Capitec Bank: Impressive growth

Capitec released an impressive set of results yesterday. For the six months to August 2015, Capitec saw a 464, 000 increase in net client growth to 6.7 million, while primary banking clients increased to 3 million. The bank has been attracting around 110,000 new clients per month, while losing about 30,000 over the same period. Capitec has also seen an tick up in its market share, which now comes in at 18.9%, up from 16.8%, according to an AMAPS survey. The group, which now trades just below R490, has risen 98.89% in the last 12 months alone.
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Glencore: Crash

Yesterday, Glencore PLC’s listing on the JSE fell 26.44% after a bearish note by Investec questioned the group’s value given its high level of debt and the sustained slump in commodity prices. In London, the group’s primary listing declined 29.4%, its largest ever one day decline. Looking forward, the high debt burden has raised concerns that the Swiss mining and trading company will face downgrades from credit-rating firms, which in turn could cripple its debt-fueled trading business. Lastly, as it stands, Glencore’s LSE listing has lost more than 90% of its value since listing in 2011.
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Allied Electronics: Welcome boost

On Friday, Allied Electronics, or Altron, featured as one of the top gainers on the JSE, up 15.8%, after confirming it would sell its Altech Autopage clients to Vodacom, Cell C and MTN for a combined amount of R1.5bn. However, it must be noted that the three purchasers are entitled to change the consideration in accordance with an agreed formula, which takes into account various factors. The group, which has shed close to 69% of its value in the past 12 months, highlighted the impact of steep cuts to mobile call termination rates as its decision to sell the subscriber book and shut down the business.
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Telkom: Zeroing in on Cell C

On Wednesday, news broke that Telkom might be looking to acquire Cell C. Telkom, in which the SA government has a 40% stake, is interested in Cell C as a way to grow and increase its struggling mobile business. In response to the potential bid, Cell C boss Jose Dos Santos, said Telkom should go ahead and “write a check” if it was serious about taking over the company which is 75% owned by Oger Telecom in Dubai. In light of the news, Telkom’s share price rose 1.41% on Wednesday, taking it to R66.23. In the last 12 months, the share has risen just shy of 28%, but is 6% lower for 2015.
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SA Monetary Policy: To hike or not to hike

At 15:00 today, the South African Reserve Bank’s Monetary Policy Committee, led by Governor Lesetja Kganyago, will announce whether or not it will hike the South African repo rate. The decision comes after the U.S. Federal Reserve decided to keep its Federal Funds rate unchanged, citing global economic developments and inflation as the primary reasons for not instituting the much talked about “lift off”. However, the officials from the Fed have hinted that a rate hike may be possible later this year. As central banks around the world look to Fed policy for guidance, today’s decision is certainly not a forgone conclusion. For South Africa, the quagmire stems from the need to boost stagnant (albeit structurally hindered) economic growth whilst aiming to keep inflation between the 3%-6% band. The repo rate currently stands at 6%, after a 25 basis point hike at the previous meeting.
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Hilary Clinton plans to end biotech “price gouging”

U.S. markets rebounded from their losses last week to end higher on Monday, boosted by a surge in Apple and financial stocks. At the close of the session, the financial index had risen 1.1%. However, biotech shares limited the advance after U.S. Democratic presidential candidate Hilary Clinton said she plans to stop “price gouging” for specialty drugs. As a result, Biogen and Gilead fell 5.6% and 2.5% respectively, with the NASDAQ biotech index slumping 4.4%. Lastly, Apple provided a major boost for the S&P 500 as it rose 1.6%, following reports that the company is committed to building an electric car by 2019.
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Impala: Job Cuts

Last week, Impala Platinum, the world’s second largest platinum producer, announced it would be next in-line to reduce its workforce as it looks to cut as many as 1,600 jobs at its Rustenburg operations. This follows the recent trend of retrenchment after Lonmin and Anglo American Platinum said that they were looking to cut 6,000 and 420 jobs respectively. With Impala employing more than 55,000 people, the cuts will affect less than 2% of its workforce, but CEO Terrance Goodlace also said that the company is looking to close one shaft and another section of the mine. At the close on Friday, Impala Platinum fell 0.73% to trade at R46.10, close to a multi-year low set in August.
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Fed: Yellen holds back on rate hike

U.S. markets ended the session on a mixed note on Thursday as all major indices were off their session highs following the U.S. Federal Reserve’s decision to hold off on raising interest rates. Janet Yellen did leave open the possibility of increasing rates later this year and reiterated that the October meeting was still “live” as a potential lift off date. At the end of the session, only 4 of the 10 major S&P sectors were higher, with a 1.3% gain in the utilities index leading the way. On the downside, the financial services index led the declines, down 1.3%, after being one of the top performers during the week. At the close, the Dow Jones had fallen 0.39%, while the S&P 500 shed 0.2% and the NASDAQ rose 0.1%.
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SABMiller: Takeover Surge

We have to select SABMiller as the “chart of the day” after yesterday’s extraordinary move. The massive price spike came on speculation of a tie-up between Anheuser-Busch InBev, the world’s largest brewer, and SABMiller, currently number two. If the deal is approved it will rank as one of the six largest takeovers in history. The single entity would account for one out of every three beers sold and would include brands such as Budweiser, Corona, Peroni, Grolsch and many others. At close, SABMiller had risen 19.89% on the London Stock Exchange, where it has primary listing, and 18.35% on the JSE. However, it must be noted that there is no certainty that the deal would lead to an offer or agreement. Furthermore, any tie-up between the two companies would be subject to a great deal of scrutiny by the competition authorities.

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24% jump on SABMiller: Good time to reduce risk?

SABMiller gained as much as 24% on Wednesday as rumours once again re-surfaced that Anheuser-Busch Inbev NV (or ABInbev for short) had acquisition aspirations.

By the close SABMiller had added around $14 billion (R180 billion) taking the the company’s market cap to a whopping $90 billion. SABMiller makes up around 10% of the Top40 index and the rapid increase managed to drag our local market up around 3.64%. According to Bloomberg, this is the biggest one day movement in SABMiller since shifting its primary listing to London in 1999.

Is this mega deal viable?

The acquisition of SABMiller would be the biggest in the industry’s history and solidify more than a decade of consolidation in the brewing business. It would make it one of the six biggest deals in human history and, if the deal were to go through, “SABInbev” would produce one out of every three beers world-wide.

You’ll hear many a market commentator point to the “overlap” (see picture below) as a reason why the deal is viable and, in fact, likely. Excluding the US and China, the geographic footprint looks like a carefully constructed puzzle.

20150916SAB

The problem comes that both companies are present in the world’s number one and two economies. ABInbev may have the larger portion of US sales, while SABMiller is more prevalent in China, but this duplication will come with competition issues. And it’s not just the regulatory hurdles that indicate there is no “end-game” brewing.

When you actually look at the possible deal terms (and please pop me a mail if you want more detail: gary@randswiss.com) it looks as if it will be very difficult to unlock value for shareholders at these prices.

What have the companies said so far?

Well, actually very little has been said.

Speculation started when both management teams excused themselves from different broker conferences simultaneously.

Apparently ABInBev told the media that it had approached SABMiller’s board about a “combination of the two companies”. It added that there was no certainty the approach would lead to an offer or an agreement, saying it wanted to work with the board of SABMiller “toward a recommended transaction.”

In reply, SABMiller has published a SENS announcement entitled, “Response to press speculation” in which it said:

“The Board of SABMiller notes the recent press speculation and confirms that Anheuser-Busch InBev SA/NV (“ABInBev”) has informed SABMiller that it intends to make a proposal to acquire SABMiller. No proposal has yet been received and the Board of SABMiller has no further details about the terms of any such proposal.”

So, what will happen next?

The best guess is probably nothing.

By their very nature, monolithic deals are slow moving and involve kilometres of red tape and unforeseen obstacles.

Firstly, SABMiller would have to exit its Molson Coors Brewing Co JV in the US and ABInbev would likely have to sell SABMillers’ 49% stake in CR Snow, its Chinese brewing partner. The companies would also have to win shareholder approval, the very thing which scuppered SABMiller’s deal with Heineken last year.

At that stage, experts hypothesised the entire merger with Heineken was purely to make SABMiller more resilient to a take-over from ABInbev. The Heineken family, which owns a controlling stake, chose to preserve its “independent heritage”.

If the SABMiller management were looking to retain control, and make SABMiller a more challenging take-over target, you’d better believe they’re going to demand a significant premium to their ruling share price. Most analysts have this pegged at around a 30% premium to Tuesday’s share price. But I wonder if management will be more reluctant now that the company is already trading 20% higher.

One of the conspiracy theories doing the rounds in dealing rooms, is that SABMiller executives are open to talks around merger prospects specifically because it will prevent a deal. If the the market believes a deal is in the works and buys up SABMiller stock, the likelihood of a deal dissipates, as its unlikely ABInbev would want to proceed with an offer, when faced such expensive SABMiller scrip. The paradox being, the more management embrace a potential deal, the less likely it is to succeed, and the more likely they will maintain control.

On a less conspiratorial note, the sell-side does tell us the deal has the backing of not only SABMiller management but also Altria, one of SABMiller’s major shareholders.

Show how long before we know more?

According to “Rule 2.6(a) of the Code, ABInbev must, by not later than 5:00 pm on 14 October 2015, either announce a firm intention to make an offer for SABMiller or announce that it does not intend to make an offer for SABMiller”. This deadline will only be extended with the consent of the Takeover Panel.

What are we doing at Rand Swiss?

Any deal between the two is likely to be “messy and expensive”. But, exaggerated stock price movements do bring opportunity. The beer market has been fairly stagnant of late. Mega-cap brewers have been losing business to wine, spirits and craft brew competitors. Volume growth has been flat (excuse the pun) and, with SABMiller’s EM market currencies under pressure, we’re using this opportunity to take profit.

Our local model equity portfolio holds an 8% stake in SABMiller and we’re using the 20% spike to unload around half. We still like the company, but with this rapid appreciation it’s time to manage our risk.

We can also see from our order book, our short-term traders have increased short-positions and are betting on a retracement back towards R700. No doubt some traders are balancing out their holdings ahead of the Fed announcement tomorrow.

If you’d like to know more about setting up short-term trading account or building a long-term personal share portfolio contact us on info@randswiss.com or visit our site at www.randswiss.com.


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