Resources look a good bet

The economically damaging troubles in our mining industry cast a black cloud over the sector, yet the JSE Resources 20 index has leaped 14% in the past nine working days. The final surge came on news of the US Fed’s intention to buy $40bn mortgage bonds a month. But, as could be expected, the non-precious miners have scored the most.

The chart shows the index surging upwards though a standard deviation channel that’s been in place almost all of this year. A buy signal has been given with an upward break through the single line of its moving average convergence/divergence (MACD) indicator. This puts the indicator back in positive territory above the dashed zero line.

However, the upward rush has placed the index in a short-term overbought position, 13% above its equilibrium, which leads me to expect a pull-back. However, for the longer term, it has broken upwards though a triple top and we have a longer-term count from its current 513 to around 619.

Major index constituent Billiton has risen 15% in the past ten days and next largest constituent, Anglo, by 24%. Third largest, Sasol, dogging the oil price, has risen 17% since early July. Collectively the three account for 70% of the index.

Gold and platinum prices are surging both in dollar and rand terms, but while miners remain on strike, less is produced which means less can be sold. This, coming at a time when the low rand/dollar exchange rate could boost exports, is a double whammy to producers. Therefore gains in precious metal producers, Anglogold-Ashanti, Implats, Goldfields, Angloplats and Harmony, which collectively account for about 25% of the index, have been limited.

While mining strikes overhang the market, a headlong dive into resources might be speculative. When the time to buy does come, a Satrix Resources ETF might be the best route. Rather than gold shares, already mined gold, via the Newgold ETF, seems a safer bet. However, assuming these troubles do not spread to other mines, a near-term nibble at non-precious metal producers could prove to be sweet.

Jean Temkin



Value in AVI

We bought AVI’s shares for our High Yield portfolio in February 2011. The gross price per share was just under R30 and the price at Thursday’s closing price was a shade under R60. At Thursday’s closing price the investment in AVI had generated an annual compound internal rate (cash outflow to cash inflow) of 32%.

The latest report on the preliminary results for the year ended June 2012 published on Monday and was in line with its earlier trading update. Salient figures were: Revenue from continuing operations up 11% to R8,29bn; operating profit from continuing operations up 23% to R1,37bn; headline earnings per share from continuing operations up 30% to 320c and increased operating profit margin up to 16,6% from 14,9%.

The directors also reported that, over the year, additional expenditure of R541m was made to cover major capacity and efficiency projects that the Green Cross acquisition (forming part of its fashion brands division) was concluded.

Especially heart-warming for us income yielders was the declaration of two dividends, a final gross dividend of 120c per share (102c net) and a special gross dividend of 180c (153c net). The total ordinary gross dividends per share for the year were, therefore, 203c (net 185c). For those who, like us, have to pay withholding tax, the cash from total dividends for the year will, when the dividends are paid next month, have been 338c per share.

The current dividend policy, based on diluted headline earnings per share from continuing earnings per share, was changed in March this year to a ratio of 1,5 from 2 previously.

I’ve digested the report and looked in particular at the company’s return on assets managed and cash flow. I’ve also read the directors’ outlook and this is positive despite the continuing pressure on consumer spending and the rising cost of inputs.

When we invested in AVI, my expectation was that headline earnings per share in the financial year would be about 242c. The forward market ratings were a price-earnings ratio of between 12,5 an earnings yield 8% and dividend yield of 4%. These ratings told me the shares were under-valued.

The market felt the shares were fully-priced for quite some time and by June last year, when I last wrote on AVI in Business Day, I had begun to believe the market was right – earnings growth would probably be less than in the 2012 financial year.

The market now believes the current share price of around R60 is justifiable on an historic price earnings ratio of 19. This suggests expected above-average earnings growth again in 2013- possibly, say 20% to 379c, a forward-price-earnings ratio of 15,8. The market is probably right and the gross forward dividend yield of 4% is appetising.

The macro trading environment is full of imponderables but given AVI’s management strength in tough past times, there has to be value in its price now.

Ben Temkin


Sasol and gold could relieve the pain

The oil price has risen 28% since mid-June, and is now only 7% lower than the swingeing March and April days when the unnecessary burning of petrol was a luxurious as bathing in goat’s milk. But in March and April, the rand was a heck of a lot stronger against the dollar than it is now, leaving us currently with the double whammy of a lower rand and a higher oil price.

As you’ll lick your wounds when you fill up your tank later this week, may I suggest a balm to sooth the agony; in fact may I suggest two? Neither will totally take the pain away, but might go a little way towards a more restful sleep.

The first balm suggestion doesn’t take too much figuring out. As Sasol dogs the steps of the oil price, an investment in shares soothes when petrol pumps prices hurt. Sasol gave a buy signal at the start of August, but is only about 2% higher now. The volume of trading in Sasol had been low for several weeks but has begun to pick up in the past few days showing that the professionals have begun gathering stock.

Sasol has been in a bear trend since early March but confirmed a new bull trend towards the end of August. Three positives, an upward break by the signal line through the MAC, an upward flip in the share price together with increasing volume, and a new bull trend lead me to believe that now is an excellent time to buy Sasol shares while it is at an attractive 4,3% dividend yield.

As you see from the chart, Sasol’s price plotting has broken upwards out of a Fibonacci Arc built over a year. The new stacking order of the moving averages seen on the right, red (short term), above green (medium term) and blue (longer term) illustrate a new bull trend.

Balm suggestion two is investment in gold. Rather than the dollar gold price South Africans are interested in the rand gold price, whose value is dictated by a combination of the dollar gold price and the dollar/rand exchange rate. The hedge against the petrol price rise is its rand content and against inflation, gold.

On the dollar gold price, the Federal Reserve Chairman Ben Bernanke’s speech prompted mixed feeling amongst the commentators. Some were hoping for QE3, which as he promised action if needed, still may be to come. While a less alarming description, the real meaning of quantitative easing is printing money, and as printing money devalues a currency, inflation is a sure result.

The age old defence against the spending power of your money being eroded by devaluation or inflation is to put it in gold. This has started to happen. Gold, which lost its bull trend in March, has confirmed a new one. Its overbought/oversold plotting has just moved back into positive ground since falling into negative ground and staying there since March. The more important rand gold price has also moved into a new bull trend, and given a new buy signal.

As well as all the other negatives, on-going kafuffles at platinum mines are said to be spreading to gold mines, making shares unappealing. The slight appeal of gold shares over other gold investments is that some pay dividends, but typically yields are low. This leaves us with Krugerrands currency trading on the JSE at R14 100, or Newgold at R138. Both have given new buy signals and moved into new bull trends.

Jean Temkin


(Click on the chart to see it more clearly)

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