Oil settles lower, Brent retreats from 5-month high on U.S.-Iran diplomacy hopes
Market Scorecard
Both the South African and US markets started the day in the green and then finished trading in the red. For the US market, it was at around 11 when the market suddenly just dropped 1%. None of the reasons given for the drop by financial media looked overly convincing. Should we just say drops are normal, and move on? One asset class that is doing well with all the concerns around the coronavirus is gold. Thanks to an increasing gold price and a weak Rand, the price of gold in Rand terms is at an all-time high. Having PGM and gold prices at very strong levels has given massive support to the local mining industry.
Yesterday the JSE All Share closed down 0.26%, the S&P 500 closed down 0.38%, and the Nasdaq closed down 0.67%.
Company Corner
Byron's Beats
Yesterday Woolworths (ASX:WOW) released their 26 week results ending December 2019. Total sales increased a meagre 3.8%. Due to higher operating costs, mostly in Australia, this resulted in headline earnings per share dropping 11.7% to R1.79. The below table gives you a good idea of where sales are coming from and which areas are struggling.
As you can see, the food segment in SA is still doing well. It now contributes 29% to overall group profits. Price movement was 5.1%, slightly ahead of inflation while online sales grew 22.3%. I am surprised more people do not buy groceries online. I despise grocery shopping, maybe that's why I am surprised.
Clothing is where the problems lie. In SA this only grew 2.2%. Volumes dropped, and prices increased by 4%. Online sales grew by 29.5%, which is encouraging. The presentation includes an interesting graph on market share.
In recent times Woolies peaked in August 2019 at 11.5%. They have since dropped to 9.5%. That is a combination of prices, picking the fashion trends and trying to adapt to weather patterns. All of which Woolies have struggled to get right. Let's not mention the already tough environment.
David Jones in Aus did at least increase sales by 4.9%. The Elizabeth Street refurbishment is still happening. Can you believe it? And we thought things were slow in SA? Online sales grew 61.8%, now contributing 10.4% of David Jones sales. That is good news.
As expected, this was another disapointing set of results. One feels the company could have been navigated better through a very tough environment. We know the acquisition was poor but we need to put that behind us now. The coming CEO, Roy Bagattini has a great CV. I am excited to see what some fresh ideas can do to what is a very good brand. If you hold the share, keep it. We feel the bad news is priced in and a turnaround is likely.
Bright's Banter
Discovery (JO:DSBPp) released its interim earnings yesterday that came short of expectations, including our own. This explains the recent sharp drop in the share price from R127 to R105.60 at market close yesterday. The Achilles heel was the VitalityLife business in the UK. It reversed its fortunes by 145%, due to high client churn by brokers and a hedge that went against the company.
Discovery's normalised headline earnings were down 11% to R2.1 billion, reflecting the VitalityLife's impact, which has not only been affected by the above reasons but also a very low interest rate environment. The company's new business annualised premium income as a whole grew by 17% to R11.11 billion thanks to the matured businesses growing spectacularly.
On an operational level, the other businesses called "emerging businesses" surged by 50% to R253 million, still a drop in the ocean for Discovery (JO:DSBPp) but headed in the right direction. Discovery said it continued to invest R1 billion in these new initiatives, despite a tough operating environment, because they're strong believers in organic growth.
Discovery (JO:DSBPp) is of the same view as us here at Vestact that as we live longer, healthcare spend will increase, meaning that private healthcare will become even more important than in the past. This includes an environment where NHI is prevalent; there is still a case for private healthcare for those who can afford it in their opinion.
The one thing that stood out was the early success of Discovery (JO:DSBPp) Bank which boasts over 78 000 clients with over 180 000 accounts, holding R1.2 billion in deposits and credit card utilisation of R1 billion. The company has spent a fortune establishing the bank, and they assured investors that they're on budget.
Discovery (JO:DSBPp) Bank client profiles differ dramatically to that of other online only challenger banks like Tyme Bank. Discovery has made it clear from the start that they're mostly interested in the affluent market which is what they've already captured through the Discovery Card, Discovery Invest, Discovery Health, Discovery Life and Discovery Insure ecosystem.
Finally, PingAn Health is firing on all cylinders with an increase of 28% in new business and a 59% increase in written premiums to R11.1 billion, leading to a 467% increase in after tax profits. However, don't get too excited just yet as this is a business still in its infancy and showing a profit margin of 1%, due to a high reinvestment of earnings.
In closing, Discovery (JO:DSBPp) isn't looking for the next big acquisition. They want to grow organically by targeting their current clients, using innovative ways, and hopefully current clients convince their peers to join the revolution. At R106, Discovery trades at the same level as it was in November 2014 with a business about roughly three times the size, it's a bargain!
One thing, from Paul
I was intrigued to hear the news yesterday that Morgan Stanley (NYSE:MS) is buying E*Trade in a $13 billion deal. It is the biggest takeover by a bulge-bracket US bank since the 2008 crisis.
E*Trade has five million retail customers and $360 billion in assets under administration. It also has a full online bank and a unit that offers corporates sub-accounts for their staff share incentive schemes. It was founded in Palo Alto, California in 1991. In the early days of retail day trading on the internet, E*Trade was the market leader. Do you remember their fabulous advertisements? My favourite was the one about the E*Trade customer who is being wheeled into hospital on a stretcher and the doctor says "he's got money coming out the wazoo". Or the series of ads about the E*Trade baby!
In fact, I visited the E*Trade team in 1999 to see if they would be interested in a South African branch. We had built an online trading business here on top of a Diagonal Street JSE broker and we wanted to rebrand and list the business. They were not interested in South Africa at that time, so we came up with our own name, Tradek.
E*Trade continued to thrive, but they got walloped in the dot com meltdown. So did Tradek, but that's a story for another day. E*Trade recovered and then diversified into banking and mortgage lending, but got hammered again in the great financial wipeout of 2008/09.
Morgan Stanley (NYSE:MS) is a wealth management and banking leviathan. Their headquarters are in a massive tower on Time Square (NYSE:SQ) in Manhattan. They already have 15,500 human wealth advisers catering to really rich families across the US. This division has almost $2.6 trillion of customer assets and made $962 million last quarter. I have a friend who works on one of these teams of advisers and I took a tour of their floor and chatted to their boss about asset allocation.
I'm not sure that this is going to be a great deal for Morgan Stanley (NYSE:MS). You will recall that brokerage commissions for active traders have gone to zero. Robinhood, Charles Schwab (NYSE:SCHW), TD Ameritrade, Fidelity and others have all been falling over each other to cut their rates.
I suppose that purchasing E*Trade helps Morgan Stanley (NYSE:MS) add clients who are less wealthy than its traditional customers. The acquisition also gives them access to low cost retail bank deposits. In my view, having a famous name and thousands of rich clients is a better business than having a website and catering to day traders.
Michael's Musings
In 2018 Elon Musk announced Tesla's new solar roof tiles, and then nothing. Two years later though, installation crews are starting to work their way through waiting lists, and taking more US households off the grid.
The idea from Tesla, is for all Tesla car owners to use renewable energy to charge their vehicles. What is the point of having an electric car if the electricity used to power it is generated from coal?
The roof above costs $83 000 (R1 245 000) to install. This includes roof tiles and two Tesla Powerwalls. That is more than the cost of most houses in South Africa! Even at that cost, there is a very long waiting list. It also took 17 days to install the roof. As more people buy the product, the cost will come down and so will the install times. Elon Musk says he is aiming to have the install time on an average house down to under one day.
Tesla is aiming to be a company for the future. It is why you can not value it like a traditional car manufacturer. Given Elon's ability to create and get things done, I would not want to bet against him.
Here is a video of the installation - Tesla Solar Roof V3 Installation
You can also read what Bloomberg has to say - Tesla's Next Big Challenge Is Bringing Solar Roofs to Superfans
Signing off
The Rand is a bit weaker this morning, currently at $/R 15.10. As Byron pointed out in the office today, the Australian Dollar is at an 11 year low against the US Dollar. In general, investors want to have their money in the US of A, and as a result that currency has been really strong. Data out today includes manufacturing figures from the EU, UK and US. Good luck to the Proteas this weekend.
