Greenlight for Newgold?

It’s just a gut feel at this stage, but along with other chartists, I’m keeping my eye peeled for a lift in the dollar gold price. The gut feel grows stronger each time I take a look at Europe, and see the mess it’s in getting stickier by the day. The worst case scenario would be a total collapse of the euro, which I don’t think could happen (my crystal ball is murky on the subject) but currency upsets automatically send people scurrying into gold. There are a few bits of good news coming out of the US, but while, at the moment, the dollar looks strong, the economy is still fragile. History doesn’t repeat itself but gold-bug spirits lift as we near the first anniversary of gold almost hitting $1 900.

Chartists are watching the mid-May to date sideways pattern in gold. Point-and-figure chartists are keenly watching for an upward break through the solid resistance that has built at $1 600 plus. If the break is strong enough, it may produce forward counts in excess of $2 000. But the three white candles seen on the far right of the chart excite me. This formation is known as ‘Three White Soldiers’ which signals a bottom reversal.

However, even more exciting is that Newgold has given a new buy signal with an upward break through its moving average convergence/divergence (MACD) potting. Newgold, which like the Krugerrand, mimics the rand gold price, is attempting to nudge back into a bull trend. It has just broken a double top on its point-and-figure chart that gives a possible count to R167,00. As the rand gold price depends upon two components, the dollar gold price and the value of the rand against the dollar, the fortunes of both dictate its value.

Why Newgold rather than gold shares or Krugerrands? Some gold shares distribute dividends, but, at this point of time, that appears to be their only advantage. Nationalisation scare-stories detract from investment while costs for the still-to-be-mined gold, are in a upward spiral. Gold, fashioned into Krugerrands are highly attractive objects, but only a brave investor would keep them on hand to be constantly admired. The investor can well keep his physical gold, rarely seen, tucked away in a safety deposit box, along with the 1,3-million fine troy ounces of gold bullion held in Newgold’s depository storage in London.

Newgold ETF continually tracks the price of gold bullion on international markets by holding physical gold bullion equivalent to the value of the securities in issue. At last week’s close the rand gold price was R13 217,06 an ounce, which left Newgold (about one percent lower) at R128,50.

Jean Temkin

(Click on the chart to see it more clearly)

Ellies is a glint in our eyes

I first wrote in Business Day on Ellies Holdings two years ago when the company had moved from the JSE Altx to be listed on the main board. I remarked that I liked company’s investment fundamentals for the long term. The company did not, however, meet the criteria for the either the High Yield or Private Investor portfolio whose tale I was telling in the newspaper.

But, at a share price then of R1,60, the shares were a glint in Jean’s and my eyes. The glint was sparkled by our personal experience of a few of its products.

Ellies describes itself, in part, as the largest manufacturer, wholesaler, importer and distributor in Southern Africa of television reception-related products, such as satellite equipment and antennae, as well as domestic electronic and industrial audio products.

A year ago, Ellies published a trading update on expectation of headline earnings per share for the financial year ended April 30 2011, and I reckoned it was time to revisit the company.
On June 29 2011, Ellies had published a positive trading update.

In my column I wrote: ‘The company expects headline earnings per share for the 2011 financial year to be between 18% and 23% higher those in 2010. The expected range is, therefore, between 30c and 32c.
‘The share is now trading a shade under R2. Based on this price, and taking median earnings of 31c, the market ratings are a price-earnings ratio of 6,5 and the earnings yield is 15,5%. If it declares a dividend of 20% of earnings, the projected dividend yield is 3,1%. These ratings are about the same as the historic ratings last August. The difference is that it’s been delivering growth at the bottom-line and the share price has moved by 25%. Looks like a sound long-term growth investment.’

About three weeks ago, Ellies published a revised trading update for the financial year ended April 30 2012. The directors wrote: ‘Ellies is now in a position to advise that it expects EPS and HEPS to be between 68% and 78% higher for the year ended 30 April 2012, compared to EPS and HEPS for the year ended 30 April 2011.’

(The year’s results are due to be published on July 23.)

In an earlier update towards the end of March, the expectation was a 40% year-on-year improvement, and that update moved the share price up from around R3 to close to R4. The revised update accelerated the share price and, as I write, it is trading around R5,30.

Ellies didn’t declare a dividend in the 2011 financial year but its HEPS were 31,42c a share. If this year HEPS were, say, 70% higher year-on-year, they will be around 54c. At a share price of R5,30, the guesstimated historic market ratings are a price-earnings ratio of about 10 and an earnings yield of 10%.

There may be a dividend sweetener this year but as the company is sweating its assets, it needs cash to meet market demand. The share price looks challenging but I feel Ellies should be able to maintain earnings growth of at least between 15% and 20% for the medium term. It’s still a glint in our eyes.

Ben Temkin


GO DUTCH

My hope that the lowering of interest rates by the European Central Bank to 0,75% would create the desperately needed economic stimulus, were almost immediately dashed when markets treated the news as yet another non-event. I guess we have already seen so many confidence-building squibs fizzle out that the cut was treated with indifference.

Yet, if you lived in Ben’s and my former home, the Netherlands, whose consumer price index currently stands at around 2,3%, and received a tiny 0,75% rate of return on your savings, you’d surely become agitated. Knowing the prudent Dutch investor, I imagine his hackles rising at the thought that the spending power of his money disappearing at a rate of 1,45% a year. The extent of gain or erosion of an investment is the difference between the rate of inflation and how much the investment yields. Even though 10-year Dutch bonds yield 2,04%, your money is being whittled away at a rate of 0,26% a year.

Before the damp squib dashed my expectations, I’d imagined the Netherland investor’s fiercely growing scowl, prompting him to do that he did a couple of years ago; swap his euros for rand-denominated investments. That was when keen foreign investment pushed the rand’s value to uncomfortably high levels. This did great harm to our exporters, but held the petrol price at a more reasonable level. That is where the ‘which side of the fence’ comes into play - import or export - simply translated into jobs vs cheaper foreign goods. Pity we can’t have both!

Was it a glimmer of hope at the end of the Europe-problem tunnel, that made our Netherlander begin switching out of rand, so dipping its value 26% against the dollar from August to December last year? Then after an 11% recovery did his further switches dip it by 10% from March to early June this year? Then again, perhaps rather than lights at the end of tunnels it was shenanigans within our government that frightened investors away.

Nevertheless, despite our wobbly, sometimes laughing-stock government, Foreign Direct Investment (FDR), a la Walmart’s purchase of a 51% stake in Massmart, in South Africa is attractive for several reasons. Problems in North African countries have detracted new foreign investment there. Unveiled dirty deeds at the crossroad by some Barclays bank execs in Europe’s erstwhile financial capital, has put an ink-blot over sterling. That’s why I think our Netherlander might take another look at rands. He knows that the one area that SA appears to excel is that those running the country’s finances are level-headed and well respected. It was after all tough banking laws which saved us from the 2008 banking shindig.

My suggestion is that the Netherlander takes a closer look at the South Africa share market, and if he does, so should you. This would especially apply if, as rumour suggest, our rates are cut next time around. Local rate cuts boost share markets while foreign demand pushes up share prices at the same time as providing a reasonable return. These days with a plethora of unit trusts and in my opinion even better options, ETFs, you don’t have to be a share-market guru to successfully invest.

Looking at the market as a whole, the JSE AlS40, is comprised of a collection of the top 40 shares that make up about 60% of trading. That index currently has an earning yield of 8,23%, a dividend yield of 2,99% and a p/e ratio of 12,15. Amongst ETFs, the Satrix Dividend Plus (Satrixdiv) has gained 121% since March 2009. Over the three years ended June the ETF had an annual compound return of 21,73% and now has an historical dividend yield 3,09%. The object of this exercise is investment yields, hence my choice of this ETF over the others.

As a loyal citizen, our Netherlander might rather be drawn towards his own share market. But as the Amsterdam index is currently 44% below its 2007 record high, compared with the JSE-Overall at 3,8% above its 2008 high, his choice is made easier. Instead he might look at Wall Street where the DJ-Industrial is 9% below its high, or Australia’s Sydney all share at a negative 38%. In fact the JSE has the only overall index that is above record highs.

In the accompanying chart I have used a candlestick plotting for the Satrixdiv and a bar plotting for the JSE Als40. Moving much in unison, differences occur with the Satrixdiv pick of high yielding dividend payers. I have overlaid three blue speed resistance lines that mostly encompass both plottings and head steadily upwards. To the Satrixdiv plotting, I have added a red zigzag which turned upwards on July 3. Not shown is the moving average convergence/divergence plotting which had just given a buy signal with an upward break through its signal line.

Jean Temkin


(Click on the chart to see it more clearly)

Steady growth expected from Hudaco

I closely monitor the progress of Hudaco, a counter Jean and I hold in both the Private Investor and High Yield portfolios about which I used to write in Business Day. About a year ago, after Hudaco published its results for the six months ended May 31 2012, I reckoned that its then share price of R82 was attractive.

I figure that the much smaller number of readers of our newsletter could be interested why I made that conclusion and, more importantly, what I feel about the share at its Friday’s closing price of R114,05.

A year ago, I wrote: ‘Half-year on half-year Hudaco’s sales improved by 26% to R1,41bn from R1,12bn, and operating profit rose by 24% to R149m from R120m. This performance translated into 11% growth in headline earnings per share to 377c from 341c, while bottom-line diluted headline earnings per share were 10,4% up to 371c from 336c.

‘In the whole previous financial year, diluted headline earnings per share were 784c. Second-half earnings per share were, therefore, 448c. I reckon that the company can grow its second-half earnings by at least 10% in the second half of this current year, to say, 493c. My guesstimate for the whole year, is, therefore, the sum of first-half earnings of 371c and second-half conjectural 493c, a total of 864c. Dividends over the year (an interim of 130c per share has just been declared) could be about 364c.

‘At the current share price of R82, the forward ratings on my guesstimate is a price-earnings ratio of 9,5, the earnings yield is 10,5% and the dividend yield is 4,4%.’

My forward view was over-conservative. In the financial year, diluted headline earnings per share were 1010c compared with my guesstimate of 864c and dividends for the year were 440c a share, compared with my guesstimate 364c.

In that latest half-year period, diluted headline earnings per share were 434c a share, 17% better half-year on half-year. As we know the economy is having a tough time, and its mining sector, platinum in particular, is having a bumpy ride. But despite this Hudaco’s directors are confident in growth in earnings. It has already made a promising investment.

My feeling is that year-on-year bottom-line earnings per share could improve by at least 10% to 1 111c. Dividends per share, after withholding tax of 15%, could be around 480c for the year.

At a share price of R114, the forward price-earnings ratio on earnings of 1 111c a share is 10,26, the earnings yield is 9,7% and the net dividend yield is 4,2%.

These ratings are much similar to those a year ago, and, to my mind they are attractive for long-term investors.

Incidentally, our High Yield portfolio invested just over three years ago and its annual compound internal rate of return was just over 30% until Friday’s market close.

Categories


Archives


Subscribe to the Newsletters

Just type in your email address, and you’ll be subscribed automatically.

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