JSE Direct with Simon Brown

What's an asset light business and why's it a great investment (#603)

JSE Direct with Simon Brown

09/18/24 • 22 min

Episode Overview:

In this episode, Simon Brown dives into the current economic landscape with a focus on interest rates, inflation, and the state of the South African Rand (ZAR). He also explores asset-light businesses and why they make great investments, followed by a breakdown of the latest market activity and local company results.

Rate Cuts & Inflation Outlook:

South African CPI (August): 4.4%.
A possible drop to 3.5% in October discussed with Johan Els, Chief Economist at Old Mutual.
The need for rate cuts to stimulate the economy, with experts debating between 0.25% and 0.5% cuts.
Fed decision and its potential market impact.

SA Prime and CPI September 2024

ZAR Strength & Market Trends:

Rand showing strength, potentially reaching sub-17 levels.
Global market highs: S&P 500, NASDAQ, and JSE Top 40.
Consumer confidence in the US and South Africa rising but still negative.

Platinum Group Metals (PGMs) & Palladium:

A strong bounce in PGM stocks, driven by oversold positions and palladium production cuts.
Palladium’s recent performance and its potential future breakouts.

Palladium weekly chart | 18 September 2024

Asset-Light Businesses & Their Investment Potential:

Definition and benefits of asset-light businesses (e.g., Santova, Nvidia).
Simon breaks down why businesses with fewer physical assets can provide higher returns on equity and efficiency.
Comparison to asset-heavy businesses like banks and retailers.
A deep dive into asset-light models like Shein, Temu, and logistics firms.

Company Updates & Local Results:

Outsurance: Strong financial results and special dividends; analysis of the short-term insurance industry’s ability to reprice premiums annually.
Altvest IPO: Simon discusses the upcoming Altvest IPO on the JSE and why he's not taking part in it, despite its interesting SME funding model.
Finbond: A look at the excitement surrounding Finbond’s potential delisting and the company’s moves in the US market.

Noteworthy Quotes:

"Rate cuts are coming, and I think we'll see a short-term sell-off as markets react." "Asset-light businesses like Santova and Shein are great investment opportunities because they don't carry the heavy burden of owning physical assets." "Outsurance continues to impress with strong numbers and dividends, proving the strength of short-term insurers."

Chapters 00:00 Economic Landscape and Rate Decisions 03:09 Understanding Asset-Light Businesses 05:54 Market Psychology and Upcoming Events 09:11 Local Results and Investment Insights 11:52 Exploring New Investment Opportunities 15:10 Finbond and Market Speculations 17:59 Larry Ellison and Oracle's Rise

REITs Booming and Still More to Come (#605)

JSE Direct with Simon Brown

10/02/24 • 17 min

China's Market Rebound

Stimulus Measures: The Chinese government has initiated a stimulus, which includes cutting reserve requirements and lowering interest rates. While spending has not picked up fully, the China 50 ETF (in US dollars) has wiped out losses dating back to July 2022. Hong Kong’s Hang Seng index shows a similar trend.

Market Sentiment: Short squeezes have played a role in pushing the prices of big Chinese companies like Alibaba and Tencent higher. Despite concerns about China's long-term investability (raised by experts like Viv Govender of Rand Swiss), Simon remains optimistic about continued growth in the medium term.

Shift in Hot Money: There's been a notable shift away from tech stocks like Apple and Nvidia, with more capital flowing towards China in recent days. Simon discusses the potential for short-term pullbacks, but he sees this as an opportunity.

South African ETFs Performance

Top Performers: Property ETFs have outperformed, with the CSPROP, Satrix Property, and 1nvest Property ETFs gaining between 30% and 31.7% over nine months ending in September 2023.

Underperformers: ETFs linked to palladium, platinum, and tech innovation (e.g., Sygnia’s Fourth Industrial Revolution ETF and Satrix Healthcare Innovation ETF) have shown negative returns.

Outlook for South African REITs

Simon expects further growth in the property sector but at a more moderate pace than this year’s 30% returns. He highlights the potential impact of upcoming interest rate cuts, consumer spending at malls, and the demand for yield as government bond rates decrease. Some REITs, particularly those in rural and township retail spaces, are performing exceptionally well.

The market tends to move ahead of the cuts based on expectations, but technically any cut is great for cheaper debt and more consumer spending at the underlying properties, plus a lower rate for the valuations which means a higher present value. So yes, they can keep going.

— The Finance Ghost (@FinanceGhost) October 2, 2024

The South African Rand and Global Markets

The Rand has seen fluctuations, dipping to as low as 17.02 against the US dollar and facing pressures from global events such as the Iranian attack on Israel and rising oil prices. Simon expects the Rand to strengthen and potentially break below 17, possibly reaching levels as low as 14.

Oil Prices: OPEC is grappling with maintaining production discipline. Oil prices are likely to hover around $70 per barrel, which is positive news for South African consumers in terms of petrol prices. South African PMI and Vehicle Sales

PMI: South Africa’s PMI for September was positive, indicating slight economic expansion. The absence of load shedding and lower interest rates have contributed to the improved outlook.

Vehicle Sales: September saw better-than-average vehicle sales (44,000 units). Simon emphasizes the potential upside in companies like Combined Motor Holdings (CMH), which has started to perform after years of stagnation. Investment Strategy in a Bull Market

September SA vehicle sales

Simon reiterates his bullish stance, noting that while there will be pullbacks (up to 10% corrections), the overall trend remains upward. He advises staying long in the market, especially in a bull phase.

Crypto Flies while Gold Crashes (#611)

JSE Direct with Simon Brown

11/13/24 • 18 min

Market Overview

Crypto Surge, Gold Decline: Bitcoin rallies as investors shift from gold to crypto. Gold hit a recent high of $2,800 but is now pulling back, possibly towards $2,300-$2,400. Central banks continue to buy gold as a hedge against U.S. dollar dominance and geopolitical risks.

[caption id="attachment_43623" align="aligncenter" width="849"] Gold | Weekly | 13 November 2024

Rand Weakness: The ZAR weakened above 18 to the dollar, driven by strong U.S. dollar demand amidst market volatility. South African Rand overshoots due to its high liquidity, making it vulnerable to sharp moves.

Trump's Impact on Crypto

Market speculation suggests Trump may be crypto-friendly, unlike the current SEC chair Gary Gensler, known for his strict regulatory stance. Potential shifts in the regulatory landscape could benefit cryptocurrencies, particularly Bitcoin.

Simon holds Bitcoin and advises caution: ensure crypto is stored in a hardware wallet for safety.

Bitcoin | Weekly | 13 November 2024

Local Telco Sector: Vodacom & MTN

Both companies struggle with weakened African currencies like the Ethiopian Birr and Egyptian Pound. Profits are impacted when converted back to ZAR.

Despite attractive dividend yields (MTN ~4%, Vodacom ~5.6%), Simon remains bearish, highlighting high capex demands and sector challenges.

Raubex: Construction Sector Bright Spot

Strong results from Raubex, showing resilience in a struggling sector. Diversification into renewable energy and mining operations boosts performance.

Simon notes it as one of the few quality construction plays left, alongside Afrimat.

Consumer Market Struggles

Updates from AVI and BidCorp indicate persistent weak consumer demand, despite optimism from a possible government of national unity. Inflation has eased, but consumer spending remains subdued as households repair balance sheets.

Retail updates show mixed results: Truworths reported disappointing numbers, while The Foschini Group* performed better.

Tencent Results

Tencent posted strong results, though it did not significantly boost Naspers or Prosus stock prices. The market reaction was muted despite the solid performance.

Final Thoughts

The market remains volatile, with significant moves in crypto, gold, and the Rand. Simon advises a cautious approach, with a focus on quality stocks and long-term plays.

Remember: be kind and look out for others. Kindness is rule number one.

00:00 Market Overview: Crypto vs Gold 02:50 The Trump Effect on Gold and Crypto 06:01 The Future of the Rand and Emerging Markets 08:55 Sector Analysis: Vodacom, MTN, and Raubex 16:02 Consumer Trends and Company Updates

Two-pot system is here, it's actually three pots and we've everything you need to know (#590)

JSE Direct with Simon Brown

06/05/24 • 19 min

New Two-Pot Pension System:

Details on the implementation and implications for retirement savings.
Kicks in 1 September 2024
Can take up to R30k immediately, but this will be taxed.
Thereafter 30% of contribution go into a savings pot your can take out, it will be taxed.
Only use for an emergency, not holidays.

Rainbow's Return to JSE:

Analysis of Rainbow's re-listing after 17 years.
RCL Foods will be unbundling later in June
One Rainbow share for every RCL Foods share
But is Rainbow the best chicken stock on the JSE?

OPEC+ Impact on Oil Prices:

Members agreed to cut voluntary production cuts
Oil crashed
As did Sasol

[caption id="attachment_42315" align="aligncenter" width="849"] Brent oil | weekly | Koyfin

Q1 GDP Results:

Negative Q1
Q2 should be slightly better thanks to reduced load shedding
But election will have worried investors.

Santova Stock Analysis:

Buyer at 750c
Seller at 760c

[caption id="attachment_42316" align="aligncenter" width="849"] Santova daily | 06 May 2024 | Koyfin

Coalition Talks:

ANC is talking with everybody
They seem keen on a governmnt of national unity
Rand volatile

Recent uploads onto Just One Lap

Is there really value in Sasol? (#599)

JSE Direct with Simon Brown

08/14/24 • 20 min

Sasol's Struggles:

Simon revisits Sasol's recent production and trading updates. Despite some positive news, the company's financials remain grim due to significant write-downs and a challenging pricing environment, especially in the chemical complex. With a forward PE ratio hovering around 3, Simon questions the actual value in Sasol and advises caution, emphasising the importance of waiting for a stock to show signs of recovery before investing.

Sasol weekly chart | 13 August 2024

ADvTech's* Solid Performance:

Simon provides insights into ADvTech's latest trading update. Despite a voluntary update (not mandated by a 20% variance), the company shows strong growth in earnings per share. He discusses the stock's valuation, historical performance, and why he remains optimistic about its future prospects, even as it trades at a PE ratio of around 15.

ADvTech weekly chart | 13 August 2024

Combined Motor Holdings* (CMH):

Simon shares his thoughts on CMH, a stock he has held for years. Despite a stagnant price movement over the past three years, the stock offers a solid dividend yield. He discusses the broader consumer environment, the potential impact of reduced interest rates, and why he continues to favour CMH over competitors like Motus.

CMH weekly chart | 13 August 2024

Renegen's* Milestone:

After a year and a half of delays, Renergen finally starts producing helium. While the stock has seen a recent uptick, Simon highlights the challenges that still lie ahead, including scaling up production and the company's upcoming NASDAQ listing. He also reflects on the broader sentiment in the junior mining sector.

Coronation's Active ETFs:

Coronation has launched six actively managed ETFs on the JSE, a significant development in the local ETF market. Simon explains the concept of actively managed ETFs and why this move could be a game-changer for both Coronation and the JSE, even if he personally isn't planning to invest in them. Find details here.

US Inflation Update:

The latest US CPI data shows a slight decrease to 2.9% for July, but core inflation remains elevated. Simon discusses the implications for future interest rate cuts by the Federal Reserve and the potential impact on South African monetary policy.

Tribute to Brett Duncan:

Simon pays tribute to Brett Duncan, a former stockbroker and warrants market leader at Standard Bank, who recently passed away. Brett was a key figure in Simon's early career and played a significant role in the South African warrants market. His passing is a significant loss.

The President wants to turn South Africa into a construction site, which stocks benefit? (#596)

JSE Direct with Simon Brown

07/24/24 • 20 min

Presidential Vision for Infrastructure Development:

The South African President's recent speech emphasised making the country a hub of construction and infrastructure development. The potential for public-private partnerships and the types of infrastructure that might be developed, including roads, energy transmission, and public buildings.

Stocks That Could Benefit:

Construction Stocks: A detailed look at various construction-related companies and their potential to benefit from the President's infrastructure plans.
PPC: Potential benefits from increased construction activity.
Murray & Roberts: Despite historical losses, they have a division in infrastructure and renewable power that might benefit.
Stefanutti Stocks: Focus on their claim against Eskom, which is crucial for their future.
Wilson Bayly Holmes (WBHO): Expected growth, though a significant portion of their revenue comes from Australia.
Raubex: Strong performance and solid management, with significant involvement in road construction through Sanral.
Afrimat: Supplier of construction materials, benefiting from Sanral and Transnet orders.
Reunert: Involvement in industrial cabling and commercial battery storage, critical for new power facilities.

Market Insights:

Mr Price* Update: Gaining market share and performing well post-elections and during a late-arriving winter.
Sasol Production Update: Management's effective handling of controllable factors and slight improvements in Transnet's performance.
Kumba Iron Ore: Confirmation of slight improvements in Transnet, echoing Sasol's observations.

JSE Listed Construction Stocks | 1 year return | close 23 July 2024

International Market Movements:

CrowdStrike* Incident: A significant security update issue affected numerous systems, impacting the stock but not signalling an end for the company.
US Small Cap Stocks: Rotation into small caps like those in the Russell 2000 index, offering a cheaper alternative to large-cap tech stocks.

Simon Brown wraps up the episode by emphasizing the importance of infrastructure development for South Africa's economy and reiterates his top stock picks to benefit from potential future construction projects: Raubex, Afrimat, and Reunert. He also touches on the potential 3% GDP growth for 2025 and the broader market implications.

JSE delisting; can we spot them in advance and profit? (#597)

JSE Direct with Simon Brown

08/01/24 • 22 min

Jerome Powell's Statement:

Rates left unchanged in the US.
Possible rate cuts on the table for September.
US MPC meeting on 19 September.
Data needed: improving inflation and higher unemployment.

Oil and Gold Market Update:

Brent Crude:
- Under pressure, signaling weak global demand.
- Lower highs trend since June 2022.
- Support at $72.50 and resistance around $88.
Brent Oil | 01 August 2024
Gold:
- Trading near all-time highs.
- Strong central bank buying.
- Uncertain targets, but bullish sentiment persists.

Gold | 01 August 2024

Potential JSE Delistings:

Criteria: Dividend yield > 0, market cap < 5 billion ZAR, NAV price > 100, P/E < 10, and profitable.
Initial search yielded 53 stocks, refined criteria (dividend yield > 5%) narrowed it down to 25.
Top candidates: African Media Entertainment, Argent, Combined Motor Holdings*, eMedia, Frontier Transport, Home Choice, Mustek, PrimeServe, Transpaco.

Shoprite*:

Trading at all-time highs.
12% revenue increase, 6.3% like-for-like growth, 5.8% inflation.
Successful new store formats (PetScience, Checkers Outdoor, UNIQ Clothing, Little Me).

Woolies:

Disappointing trading statement.
Comparable store sales up 6.9%, inflation at 7%, volume decline.
Heps down 14-19%, market expectation miss.

RSA Retail Bonds Update:

New Rates: Two-year at 8.75%, three-year at 9%, five-year at 10.25%.
Rates have been declining since June.

Local small caps; value or value trap? (#586)

JSE Direct with Simon Brown

05/08/24 • 19 min

Introduction:

Simon Brown kicks off the episode discussing the current state of the Rand, noting its stability leading up to the elections despite fluctuations.
Speculation around ANC's momentum in the polls and potential coalition scenarios.
The impact of the dollar's weakness on the Rand's performance.

Structured Products:

Simon delves into the concept of structured products, which offer capital guarantees and enhanced returns through strategic investment mechanisms like options and bonds.
Announcement of an upcoming Power Hour with Standard Bank focusing on structured products.
Brief overview of actively managed certificates, also at next weeks Standard Bank Power Hour.

FNB's New ETNs:

FNB's introduction of new Exchange Traded Notes (ETNs), including a variety of indices and US-listed stocks.
Explanation of Compo and Quanto variations, tailored to currency impacts.
Highlights of recently launched ETNs, such as Nvidia, Booking Holdings, Eli Lilly, and Palo Alto Networks.

Amazon.co.za's Arrival:

Simon provides insights into Amazon.co.za's debut in South Africa, discussing initial observations and comparisons with local competitors.
Discussion on the potential impact of Amazon's entry on brick-and-mortar retailers and existing online platforms.

Exploring Small Caps:

Simon poses the question of whether local small caps on the JSE offer value or pose as value traps.
Definition and implications of value traps in investments, emphasising the importance of dividends and price appreciation.
Insights from John Biccard of Investec on potential post-election performance in small caps.
Examination of various small cap stocks, analysing dividend yields, price-to-book ratios, and earnings potential.
Simon's perspective on the opportunities and challenges presented by small cap investments, urging caution and strategic analysis.

Booming Local Retail Sales and RIP Tito Mboweni (#607)

JSE Direct with Simon Brown

10/17/24 • 18 min

Strong Retail Sales and the Two-Pot System:

Retail sales show a positive trend, rising 3.2% in August, exceeding expectations of 2.1%.
The Two-Pot System has already released R20 billion in six weeks, with the money used mainly for paying down debt, saving, and spending.
Retail sales recovery, though from a low base, is a strong indicator of improved consumer health due to factors like slightly lower interest rates and inflation.

South African retail sales | YonY

Tribute to Tito Mboweni:

Simon reflects on the passing of Tito Mboweni, former Finance Minister and Reserve Bank Governor.
Mboweni’s contributions include institutionalising the Reserve Bank’s MPC meetings and implementing key labor reforms during his tenure as Labor Minister.
His lasting impact on the country’s economy and financial sectors was highlighted, along with his personality as a Twitter chef and self-styled "Duke of Magoebaskloof."

Johnson & Johnson – A Smooth Dividend Play:

Simon shares his reasons for holding Johnson & Johnson: consistent dividend growth (around 3% yield) and a steady 8% annual share price growth in US dollars.
Despite some issues, the company offers reliable long-term returns in a competitive health and consumer space.

Johnson & Johnson quarterly dividend payments

Bytes Technology Group and Investment Opportunity:

Bytes operates in the UK, offering hardware, software, and services. The stock showed mixed market reactions but has strong support around certain levels.
With a forward P/E of 20 and a dividend yield of 3.6%, Simon sees it as an interesting opportunity for long-term investors in the tech space.

Quilter Trading Update:

Quilter’s strong Q3 results follow a good first half of the year, with significant inflows supporting future earnings.
A solid financial services player with a dividend yield near 4% and a forward P/E of 15, Quilter is performing well and trading at all-time highs since its 2018 listing.

Sasol – A Weak Chart:

Simon discusses Sasol’s ongoing struggles, with a weak chart suggesting possible further declines.
Investors should wait for technical indicators before making any moves.

Brent Oil Price and Rand Volatility:

Brent crude oil hit highs recently but is now retreating to $70 per barrel, with potential for further declines due to global oversupply.
The rand, affected by dollar strength, is volatile but could see a return to 16.80 against the dollar in the coming months.

Chapters

00:00 Retail Sales Recovery and Economic Outlook 04:29 Tribute to Tito Mboweni 08:32 Johnson & Johnson: A Steady Investment 09:52 Bytes Technology Group: Market Reactions 12:32 Quilter's Strong Performance 14:29 Cecil's Ongoing Struggles 15:56 Brent Oil Prices and Global Economy 17:48 Volatility of the Rand and Market Predictions