Durban - Financial shares moved up encouragingly on the JSE on Wednesday. But it looks like the share prices of banks and insurers were buoyed by positive news from overseas, where in the US more emergency lending was promised to banks caught in the credit squeeze.
European markets also took a more favourable view on banks, and the sentiment spread to the local stock exchange.
It has been a strange week for financials in SA, with indices riding a see-saw up and down with resource counters sitting on the other side.
There's little doubt SA-based banks and insurance companies are cheap - but are they worth buying?
"We're on a tightrope with resources versus financials," says Nigel McKenzie, head of research and financials at Stanlib Asset Management.
"Financials are probably the most difficult call to make at this stage. The view on resources is probably the clearest; our team remains bullish. The big challenge is when do we make the obvious switch into financials."
McKenzie emphasises this is a short-term consideration, and doesn't really change the asset manager's long-term outlook. But he adds there's been a lot of "table-banging" over financial share valuations - it's clearly occupying the minds of Stanlib analysts and fund managers.
In an earlier presentation Paul Hansen, Stanlib's director of retail investments, took a look at the SA market, including the perplexing question of when financial shares would re-rate.
Second-quarter numbers show the divergence in the market: resources up 13.4%, financial and industrials down 6.4%, within which the banking index lost 14.8%.
Local banks follow the downtrend overseas, where banks in the UK, Europe and US look very cheap. Median earnings multiples on banks range from around three times in the UK to just under eight times in Germany and the US.
But Stanlib's forecast for earnings growth one year out (which over the longer term should be reflected in share prices) has financials up by 11%, against 18% for industrials and 61% for resources.
Hansen warns short-term risks (for financials and industrials) are rising. "Headwinds of inflation, high wage increases, interest rates and the global slowdown are all risks to the downside."
However he adds bank shares are presenting a once-in-20-years opportunity. The dividend yield for Standard Bank, for instance, is at its highest level in 19 years.
Hansen's conclusion is to remain sceptical about financial and industrial shares "for the next year or so in the climate of rising interest rates, although some value is clearly emerging".
He feels investors could follow a "gradual buying programme" in bombed-out sectors like property, financials, many industrials and small cap funds.
Being underweight in financials, he's following his own advice for his personal portfolio, saying he?s easing money into the Stanlib Financials unit trust fund on a monthly basis.
McKenzie also feels there's too much uncertainty about future earnings of banks, and he sees the possibility of negative house prices as a risk as it could become the largest component of banks' bad debts. "The only time bank shares have traded below book valuations was in 1984 when house prices were negative," he says. What should investors do? Phasing money into a financial fund seems a sound idea, taking advantage of low share prices (that could fall further) but being placed in the market for the upturn. Buying individual counters is a tougher decision.
Investors with a longer-term view might consider dipping into selected counters now. You can wait for signs of a sustained upturn, but by the time you get in you might have lost 10% to 20% of the re-rating.
- Fin24.com
Thursday, July 17, 2008
All that glisters need not be gold
Johannesburg - Fund management firm Sanlam Investment Management (SIM) says it is now looking at non-traditional resources like paper and chemicals for pockets of value for investors.
"We are struggling to find value in the "resources" sector," says Shoaib Vayej, who heads up the resources fund. "We're now looking at paper and chemicals counters, but are also looking at the gold sector."
Base metals and oil have sustained the JSE over the last few months, while indices that are not driven by resources have suffered.
In the paper sector Vayej says SIM's preferred counter is Mondi. "Mondi is a quality business with a good growth outlook and exposure to emerging markets. Mondi also currently has projects on the go in Poland and Russia,which the market appears to be discounting".
Vayej says that a big reason for the Mondi's share price being under pressure (down 30% since March) is that both Mondi and fellow paper company Sappi have large numbers of overseas shareholders who are selling down paper stocks.
On the chemicals side, Vayej likes AECI. He believes that the market is underrating the performance of subsidiary Chemserve and the value of the property assets managed by Heartland.
Heartland is responsible for some 2 200 hectares of land located primarily at Modderfontein in Gauteng and Somerset West in the Western Cape.
The leasing division has a gross lettable area of 275 000 m² under management and has recently appointed Anthony Diepenbroek as the new CEO.
Gold pick
The South African gold index has been equally out of favour with investors. Down 19% since peaking in mid-March, the gold index has been an underperformer in comparison to the rest of the resource sector.
Vayej's pick here is Anglogold: "Anglogold is the best cost performer amongst the three locals [Gold Fields and Harmony being the other two]". He attributes the share price underperformance to the continued overhang of the Anglo American shareholding.
These sentiments were echoed by Imara SP Reid analyst Percy Takunda Chiweshe. In a note assessing the recent Anglogold rights issue and prospects going forward he says the group's financial performance "can only get better... and the reduction of the hedge could also result in a re-rating of the stock".
Chiweshe says the financial impact of the rights issue will probably be evident by the third quarter of financial 2008; "if bullion remains at current levels there could be a significant change of fortune for this miner".
In the first quarter of 2008, funds were net buyers of Mondi (Both PLC and Ltd), AECI and Anglogold.
- Fin24.com
"We are struggling to find value in the "resources" sector," says Shoaib Vayej, who heads up the resources fund. "We're now looking at paper and chemicals counters, but are also looking at the gold sector."
Base metals and oil have sustained the JSE over the last few months, while indices that are not driven by resources have suffered.
In the paper sector Vayej says SIM's preferred counter is Mondi. "Mondi is a quality business with a good growth outlook and exposure to emerging markets. Mondi also currently has projects on the go in Poland and Russia,which the market appears to be discounting".
Vayej says that a big reason for the Mondi's share price being under pressure (down 30% since March) is that both Mondi and fellow paper company Sappi have large numbers of overseas shareholders who are selling down paper stocks.
On the chemicals side, Vayej likes AECI. He believes that the market is underrating the performance of subsidiary Chemserve and the value of the property assets managed by Heartland.
Heartland is responsible for some 2 200 hectares of land located primarily at Modderfontein in Gauteng and Somerset West in the Western Cape.
The leasing division has a gross lettable area of 275 000 m² under management and has recently appointed Anthony Diepenbroek as the new CEO.
Gold pick
The South African gold index has been equally out of favour with investors. Down 19% since peaking in mid-March, the gold index has been an underperformer in comparison to the rest of the resource sector.
Vayej's pick here is Anglogold: "Anglogold is the best cost performer amongst the three locals [Gold Fields and Harmony being the other two]". He attributes the share price underperformance to the continued overhang of the Anglo American shareholding.
These sentiments were echoed by Imara SP Reid analyst Percy Takunda Chiweshe. In a note assessing the recent Anglogold rights issue and prospects going forward he says the group's financial performance "can only get better... and the reduction of the hedge could also result in a re-rating of the stock".
Chiweshe says the financial impact of the rights issue will probably be evident by the third quarter of financial 2008; "if bullion remains at current levels there could be a significant change of fortune for this miner".
In the first quarter of 2008, funds were net buyers of Mondi (Both PLC and Ltd), AECI and Anglogold.
- Fin24.com
AngloGold output up, hedge cut
Johannesburg - AngloGold Ashanti has cut 4.4 million ounces out of its hedgebook, narrowing the discount to the spot price it will receive this year and reducing earnings for the second quarter by $1.1bn.
AngloGold, one of the world's largest gold producers, said its second quarter gold output and cash costs were better than it had initially forecast for the second quarter.
The company has raised $1.7bn in a rights issue towards restructuring its hedgebook, which this year would have resulted in a 47% discount to the spot price for the the second half of 2008, and tipped the company into a run of losses.
"What AngloGold has essentially done is take the bulk of the pain in one hit," said a gold analyst, who declined to be named. "They've gone from three quarters of losses to one quarter. They're over the hump."
AngloGold has 6.9 million ounces left on its hedgebook, a 39% reduction from the 11.3 million ounces at the start of 2008.
"The company capitalised on a weaker gold market during the second quarter in order to execute a combination of delivery into and early settlement of non-hedge derivative contracts,? AngloGold said in a statement.
"The restructuring will, however, result in the realisation of an incremental pre-tax loss of approximately $1.1 billion during the second quarter and therefore will translate into a negative received price," it said.
The giant bite out of the hedgebook means there is a much smaller target of just 800 000 oz left to meet the target set by CEO Mark Cutifani earlier this year.
Cutifani, who took over AngloGold Ashanti in October, made the reduction of the hedgebook one of his priorities.
"The completion of our landmark rights issue has given us the flexibility to restructure our forward commitments in gold and facilitate much greater spot price participation going forward," he said.
The discount to the spot price, assuming $900/oz, will be 17% for the remaining half of 2008. If the rest of the restructuring goes to plan, the discount will fall to just 6% in 2009.
"This will be the beginning of the start of the re-rating of the stock. Taking into account the rights issue, the stock has moved sideways. It was the right thing to do," the analyst said.
Srinivasan Venkatakrishnan, the chief financial officer, said the company would be much stronger financially in 2009 after a year which was always seen as a tough one for the company because of the unfavourable hedgebook, which coincided with reduced gold output from the Geita gold mine in Tanzania.
"Next year, we'll have a six percent discount to spot, better group gold production, with Boddington coming on line, and more uranium production onto the spot market, which will all translate into a pretty good kicker for earnings," Venkatakrishnan told Miningmx.
"If we can continue to deliver and beat our production guidance... the margin is opening for gold and uranium in 2009, yes, you'll be looking at a completely different income statement going into that year," he said.
In coming years, AngloGold will "restructure and smooth out the profile" of the hedgebook. "We'll do that one step at a time. The first thing is to address the hedge reduction in 2008 and 2009," he said.
AngloGold has produced three percent more gold than its forecast 1.25 million ounces in the second quarter of 2008. Cash costs improved by $30/oz over the guidance, coming in around $434/oz.
AngloGold is reviewing its portfolio of assets, tightening up ownership where it can, taking strategic positions in companies in favourable jurisdictions and selling off assets it deems no longer core to its business.
It sold its 50% stake in Nufcor International Ltd, the uranium trading company, for $50m. It has retained its 100% ownership of the Nuclear Fuels Corporation of South Africa (Nufcor SA) calcining business, which processes yellow cake, a product containing 75% uranium oxides which increasing numbers of companies in the country are beginning to produce.
AngloGold used that $50m towards cancelling a million pounds of uranium forward sales, a one third reduction of contracts on its books at the start of 2008, freeing the company to be more exposed to the higher spot prices from the start of 2009.
"Our view is that most utility companies have secured their uranium for 2008, but we think there is a squeeze coming in 2009 when a large chunk of the one million pounds would have matured," Venkat said.
What it means for AngloGold is that around 300 000 pounds of uranium will come onto the spot market this year against the initial contracts for virtually all production to be sold into contracts at prices well below the spot price.
Another 700 000 pounds will be sold at spot prices next year, he said.
The spot price is currently $60/lb, according to industry website, The Ux Consulting Company.
AngloGold will double uranium production to two million pounds by 2012, Cutifani has said.
AngloGold, one of the world's largest gold producers, said its second quarter gold output and cash costs were better than it had initially forecast for the second quarter.
The company has raised $1.7bn in a rights issue towards restructuring its hedgebook, which this year would have resulted in a 47% discount to the spot price for the the second half of 2008, and tipped the company into a run of losses.
"What AngloGold has essentially done is take the bulk of the pain in one hit," said a gold analyst, who declined to be named. "They've gone from three quarters of losses to one quarter. They're over the hump."
AngloGold has 6.9 million ounces left on its hedgebook, a 39% reduction from the 11.3 million ounces at the start of 2008.
"The company capitalised on a weaker gold market during the second quarter in order to execute a combination of delivery into and early settlement of non-hedge derivative contracts,? AngloGold said in a statement.
"The restructuring will, however, result in the realisation of an incremental pre-tax loss of approximately $1.1 billion during the second quarter and therefore will translate into a negative received price," it said.
The giant bite out of the hedgebook means there is a much smaller target of just 800 000 oz left to meet the target set by CEO Mark Cutifani earlier this year.
Cutifani, who took over AngloGold Ashanti in October, made the reduction of the hedgebook one of his priorities.
"The completion of our landmark rights issue has given us the flexibility to restructure our forward commitments in gold and facilitate much greater spot price participation going forward," he said.
The discount to the spot price, assuming $900/oz, will be 17% for the remaining half of 2008. If the rest of the restructuring goes to plan, the discount will fall to just 6% in 2009.
"This will be the beginning of the start of the re-rating of the stock. Taking into account the rights issue, the stock has moved sideways. It was the right thing to do," the analyst said.
Srinivasan Venkatakrishnan, the chief financial officer, said the company would be much stronger financially in 2009 after a year which was always seen as a tough one for the company because of the unfavourable hedgebook, which coincided with reduced gold output from the Geita gold mine in Tanzania.
"Next year, we'll have a six percent discount to spot, better group gold production, with Boddington coming on line, and more uranium production onto the spot market, which will all translate into a pretty good kicker for earnings," Venkatakrishnan told Miningmx.
"If we can continue to deliver and beat our production guidance... the margin is opening for gold and uranium in 2009, yes, you'll be looking at a completely different income statement going into that year," he said.
In coming years, AngloGold will "restructure and smooth out the profile" of the hedgebook. "We'll do that one step at a time. The first thing is to address the hedge reduction in 2008 and 2009," he said.
AngloGold has produced three percent more gold than its forecast 1.25 million ounces in the second quarter of 2008. Cash costs improved by $30/oz over the guidance, coming in around $434/oz.
AngloGold is reviewing its portfolio of assets, tightening up ownership where it can, taking strategic positions in companies in favourable jurisdictions and selling off assets it deems no longer core to its business.
It sold its 50% stake in Nufcor International Ltd, the uranium trading company, for $50m. It has retained its 100% ownership of the Nuclear Fuels Corporation of South Africa (Nufcor SA) calcining business, which processes yellow cake, a product containing 75% uranium oxides which increasing numbers of companies in the country are beginning to produce.
AngloGold used that $50m towards cancelling a million pounds of uranium forward sales, a one third reduction of contracts on its books at the start of 2008, freeing the company to be more exposed to the higher spot prices from the start of 2009.
"Our view is that most utility companies have secured their uranium for 2008, but we think there is a squeeze coming in 2009 when a large chunk of the one million pounds would have matured," Venkat said.
What it means for AngloGold is that around 300 000 pounds of uranium will come onto the spot market this year against the initial contracts for virtually all production to be sold into contracts at prices well below the spot price.
Another 700 000 pounds will be sold at spot prices next year, he said.
The spot price is currently $60/lb, according to industry website, The Ux Consulting Company.
AngloGold will double uranium production to two million pounds by 2012, Cutifani has said.
'Gold heading towards $1 000'
London - Gold rose to a four-month high above $970 an ounce on Monday as lingering fears of financial market instability and rising inflation boosted buying of the metal for its safe haven appeal.
Spot gold climbed $970.70 an ounce - the highest since March 19 - before easing to $968.15/$969.150 an ounce at 15:09 GMT from $963.00/965.00 late in New York on Friday.
Gold has soared since fears over the future of US mortgage firms Fannie Mae and Freddie Mac came to the fore on Friday, dragging down equities and the dollar.
US stocks slipped on Monday as investors worried that plans to shore up the government sponsored mortgage companies won't be enough to allay concerns about the fallout from the housing slump in the world's biggest economy.
"The issue of Fannie May and Freddie Mac's stability definitely brought the fear factor back," said Daniel Hynes, metals strategist at Merrill Lynch.
"A month ago, gold looked like it might have struggled to get back towards $1 000 but it now looks like it could be heading back towards those levels."
Gold dipped earlier on Monday after a firmer tone in the dollar encouraged pockets of profit-taking. However the dollar later retreated as stocks fell.
Oil prices above $146 a barrel were also supporting gold, as many investors use the precious metal to hedge against fuel-led inflation.
Heightened risk
Bullion held by the New York-based SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, jumped to a historic high of 705.90 tonnes on Friday amid nervousness over Fannie Mae and Freddie Mac.
Investment bank UBS on Monday raised its short-term gold price forecast to $1 000 an ounce over the next month, against a previous forecast for $900, citing heightened risk aversion and ETF holdings.
Gold hit a record above $1 000 per ounce in March on a combination of historic dollar weakness, rising oil prices and widespread financial market fears in the wake of the near collapse of Bear Stearns.
Commerzbank trader Michael Kempinski said gold could be heading back towards $1 000 an ounce.
"The general direction is to the upside at the moment, with the dollar still weak, oil at record highs and safe haven buying increasing.
We see resistance at $990, but if oil continues to move higher I see it pushing through."
However, slowing physical demand from jewellers in response to higher prices continues to weigh on gold, with Turkish gold exports on Monday reported to have fallen by 25.5 percent to 5.8 tonnes in June.
Spot platinum rose to $2,0085.00/2,028.00 an ounce from $2,023.00/2,043.00 late in New York on Friday. Spot palladium eased to $446.50/454.50 an ounce from $448.50/456.50 an ounce.
Silver tracked gold higher to trade at $19.00/19.06 an ounce from $18.76/18.84 late in New York on Friday.
Spot gold climbed $970.70 an ounce - the highest since March 19 - before easing to $968.15/$969.150 an ounce at 15:09 GMT from $963.00/965.00 late in New York on Friday.
Gold has soared since fears over the future of US mortgage firms Fannie Mae and Freddie Mac came to the fore on Friday, dragging down equities and the dollar.
US stocks slipped on Monday as investors worried that plans to shore up the government sponsored mortgage companies won't be enough to allay concerns about the fallout from the housing slump in the world's biggest economy.
"The issue of Fannie May and Freddie Mac's stability definitely brought the fear factor back," said Daniel Hynes, metals strategist at Merrill Lynch.
"A month ago, gold looked like it might have struggled to get back towards $1 000 but it now looks like it could be heading back towards those levels."
Gold dipped earlier on Monday after a firmer tone in the dollar encouraged pockets of profit-taking. However the dollar later retreated as stocks fell.
Oil prices above $146 a barrel were also supporting gold, as many investors use the precious metal to hedge against fuel-led inflation.
Heightened risk
Bullion held by the New York-based SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, jumped to a historic high of 705.90 tonnes on Friday amid nervousness over Fannie Mae and Freddie Mac.
Investment bank UBS on Monday raised its short-term gold price forecast to $1 000 an ounce over the next month, against a previous forecast for $900, citing heightened risk aversion and ETF holdings.
Gold hit a record above $1 000 per ounce in March on a combination of historic dollar weakness, rising oil prices and widespread financial market fears in the wake of the near collapse of Bear Stearns.
Commerzbank trader Michael Kempinski said gold could be heading back towards $1 000 an ounce.
"The general direction is to the upside at the moment, with the dollar still weak, oil at record highs and safe haven buying increasing.
We see resistance at $990, but if oil continues to move higher I see it pushing through."
However, slowing physical demand from jewellers in response to higher prices continues to weigh on gold, with Turkish gold exports on Monday reported to have fallen by 25.5 percent to 5.8 tonnes in June.
Spot platinum rose to $2,0085.00/2,028.00 an ounce from $2,023.00/2,043.00 late in New York on Friday. Spot palladium eased to $446.50/454.50 an ounce from $448.50/456.50 an ounce.
Silver tracked gold higher to trade at $19.00/19.06 an ounce from $18.76/18.84 late in New York on Friday.
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