands as they did in 2010 and early 201l. This has resulted in the falling value of the rand. In the second half of 2011, the rand lost almost 28% against the US dollar. There was a recovery start the start of this year, but since the start of March the rand has lost 8,47% against the dollar, 9,19% against the pound and almost incredible, given its dire circumstances, 5,29% against the euro.

A falling rand is inflationary as we’ve already seen at the petrol pumps where the 11% fall in the price of oil in the past six weeks, has so far not been reflected. Already prices of imported foodstuffs, like coffee, have rocketed, and other imports will follow. While the lower value of the rand and is good for exporters, a shock drop in manufacturing and falling metal prices, may have negated the advantage.

In the 1990s and early 2000s rand hedging became highly profitable. From 1990 to 1999 the rand lost 140% against the dollar and another 117% in the following two years the rand eventually hit a low of $1/R13,75. From 1990 to the end of 2001, the rand lost 379% to almost touched R20 against the pound.

Currency hedging is undertaken to minimise exposure to unfavourable shifts in the money market. Back in the 1990s and early 2000s, tight exchange control regulations made it difficult hold foreign currencies, but investors got around this by holding mining stocks. Today, exchange controls have been substantially relaxed, which gives the holder of rands far more opportunity to convert to alternative currencies.

For several years after its inception, my preferred investment currency was the euro, but I now see it as high risk. When my head rules, I see the US dollar as the currency that seems always to eventually float back to the top, come what may. Of course in this changing world, the brave investor may prefer one or more of the Asian currencies, or the hitherto reliable Swiss franc, but even that is now losing against the US dollar. While the UK’s problems seem no nearer a solution, as the country of my birth, I still have a fondness for pounds.

However, my greatest fondness is for shares, but rather than the erstwhile rand hedges, mining, and particularly gold shares, I prefer those that have dual listings, or earn in foreign currencies. Our sugar companies, for example, trade in a mix of currencies and as well as sugar export its by-products and other commodities. Tongaat’s six divisions, earning in dollars and euros offer starch, sugar glucose, aluminium, property, building materials and textiles. Illovo’s by products include bio-fuel while Crookes is involved in animal husbandry.

My most favourite rand-hedge as well as oil-hedge stock is Sasol, the share that recently left egg on my face after drawing attention to its buy signal which was scuppered by results of Greek and French elections. The good news on Sasol is that it has now repeated that buy signal.

For those investors who prefer a currency, I’ve drawn a chart that shows what has happened to the rand over the past 12-months during which the rand lost 15% against the pound and almost 17% against the dollar. I have used candlesticks for the pound and a red solid line for the US dollar. The lines running diagonally over the plotting are linear regressions, the upper of the pound and the lower of the dollar.

The rand began weakening again six days ago and against the pound it is now only 2,5% stronger than in November and 5,4% stronger than the dollar. The MACD (moving average convergence/divergence) plotting had broken through it signal line indicating that it will continue weakening.

(Click on the chart to see it more clearly)

Jean temkin

Measuring the rate of return

It’s nice to know that our new website (still being improved) is being read. One reader was puzzled by my column on Sasol in which I measured its performance on Sasol by measuring its return on investment.

Let me, therefore, clarify.

When you make an investment, you make a cash outflow, the gross cost of the shares. As you do this your investment has a cash realisable amount – the market value of the shares less transaction costs. If the share price hasn’t changed, your cash outflow (the realisable value) will be less than the cash outflow. Currently you will have a capital loss of close to 2%.

The realisable cash inflow changes each time the share price changes. It’s a moving target. This cash inflow should, if you have bought wisely, grow. Its gain should be measured by its annual compound return.

Over a period of time you will receive cash inflows via net dividends received. Each of these dividends should also be measured by its annual compound return.

You will appreciate that measuring each of these inflows on return is an arduous arithmetical exercise. However, a formula is easily accessible from Microsoft Excel, XIRR, which I wrote about in the column on Sasol.

To input the formula you type =XIRR. If the function isn’t available, you’ll receive an error message #NAME?

This means you’ll have to load in the Analysis ToolPak addin. Go to the Tools Menu. In the Addins available list, select the Analysis Toolpak box and then click OK. You may then have to follow the instructions in the setup programme.

As I already use some of the formulae in the toolpak. I simply typed =XIRR.

Before I could use the formula, however, I had to set up the data in two columns, one for values and the other for dates. The date is when the cash-flow changed and the value is the amount by which the cash-flow is changed.

Be careful that you choose an acceptable Excel format for the dates field. I used cccc/mm/dd (century/month/day).

For my example I have used the investment Jean and I made for Pick ‘n Pay for the Private Investor portfolio. This real portfolio’s history formed part of the narrative for my Private Investor column in Business Day. The portfolio is still alive, if somewhat feeble.

The first date was when the Pick ‘n Pay shares were bought by the Private Investor portfolio, September 5 2007. R9 916,95 was invested. This was a cash outflow, and, therefore, the input value was -9916.95 and the date was 2007/09/05. The next action was on December 14 2007, when a dividend of R90,19 was received. This was a cash inflow and the value was 90.19 at 2007/12/14.

Eight further cash inflows via dividends have been received so far and the inputs have been made.

At last Friday’s market close, the value of Pick ‘n Pay’s shares, after deducting transaction costs, was R12 959.52. In the values field the input was 12959.12.and the date was 2012/05/04

On the next row I entered the XIRR formula. You do this typing =XIRR followed by the range of values, the range of dates, 0.1). Select the range of the amounts with your mouse, and then the dates. Don’t use the column headings as part of the ranges. Make sure the commas follow the ranges followed by 0.1. When you’ve typed the closing bracket, press enter and the answer should be 0.10397 As a percentage this is 10,4%.

This is what my spreadsheet looks like:

This 10,4% is the actual return – cash out less cash in – the Private Investor would have enjoyed had it cashed its Pick’ n Pay shares in on Friday.

Ben Temkin

Time to buy Sasol

This is an exhilarating experience, my first contribution to Jean’s and my newsletter on our own new website. Accepted the circulation is small but …

The focus today is on Sasol, in my view, one of the best shares in which to invest and the heaviest weight in our portfolio.

The company featured regularly in the columns I used to write in Business Day and previously in the Financial Mail, as the focus of those columns was to share readers our view of equity investments – opportunities, dead ducks and how our own holdings were experiencing.

Despite our personal rising costs, we’re still re-investing our dividend income. We recently received dividends from Sasol, and are seriously thinking of accumulating some more although this investment will make it even heavier relative to the other counters we hold.

In a broad sense, Sasol’s share price is an oil-price/dollar-rand hedge. Thus its share price will tend to correlate with the rand price of oil. Sasol is, however, a power base of more than just oil and the company is continuously building its asset base exploiting its leading edge international technology.

We have been buying Sasol shares over the past ten years at prices between around R100 and close to R240 a share. While the value of the shares we hold are currently more than double the cost, the return we measure is the internal rate of return. This is the cash-out to cash-in compound annual rate of return on the investments realised and realisable over the period. Investments made are cash outflows and dividends received are cash inflows. The current market value of the shares now, less transaction costs, is the latest cash outflow. I use a Microsoft Excel formula – XIRR – to calculate the return. This return is a moving target as the share price moves every day and the period of investment increases daily.

Over the period we have invested in Sasol shares, we have enjoyed an annual compound return of 18,3%. It has been a good investment by any standards.

In considering some more Sasol shares, one of the most important investment fundamentals is the potential dividend yield. Making this guesstimate requires a fair amount of analysis. I begin this exercising by modelling with using the company’s return on assets managed. This model tells us how well the assets have been employed and provides a future perspective of bottom-line earnings growth.

If earnings growth is probable over the long term, the dividend yield should correspondingly grow. Of course, I accept that year-to-year, earnings could be volatile.
Let’s short-cut the exercise today.

Sasol’s financial year ends on June 30. In the 2011 financial year bottom-line diluted earnings per share were R32,85. Over most of the financial year so far the oil price has been strong and the rand versus the dollar far from strong. In the first half of the financial year bottom-line diluted earnings per share were R22,91. But this was an exceptional financial period. Suppose that earnings are only R18 a share in this current half, a total of about R41 for the whole year.

On this cautious view, the final dividend would be around R6,60 a share, a total of R16 for the whole year and at a share price of R370, a forward dividend yield of 4,3%. This yield is more than acceptable – would make the share fit in well with our own High Income Yield portfolio.

The technical factors (see chart) are positive in a buying trend.

(Click on the chart to see it more clearly)

Chart Comment: Sasol gave a buy signal on April 18 when the moving average convergence/divergence (MACD) plotting (red solid line) pushed upwards through its signal line (dashed plotting). The signal is particularly strong in as it came at -6 pm the MACD scale, (the left axis). As the chart shown, this was the lowest level reached during the period of the chart.

Sasol, the candlestick plotting, moved sideways for most of April in a particularly non-volatile manner. This lack of volatility is shown by the shortness of the candlesticks. Compare these with the highly volatile plottings experienced in November and December last year. The upward movement in the last candlesticks on the right, illustrates how Sasol is moving up from an oversold position.

Jean Temkin



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Ben & Jean share their thoughts on the Investment World & its opportunites, plus anything else that they think will be interesting