Category: Current

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Current South Africa

Unhealthy assumptions

How the new National Health Insurance (NHI) proposal for South Africa is based on the wrong assumptions, with likely dreadful consequences.

The arguments for the NHI are wide and varied. The Gauteng MEC for health, Brandile Masuku said that the quality of private healthcare is a myth, ignoring the fact that whoever has the means, will spend a lot of money to opt for private healthcare instead of public healthcare.  He also said that the new NHI would also service migrants. That would surely lead to a massive influx of medical migrants from dysfunctional states, Zimbabwe and the DRC are coming to mind. Judging by the hostility of locals towards foreign spaza shop owners, and the regular looting and violence because of it, it is hard to imagine that they will be any friendlier towards thousands of patients who would que up to get health care in South Africa. Besides these non-sensical rhetoric, there are more fundamental problems.

Before we analyze those, we would need to see what South Africa currently has. As per the constitution, every citizen must be able to access healthcare, rightly so. The state runs about 400 health care facilities which include clinics and hospitals. Even though they are mostly free, they are poorly managed, understaffed and under-supplied. Specialists are far and few. They often opt to work in the private environment, where they can work in a better managed environment and charge much higher prices. This seems to be a particular thorn in governments view. They complain that in prevents poor patients to have access to them. Because the health care system is in such shambles, the private health care industry seems to be thriving. Wealthier citizens take out relative expensive private healthcare insurance to be able to cover the cost of any potential emergency.

One of the main arguments government sites is that 4.5% of GDP is spent on private healthcare servicing only 16% of the population, while only 4.2% of GDP is spent on public healthcare servicing 84% of the population. In in other words, R139bl is spent every year on private healthcare, while R130bl is spent on public healthcare. Simple math’s (also in short supply these days) dictate that to bring the public healthcare up to the private standard would cost R868bl annually, or 47% of the governments current budget, an increase of almost 400%.

This obviously assumes that the government performs as good as the private sector in implementing the roll out of better health services. Their track record of managing their SOE’s and institutions don’t suggest that. Looking at the cost overrun experienced at Eskom, and assuming that they have learned from their mistakes, one must still assume that the cost of the NHI would be north of R1 trillion per year.

So how would the government fund it? There is no clear answer yet. Those who came up with this idea probably assumed that private individuals, who currently have a private medical health insurance must contribute their premiums to the NHI fund. The NHI would in future be the sole “purchaser” of medical procedures. (Warning lights would go off now with anyone who has studied Porters 5 forces). This assumption is flawed and has some dangerous consequences.

Firstly, the NHI by itself would not make the medical services provided to the 84% of the population any better. They get a poor service because the government is not paying enough to attract professionals into the public healthcare industry.

This leads us to the second problem. If, as the sole purchaser of health care procedures, the NHI assumes that they can reduce the fees they pay to doctors, nurses and specialists, they would simply emigrate. The world is in an unprecedented development phase, where skilled professionals are in desperate short supply. Doctors who can’t earn a decent salary here would simply emigrate. There are enough opportunities elsewhere. So what? We have already a massive shortage of skills, and we are no where near at producing enough doctors to fill the gap.

Hence the third prediction. If there is a bigger shortage of doctors, those remaining will demand a higher pay. It would be outside of the NHI, maybe another industry will emerge or they will simply just accept cash. But this is then viewed as just another informal Tax for the ability to live in South Africa. Surely more of the population that can afford to emigrate, will do so. And those are the Taxpayers South Africa so desperately needs to pay the government bills.

Besides the skills implosion, there are other problems with the NHI, like mismanagement and corruption.

The main drawback though is that the NHI doesn’t tackle the problem it is set out to archive. It will not make a better healthcare system available to the 84% currently under-serviced. The reason is simple. The best preforming hospitals are mostly in the main metro-pole areas, like Cape Town, PE, Johannesburg and Durban. Farmers in the Eastern Cape for example don’t necessarily have the means and the ability to travel thousands of kilometers to one of the good hospitals. But they do have a nearby clinic, which is likely to be understaffed and under supplied. Surely it is better to improve the performance of the 400 state facilities than threatening to tear down private healthcare. Would it not be better for the farmer to be able to go to his nearby clinic and see a qualified doctor, and get his medicine right there?

Maybe the government should be looking at working with the private sector to improve their facilities. One could imagine a scenario where in order of getting a license to build/operate one private hospital, the company needs to manage one or two public hospitals as well. The performance of those public hospitals will determine if the license to run a private hospital gets renewed on a 5-year cycle.

The South African government need to learn to harness the efficiency and expertise of the private sector to contribute to the public sector. Don’t target successful private companies because of your own failures.

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Current South Africa

Steinhoff revisited

Now that a have a bit more clarity on what happened, I thought it might be a good time to revisit the blog posts I wrote more than a year ago, when we were working on myths and assumptions. Many of my predictions turned out to be right. The company as a whole was not deceitful, but fraud was committed by a few insiders. I also still think that it is ludicrous for most shareholders to sue for their losses, as I explained in the posts.

If I was the defense lawyer of Steinhoff, I would question the logic of investing into Steinhoff in the first place. Fund managers are being paid handsomely to do due diligence on potential investments and use their superior intellectual skills to flag any potential pitfalls in the investment case. They have failed miserably.  

There are a few points Steinhoff’s legal team should focus on.

  • Why was none “overweight” Steinhoff prior to Christo Wiese buying a stake in Steinhoff? Steinhoff was very acquisitive before then, and there could have been lots of reasons to buy it. It was however off the radar of the big fund managers, because the financial statements were always very messy and not transparent and better left alone. That sentiment changed rapidly when Christo Wiese took a stake.
  • What due diligence did the fund managers do? There were numerous indicators which failed to highlight Steinhoff as an attractive investment. Take return on capital. It was far below that of its competitors, even though the return on equity seemed in line, indicating that the return was generated by a highly leveraged balance sheet, another warning sign.
  • I assume that the leverage was created partly by loans against over-inflated property values. What due diligence did the debt investors do? They should be thorough with their investigations and normally have industry experts on hand to confirm any variables. Surely they should have picked up the abnormalities?
  • What synergies did the investors expect to come from diverse businesses such as Poundland, Conforama and Tekkie Town? They would not be able to share a marketing or buyers team or even a distribution network. Before Steinhoff started diversifying horizontally, they focused on vertical integration, which makes a bit more sense. But even then, it takes time to integrate any new acquisitions. What enhanced earnings growth did the fund managers expect from these acquisitions, which in hindsight don’t appear to be there at all.
  • Why was the purchase of Matrass Firm in the USA not a big warning flag? Steinhoff paid almost double the price the shares were trading at, for a company that was on the edge of bankruptcy. More importantly, how did the fund mangers expect Steinhoff do add so much more value to the purchase? Should they sell cheap cloths or shoes through the chain of bed stores? Any decent fund manager would at that time have sold their holdings, because clearly Steinhoff was taking advantage of their expensive shares to buy anything that moves, and anything that doesn’t, in case it moves.
  • Why did no fund manager exit their positions when it was announced that the German Tax authorities raided some of Steinhoff’s German offices 2 years before the eventual crash? And why did they compare reports in the reputable and serious “Der Manager” Magazine to reports in “Noseweek”, and lough them off as sensationalistic journalism?

I think that most invested in Steinhoff purely on the belief that Christo Wiese, the retail magnet with the Midas touch would have done his thorough research before investing. That was a mistake. It is unclear how much research he did, but as the biggest looser from the fallout he would have probably liked to have done more. He might have been sweet-talked into the deal. Once inside, he was not only handsomely rewarded as a highly paid chairman, but also with all sorts of deals on the sideline, from renting out his planes to Steinhoff to purchasing debtors books. No wonder his focus was not on the integrity of the business, but rather on the added benefits of being the biggest shareholder, chairman and direct access to the fraudster-in-charge. Does he deserve to get compensated for his losses? It is a bit trickier, but I would think not, purely because he was the chairman and as thus is the ultimate person in charge of protecting the shareholders investments.

Lastly, the size of the claims is insane. Like I said in previous blog posts, it is absurd to claim losses for investments if you paid R60 per share that, even with the misstated figures of the financials could arguably be only worth R20. The only thing that the lawsuits do now is hinder the company to get back onto its feet, and by clouding the future prospects and therefore limiting their access to capital.

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Current South Africa

Cry, the beloved country

Like a pack of hyenas smelling blood, there is a crowd out there who will do anything to hunt down Cyril Ramaphosa and destroy him and what he stands for. They are aggressive, disingenuous and hypocritical. At worst of all, many of them are from within the ANC, spurring a vicious factional battle.

Cyril Ramaphosa, South Africa’s president, came to power promising to crack down on corruption and setting the country on a new path of growth, the so called “new dawn”. This after nine wasted years under the previous president Zuma, who’s only notable achievement was how long he could stay out of the courts while 700+ charges against him were tangled up in the court system. Besides that, the period was marked by the amount of money that flowed into fraudulent schemes. The beneficiaries were routine passengers of the gravy train, like the Guptas, and reputable international companies such as McKenzie, SAP, Bain, KPMG, Hitachi and China South Rail. Billions of Rands were stolen, which could have been spent on education, health, infrastructure, security and helping the poor.

Ramaphosa vowed to crack down hard on corruption and mismanagement, encourage investments into public-private partnerships and bring down the disastrous unemployment rate. The expectations were high, so were the leading indicators. But the reality of health of the economy paints a grim picture. The business confidence is sinking again, the economy is close to its second recession in two years and unemployment is edging even higher. Cape Town is now known for the extremely high murder rates (thanks to its gang wars) and the army is now patrolling the streets of the Cape Flats, something they haven’t had to do since the early 90’s.  Tourists are staying away which in turn is playing havoc in the housing market (due to the high amount of Airbnb’s staying empty).

The president’s biggest battle will surely be Eskom (the monopolistic electricity supplier). In its current state, it is a ticking timebomb for the fiscal stability of South Africa. Eskom charges almost three times as much for electricity as they did ten years ago and sell less. Currently they are not able to cover their operating costs and interest expenses. They are overstaffed by as much as 30% and their new power stations are being built behind schedule, over budget and are plagued with design flaws. It is a fiscal sinkhole, that could drag the whole of South Africa down. The government needs to take bold and decisive actions, which will set them up on a collision course with the powerful trade unions. This should be Ramaphosa’s Thatcher moment, where he takes a firm stand against the Unions who continuously demand higher than inflation wage increases, even if it means that more people will have to lose their jobs for the companies to stay competitive.

Ramaphosa needs a strong backing to drag South Africa out of this mess, but some of his own comrades have got nothing better to do than being treacherous and backstabbing. Ace Magashule , the ANC general secretary reads out press statements that differ from those agreed to by the leadership, and he takes every opportunity to incentivize disruption among their own ranks. This suits Malema, who is the commander in chief of the fascist EFF, the third largest political party. The Public Protector, who was found by the Constitutional Court to have lied under oath and acted in bad faith, wastes no time to find any possible reason to file a charge against anybody involved with fighting state capture. Gordhan was charged with a bogus offence that has been twice dismissed by the courts, Ramaphosa is charged with lying about a donation (even though he immediately corrected the mistake) and money laundering, which is outside her jurisdiction. No wonder Gordhan said at a conference I attended last year that the fightback against the state capture will be one of the hardest battles he has ever fought.

We are at a crossroad now. Either South Africans stand behind Ramaphosa, support his strategy to clean up the government, prosecute those involved in state capture and focus on getting the economy more competitive again. In that case, South Africa will have a bright future, with many opportunities. Or the hyenas win, in which case there will be a lot more carnage, think of Venezuela and Zimbabwe. The costs will be too high to contemplate, the hardship too sorrow to handle.

Many South Africans have decided not to wait until the battle is decided. Emigrations are at all-time highs, and it would be negligent not to at least think about a Plan B. Ramaphosa currently is the best option South Africa has, and should enjoy a strong backing by everybody, no matter which party you voted for. If he and his team don’t win the battle, we are going to lose our country.

Is Alan Paton right when he said: “Cry, the beloved country, for the unborn child that is the inheritor of our fear. Let him not love the earth too deeply. Let him not laugh too gladly when the water runs through his fingers, nor stand too silent when the setting sun makes red the veld with fire. Let him not be too moved when the birds of his land are singing, nor give too much of his heart to a mountain or a valley. For fear will rob him of all if he gives too much.”

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Current International

When the joker takes control

I am not talking about the psychopathic supervillain, who was disregarded by society as he terrorised Gotham City, but about Boris Johnson, the newly elected Prime Minister of the UK. He has not been to Gotham City, but was the Major of London. In fact Boris has (hopefully) very little in common with the supervillain except for the fact that both are goofy pranksters, and both do like to dramatise everything. Boris Johnson though has been the joker of the Conservative party, somebody who is widely adaptable to mould himself into the solution for any given problem.

He is seen as the savior against the sudden rise of Nigel Farage’s Brexit party popularity. He is seen as anti-establishment, even though it was the deepest establishment that voted for him. He seems to model himself on Churchill. Johnson is charismatic and proudly English, able to connect with a wider audience and not shy to stretch the truth to make his point. All those are qualities the previous Prime Minister, Theresa May didn’t have. His performances of his previous two official posts though were in stark contrast with another.

Boris Johnson did remarkably well as Major of London. He was not only well liked but also seemed approachable and normal, often cycling to work with an ill-fitting helmet. But his chaotic nature superseded any other trait when he was the Foreign Secretary. He failed to gain any respect among his European colleagues and proved to be largely ineffective. That surely only hardened his stance as pro-Brexit. These days he seems so determined to leave the European Union at any cost, that a no-deal Brexit seems to be his base case.

Because of this, he, more than anybody else, would be able to get the Europeans to agree on more concessions. Let’s see if the Boris show is all about the art of negotiations or just showmanship. If he doesn’t get a better deal, the government could collapse, and he would go down as the shortest serving Prime Minister of the UK.

Should he succeed in finding a palatable compromise and thereby saving the UK from economic self-mutilation, he could go on to be a memorable Prime Minister – provided that he surrounds himself with the most talented and hardworking executive to make up for his short coming.

It will be interesting to see, if the second Prime Minister chosen in the last 3 years, not by the people, but rather by a few old men is able to turn this democracy around.

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Current

US migration – crying babies

The USA has adopted a zero tolerance to illegal migration, resulting in thousands of refugees being arrested at the border. The minors are being separated from the adults, causing massive uproar.

 

In a world where we are being inundated with ever more gruesome visuals, it was a audio recording that really shook the world. One could hear the heartsore cry of a child being separated from its parent which caused a chill down the spine of most parents. Although it is deeply un-ethical, the attorney general, Jeff Sessions vowed to continue with the ruthless clampdown on illegal immigration. Donald Trump continued to be remorseless, but that would be expected from a man who was mainly absent when it came to raising his own children. He wants a merit based immigration system, probably similar to those in Australia. The logic goes that well educated immigrants contribute more to the economy, and thus help America grow. But that only makes sense for immigrants, and not for refugees.

However, at the point where the “illegal immigrants” cross the border, the border patrol would not know if they are refugees or illegal immigrants. That doesn’t seem to matter, because they immediately separate the family units and lock them up in what looks like “holding cages”, where they would officially stay up to 5 days, but how long they really stay nobody knows. This is like assuming that somebody is guilty before proving that they are innocent.

There is a much bigger fundamental problem though. The USA, more than any other country in the world, is built on immigrants. They mainly came from Germany, Ireland and Italy, but later also from Asian countries. They came not to flee the great wars, but they came because of poor economic prospects at home. The Irish flooded in during the well-known potato famine during the 1840’s, the Germans came during the 1820 to 1860’s when the effect of the industrial revolution caused wide spread unemployment and despair, the Asians came later from 1880 to 1914.

The dominance of American citizens with a migrant background is nowhere more obvious than in their own political elite. Currently there is no native American serving senator, there have only ever been 5. There are only two in their lower house, the House of Representatives. There have only ever been 16 though. A country, where the migrant is so engrained in their DNA, isn’t it ironic that their politicians are crying foul over the current immigration?

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Current

US tariffs – own goal

US imposes tariffs on Aluminium and Steel from almost all major producers, and they will suffer the most – why?

President Trump has once again blundered his economic policies, and imposed tariffs on most aluminium and steel products from all major producers. He has done so in the name of “national security”. Assuming that the US would ever go to war against one of its Allies (which is a peculiar thought in the first place), America would not have enough own production capacity to produce aluminium and steel for the production of their own weapons. Not only does show that Trumps policies are stuck in the cold war era, but Trump has also struck a spectacular own goal.

 

Aluminium and steel are input products in a vast array of products, ranging from motor vehicles to Pepsi cans. It is so versatile, that there is hardly any manufacturing industry that could get by without it. Therefore, it is vital for the US to get a steady and competitively priced supply of the materials.

 

It is not certain that imposing tariffs will cause the permanent production of US steel and aluminium to go up, because not many companies will commit the capital to build new production facilities. It is more likely that old inefficient ones, which have been laying idle will start up again (and can again be shut down quickly, should the tariffs be revoked). It is certain however, that the price of steel and aluminium in America will go up. That will hurt all the manufacturers who use steel and aluminium in their products. The higher input prices will have to be passed on to the consumer, and therefore all US produced products will get more expensive.

 

There are predictions that cars produced in the US will be between U$4 000 and U$8 000 more expensive, which would surely cost them market share. In return all those nations that had tariffs forced onto them are retaliating by imposing targeted tariffs on everything from Bourbon to Oranges, Pork and Harley Davidsons. They shouldn’t bother. Many of those products are going to be uncompetitively priced anyways.

So, what should Donald Tump have done to increase their homegrown production of steel and aluminium?  He could have lowered taxes on US aluminium smelters and steel mills or given them special tax breaks. But he has already given a broad tax reduction to corporate America, while the economy is booming. It is never wise to play your trump cards at the beginning, Mr Trump.

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Current

Namibian Fishing quotas –catch the foreigners

The Namibian Government wants to bar foreign and listed companies from bidding for fishing quotas. This is a mistake.

 

One of the greatest natural resource of Namibia are the abundant fishing grounds off the Namibian coast line. It is a treasure, and the government is right in saying that it should benefit Namibians, but they are wrong by insisting that all quotas must be allocated to Namibian citizens, and not foreigners or listed companies. This is a misguided decision on three accounts; firstly the scale and complexities needed to operate in the fishing industry, secondly the scarcity of capital and thirdly the message this policy sends to foreign investors.

 

Start with the complexities. To operate commercially viable fishing companies requires a fleet of ships that can stay at sea for weeks. They must be able to at least partially process the fish, pack them and get them ready to be delivered to the final destination within hours of getting to shore. The logistics are complex and often involve trucks and planes, because if the produce is not fresh, the customer would simply buy fish from another destination that can deliver fresh fish. In addition, these companies have got massively fluctuating overheads, predominantly fuel to run the vessels. Therefore, to be able to bring the product to the market profitably, these companies need volume (ie big quotas) and very deep pockets. Do we have enough local fishing companies that are able to operate in this volatile environment? Or would the recipients of the quotas just sell them on to a company that is able to handle the complexities?

 

Now to the second problem, the scarcity of capital. Put simply, capital is the total available money for investments. By definition, each country only has a specific pool of capital at any time. You can’t print more, because that causes inflation (ask Germany in the 1920’s or more recently Zimbabwe). It grows as investments grow, but that takes time. Thus, the available capital within Namibia can decide to invest a bit more into the fishing industry, but that would also mean that it has less to invest in other sectors, like agriculture. The best way to grow your economy, and thereby creating more jobs and more opportunities for all the citizens, is to attract foreign capital. In that way you can expand the fishing industry as well as agriculture. That is one of the distinguishing characteristics of wealthy countries. All of them were able to grow much faster than they would have otherwise, no matter where they started from. Think of Germany and Japan after the second world war, South Korea and now China, Vietnam and Eastern Europe, just to mention a few.

 

That leads me to my third point: the message the Namibian Government is sending. At a time of low growth and high unemployment, the message being sent to international investors is “we are closed for business”. They could help the economy, but instead, the door is being shut. India did something similar when they became independent. They insisted that they could do everything themselves and would no longer need any foreign help. It caused years of almost no growth, and rising corruption – because everybody was fighting for a piece of the pie, that doesn’t grow. Let’s not repeat the mistakes of others.

 

The rich fishing grounds should benefit all Namibians, and not just a few well connected who are able to get their hands on quotas. The fishing industry should be dominated by Namibians, as investors and employees, but don’t exclude the foreigners.  Foreign investors, who deploy their capital in Namibia  create jobs and opportunities for the locals.

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Current

Steinhoff Saga continues: where do we end up when the owners are suing themselves.

Even more mindboggling than the apparent fraud that was committed by a small group of people within Steinhoff are the current court cases claiming compensation due to the fraudulent activities. It is not only that the amount claimed, north of 60bl Rand is 6 times the current market capitalisation, but that the people suing are the shareholders of the company. In effect the owners of the company (the shareholders) are suing their own company. Obviously, this is too simplistic, and there are various claimants arguing different cases.

The biggest of them all is that of Christo Wiese, who claims that he swapped the ownership of his very successful businesses for shares in Steinhoff under false pretences. This might be true, but then again it is up to everybody in business to do their own homework and do proper due diligence. And since he became the biggest shareholder in Steinhoff, he was also the (very well paid) Chairman of Steinhoff. As the top Director of a company it would be his duty to make sure that everything is above board, and that the shareholders funds are protected. As a Chairman he would also have the ability to immerse himself into the operations of Steinhoff, and would have surely noticed abnormalities like the unrealistic high property valuations. Isn’t that what a Chairman is paid for?

The most recent shareholder who claims a right for compensation is Coronation Fund Managers. That is absurd. They are very highly paid professionals who consistently claim that the exorbitant amount of fees they charge their clients is rightful, because of their in-depth analysis of the companies they invest in. But yet they bought massive amount of Steinhoff shares even though one of the most basic measures of the performance of a company, the “return on capital” has always been poor, between 8% and 14%. One wonders if they have really been doing that much investigative financial analysis, or if they simply followed the lead of Christo Wiese (and ignored early warnings such as the raiding of the Steinhoff offices just after they listed in Germany by a specialised police force).

There are various others, who lost vast amount of money due to the 96% plunge in the share price who are suing Steinhoff. There are two problems though, and one certainty. First the problems with the claims:

A company has got shareholders, directors and various related parties like staff, creditors, the taxman and the society as a whole. For our purposes the first two are the most interesting. The shareholders are the legal owners of the company. The directors are nominated primarily to look after the interest of the shareholders as well as the other related parties. They act as the guardians of the assets of the shareholders. The executive directors are the actual “operators or day-to-day managers” of the company, while the non-executives primary role is to make sure that everything is above board. In this case it seemed that the CEO was the centre of the fraudulent activities, involving a close circle around him. The non-executive directors (two of them were from Coronation) had the power to ask the really tough questions, which they apparently failed to do. The Chairman would have the ability to do something about any allegation of mismanagement, which he failed to do. So shouldn’t the shareholders sue the directors, in particular the CEO?

The second problem is the following: What is a fair compensation? A share price is only the current reflection of the price of the company. It is not a scientifically calculated price, but more driven by sentiments. We know that companies can be very overvalued, in fact it is not uncommon for a share price to half in value at some point in a 10-year time horizon. I thought Steinhoff was very expensive at R47. If investors bought in at R60 should they be compensated for the losses they had measured to their average purchase price, even though, according to some the share price was already very overvalued?

What is for certain though is that with all the lawsuits going on, the likelihood that Steinhoff will need to file for bankruptcy has increased rapidly. No lender would want to give money to a company with such clouds hanging over it. No supplier would want to give credit, and the most talented employees search for better opportunities elsewhere. I assume that most of the lawsuits are aimed at getting to the front of the queue when Steinhoff does face bankruptcy.

Only level-headed judges who look after the interest of all related parties would dismiss these cases. Of those we have too few, because money buys the best lawyers with the most persuasive arguments who drive for a narrow-minded judgement. That is the world we live in.

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Current

Would I buy Steinhoff International now?

First and foremost – if you are managing any pension fund money, or other portfolios that don’t have an aggressive mandate, the answer is very simple: No. There is just no information available to make a informed investment decision. But if you have an aggressive mandate, or would like to speculate a bit, Steinhoff International must be on your radar screen.

It is down from its highs of R96 per share to just shy of R3 per share. That is lower than when it listed in the late 90’s. Back then it was a relatively small company, mainly involved in the furniture (in particular beds) manufacturing and sales. These days it is an international conglomerate, with about 12 000 retail outlets worldwide, 26 manufacturing facilities and thousands of employees.

I never held any Steinhoff shares, mostly because I thought that many of the recent acquisitions were overpriced, they did not offer any synergies, I never really understood their accounts and I always had the impression that the ex-CEO, Marcus Jooste would do anything just to bulk up the operations. Infact little was done to create organic growth, and his blessing in the sky came in the form of Christo Wiese, who’s operations were almost the opposite – very cash generative. So Jooste bought even bigger businesses for even higher prices. In short much of the growth was acquired and funded by debt.

But that doesn’t mean that all those businesses are worthless. Some might be worth nothing and should be handed over to business rescue, but some, if not most can be profitable, if not as wildly optimist as stated in there (false) financial statements, and therefore they should be worth something.

Steinhoff International also holds a roughly 70% stake in STAR (Steinhoff Africa Retail), which is a mix of companies from the old JD Group (Incredible Connection, Hi-Fi Coprperation, Unitrans, etc) and Christo Wieses stable (Áckermans, Pep – which are incredibly cash generative). STAR (code SRR) has a market cap of R72bl, making the 70% stake worth R50.4bl. However Steinhoff Internationals market cap is only R11,2bl. Therefore, the market is pricing the rest of Steinhoff a negative R39.2bl. Even with its overpriced properties, and the high debt levels, this is not likely. Add another R10bl of debt due to Steinhoff from STAR, and one gets to a negative valuation of -R49bl – highly unlikely unless the business is hopelessly bankrupt.

One obviously doesn’t know what covenants the Steinhoff debt facilities have, and when they trigger what events. As a fund manager with a long-term view, one would need that know that, or at least that their debt won’t suddenly be called up. But as a short-term speculation, that is the risk one takes for potential high returns.

So, as a speculative buy, Steinhoff looks enticing. Bitcoins vs Steinhoff: definitely Steinhoff.

 

 

Always remember that speculative buys should never be more than 5% of your total portfolio, and one should never gear are speculative buy. There is a chance that the investment will go down to 0.

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Current

Is investing in residential property a good idea?

This is probably one of the most asked questions, and rightly so. For most people, their own home makes up the bulk of their investment assets, in South Africa at least. However buying a home to live in is a very different decision than buying another residential property for investment purposes. A home provides your family a place to make their own, to entertain your friends and to create memories. And you don’t pay rent, but rather pay your bond of. However buying a residential property as an investment is far more sobering. The alternative could have been to buy shares or bonds or Unit Trusts among other. So how does the return of a residential property investment stack up against the others?

 

Firstly, lets start with the basics. If we had no inflation at all, and knew that for the next 20 years, inflation simply doesn’t exist, then the average price of residential properties should at most increase by the growth in GDP/capita. One could argue that as the average population gets richer, they will be able to afford to spend more on property (even though by the classical definition, this would be property price inflation – but lets ignore that for demonstration purposes). The reason is that the cost for shelter (ie property price or rent) can’t continuously increase because then it would demand a continuously higher allocation of the household budget, and in many years would be 100% of the household income. Therefore, it only makes sense that over longer time periods, residential property prices can at most increase by GDP. That would not seem like a good investment at all.

 

The reality is somewhat different. Very few buy properties outright with cash, and most borrow money from the banks to fund their purchase. So now we are talking about a geared investment (and for the technical lot: it only gets marked to market a specific snapshot, when you are taking out the loan. After that, the banks very seldom care what the property price do, they would not suddenly ask you to repay large sums – very different than a geared investment in shares). The advantage of the geared investment can be demonstrated by a very simple calculation: lets say a capital return on an investment is 8%. If you only had R1 million to invest, your return per year would be R80 000. But if the bank lends you another R2 million to buy a property for R3 million, your capital return is R240 000. Obviously you have to pay back the loan, but the government is helping you by allowing you to deduct the Interest from the Income Tax due.

 

Any reasonable property investor would also try and get a decent tenant to live in the property. The rental due would help you pay back the bonds. A general rule of thumb is that if you borrow between 40% and 50% of the purchase price, the rental would cover the bond installments at an interest rate of 10%. So effectively you are buying a property at a 40% to 50% “discount”, and let the tenant pay off the rest. So does that make it a good investment?

 

The answer is still not very clear, because taking out loans, investing into immovable and tenants come with their own risks. However, there is one more factor: inflation. In SA, we have relatively high inflation at 6%. That is not only 4% more than in most of the developed world, but 3 times the rate. So in South Africa the primary investment risk should always be inflation. If the investment does not beat inflation, you get poorer every year. The same reason why residential property prices can’t beat real GDP growth over a long time make sure that it grows with inflation. The rental should increase by inflation, as do the costs, except the repayments of the bond. In short: if you live in a “high” inflationary area, ie anything north of 4%, it does make sense to invest into residential property. In a low inflationary environment, the benefits are not clear.

So who are the winners and losers: The winners are clearly the property owners and the banks, the losers are those bank clients who keep their cash in a current account (or most other bank accounts)