Ouch from Hudaco

I didn’t enjoy yesterday’s (February 13) SENS on Hudaco when I read that SARS wanted a vast amount from the company. Reading the report (several times), I’m reasonably confident the matter will be settled but who knows?

Investment in equities always carries some risk, and often, as in the case of Hudaco’s, sometimes alarming and unexpected. Yes, I did know there was a dispute with the SARS (it was reported in detail in the report of the financial year’s results) but the company’s management was, and still is, confident that it its tax structure valid.

The amount SARS (excluding penalties and interest) is R500m. This is more than the company’s operating profit in the last financial year.

The share price was trading around R108 before the news. Not surprisingly, the share price tumbled down to R98 at Tuesday’s market close and has lifted to R100 as I write.

I reckon the management will resolve the dispute without too much blood being shed, but there’s a probability Jean’s and my holding may need a transfusion. The latest dividend of R3,10 will be cum dividend until Friday March 1. This will relieve anaemia as we continue to hold.

I expect contrarian investors will buy, accumulate or hold the shares. Seems to me a reasonable bet.

Ben Temkin

Bite into the Big Mac index

According to the Big Mac index, South Africa is last but bottom in The Economist’s published list that values currencies against the US dollar. The index is The Economist’s way of using the price of Big Mac burgers to measure the over- and under-values of 16 currencies against the dollar. The index may be considered light-hearted, but, over time it has proven to be a fair measure.

On January 20 this year, the price of an identical beef-filled Big Macs, (the exception is India where its Mac contains chicken) was compared with the American Big Mac. The index showed that currently the Johannesburger was paying about 60% less for his Big Mac than the New Yorker. Bottom of the list, paying even less than us, is the Bombay buyer; but I wonder if the meat difference account for that. Here we pay the equivalent of $2.03 and in India $1.67. Comparing like burgers, at $7,84 Norwegians are paying almost 80% more than Americans, and 396% more than us.

I rarely eat out but last week I saw for myself the extent of spiralling restaurant prices when Ben and I had simple toasted sarmies at Mug and Bean; the sarmies were delicious, the price not. I suppose we might be grateful for our cheaper-than-everywhere-else burger, but it leaves a big dent in the pride we have for our country. (However, I have to admit that of late the pride I have in my adopted country has been severely wilted.)

So what shall we do about our undervalued currency? Firstly, when shopping, bear in mind that everything that comes from abroad will be more expensive, and so stick to locally produced goods where possible. Personally I’ve given up my erstwhile preference for Colman’s hot mustard, and find that a local brand burns my tongue just as well. I am rather stuck on coffee beans but a fellow Midlands Meander outlet, The Wine Cellar, sells huge variety at more affordable prices.

As in the apartheid years when few would do business with South Africa, gaps in the market for all kinds of things emerged. Now must be a good time to set up manufacturing businesses that can produced items at lower than imported good prices, but that’s easier said than done. Few banks will risk financing a brand-new venture, and the mind-set of consumers, now used to the imported, but sometimes shoddy goods, must undergo a dramatic change. That requires advertising, which costs an arm and a leg.

Investing in rand-hedge stocks (I mentioned Sasol in my last blog)is one answer and, should peace hold in the agricultural sector, food producers are worth watching. Good news from China has helped platinum and base metal producers. However, to my mind the goings on in the mining industry still casts a cloud over that group.

Nevertheless, you should look at resources. The JSE-Resources index hit a two-year low in September and with a few humps and dips has moved up by almost 16% since then. As well as increased demand, the continued weakening of the rand has assisted prices. If China continues on its present path, whether or not the rand stays where it is, or weakens further, there could be much more gain left in this sector. Rather than individual shares, the simplest way to stake your claim would be to invest in Satrix Resources (Satrixres), whose investments follow the JSE Resources index.

I have plotted Satrixres together with the rand, to show how its price has been benefitting from the six months rise in resources. The standard error channel over the rand’s plotting gives a year-long view of our ailing currency, and sitting on the centre equilibrium line, shows it neither overbought nor oversold. We can therefore assume that barring a miracle, it will continue to weaken. I have drawn a zig-zag over the Satrixres plotting which reflects 5% changes in its direction and which now seems headed upwards.

Jean Temkin

Hudaco’s yield is tempting

Yesterday Hudaco published its annual results for the year ended November 30 2012. For some weeks the share had been trading around R117, but, following the results, the share price fell out of bed and Friday’s market closing price was R110, a loss on the day of about 6%.

Those readers who used to read Jean and my columns in Business Day will recall that part of the continuing narrative in those columns was about two (still existing) portfolios, the Private Investor and High Yield portfolios.

The Private investor portfolio initially invested R100 000 August 2007, and, with the exception of the shares in one company, the investments were made by the end of the year.

The exception was Hudaco, in which we invested just over R9 000, the proceeds of the sale of Tiger Brands, with which we were disenchanted.

There are 10 counters in this portfolio, and five of them are still suffering shell shock following the 2008 market crash. Hudaco, with a capital gain of over 50% has been the second best performer (the winner is NewGold by far). Of course, the portfolio has also enjoyed dividends from Hudaco, and this has helped to assist its internal rate of return.

The Private Investor portfolio has not been a good performer. Its capital gain over the period has been 15,3% and its internal rate of return at less than 5% annually compounded has just about countered the rate of inflation.

This takes me to the High Yield portfolio, in which a substantially larger investment was made, and in which Hudaco features again.

The investments in this portfolio were made between September 2009 and December 2011. Since Friday’s market close, the portfolio has enjoyed an internal rate of return of well over 20% a year.

The Hudaco holding was made at R66,04 just over three years ago. The internal rate of return on this investment, which takes into account the share price’s belly-flop on Friday, was 23,3% a year.

Hudaco’s performance over the year was good. It was badly affected by mining labour problems. Its woes were compounded by the rand’s volatility. When the rand is strong it gains on its price of imports. When the rand is weak it enjoys the good fortune of export-driven miners and manufacturers – provided these customers are not strike-bound. In an especially negative environment, therefore, pushing headline earnings per share by 5% to R10,71c per share and lifting total dividends per year by 6% to R4,65c was pretty good in my eyes.

Still, it remains in similar problems ahead – rand volatility, labour woes and, of course, the Eskom tariff sting. Thus: no positive or negative forecast from the directors.

From Jean’s and my perspectives, Hudaco remains a hold even if in the 2013 financial year, earnings don’t improve. At our cost price, the forward dividend yield should be 7% after withholding tax.

At the current cost of R110 per share, the forward dividend yield (based on no earnings growth) is more than 4%. If we were cash-flush, we would add some more.

Ben 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