Weekly Stocktake

Key Indicators

Source: iress

Company and Market News

Prosus and Naspers are related companies, through crossholdings with each other. Both are listed on the Johannesburg Stock Exchange and Prosus is also listed on the Amsterdam Stock Exchange. Their largest investment is a 28% stake in Tencent – one of China’s biggest technology companies. Tencent has multiple different businesses in entertainment, social media and video gaming. One of their most well-known products is the WeChat platform, that is used for chatting, but also for payments and other services. In 2001, Naspers acquired a 46.5% stake in Tencent for roughly $32 million. Today, that investment is worth approximately $95bn. An incredible investment.

The market however values Naspers and Prosus approximately 36% below the value of their assets less liabilities (Net Asset Value, or NAV). Generally, holding companies trade at a discount to NAV; but not by that high a discount value. This high discount may be due to: the high management fees, complicated crossholdings between Naspers and Prosus, potential risks associated with investing in Chinese companies and the poor performance of Naspers’s and Prosus’s other investments. At the last earnings call, Naspers and Prosus said that they were going to sell small stakes in Tencent so that they could buy back their own shares in an effort to unlock value for their shareholders. Since June this year, Prosus and Naspers have purchased a combined $5.8 bn worth of their own stock.

Naspers, released their H1 2023 results last week. A great amount of focus was put on their ecommerce businesses. Naspers has multiple investments within the classifieds, food delivery, fintech, and education technology spaces. Some of the more noticeable companies in their portfolio include: Takelot, OLX, iFood, PayU and Udemy. The ecommerce space is proving quite tricky for Naspers and Prosus to get right, requiring high levels of investments to build scale and become profitable; and operating in highly competitive environments. In all their ecommerce categories, revenue grew but all recorded trading losses. Last week, the share price for Prosus decreased by 3,35%.

Lunar Capital Weekly Roundup

Source: iress

Lunar Capital on Eastwave Radio

Every Tuesday, at 07h45, Sabir chats with Nazia from Eastwave Radio (92.2 fm, live stream on www.eastwave.co.za) on investing and the markets.

Company and Market News

Last week, Walmart released their Q3 2022 results. Total revenue increased by 8.7% quarter on quarter to $152,8 billion. However, cost of sales increased at a higher rate of 10.1% to $115,6 billion. The higher cost of sales growth than revenue growth impacted Walmart’s gross margin, which decreased from 32,5% for Q3 2021 to 31,0% for the current quarter (Q3 2022). The gross margin of a company is a good indicator when looking at their ability to withstand the impact of inflation. The higher the gross margin, the better the company’s ability to withstand the impact of inflation. Despite the still high gross margin, Walmart registered a loss of $1,8 billion for the quarter largely because of opiod legal settlements. This is down from a profit of $3,1 billion for the same quarter last year. For the full fiscal year, Walmart expects year on year sales growth of 5,5%. They also expect fiscal year earnings per share to decline by 6% to 7% YoY.  The share price for Walmart increased by 5,37% during the week.

Walmart were still able to grow sales in the current inflationary environment and they indicated that their share of higher income earners has increased as inflation and high fuel costs impact people’s buying power. In general, big retailers, such as Walmart are able to perform well when inflation is increasing. They are able to negotiate prices months before delivery (when inflation is lower.) And when they actually sell the goods, if prices for the goods are higher in the market, they are able to increase their prices accordingly.

Walmart faces competition from many different companies, including Amazon and Costco. These three companies try to gain market share by reducing their margins They can do this through the general way they set prices, or through loyalty programmes – which incentivise people to spend more but at discounted rates. Amazon does both of these, and they also have an additional super strength: their cloud business. Their cloud business has a much higher operating margin compared to the other segments of their business. Amazon are then able to subsidise their other businesses using the profits from their cloud segment.

Disclosure: Walmart and Amazon are held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
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The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.

Lunar Capital Weekly Roundup

Source: iress

Lunar Capital on Eastwave Radio

Every Tuesday, at 07h45, Sabir chats with Nazia from Eastwave Radio (92.2 fm, live stream on www.eastwave.co.za) on investing and the markets.

Listen to last week’s session here: https://youtu.be/ALBFYZEj89E

Company and Market News

The global markets have come down quite significantly since the beginning of the year. The US Federal reserve has been raising interest rates at a record rate to attempt to tame rapidly rising inflation. The global economy has also been facing supply chain issues that started at the beginning of the Covid-19 pandemic and was exacerbated by the Russia/Ukraine war. With higher energy costs and interest rates, consumers have less disposable income, thus reducing the demand for goods and services, which will likely result in a recession in many countries. China, which is the second largest economy in the world, has also maintained strict Covid-19 restriction policies since the beginning of the pandemic. An example of the effect of China’s strict Covid-19 policies on their economy is that Apple, earlier this year, decided to move some of the manufacturing of their iPhone 14 from China to India.

Despite all the above, last week, we saw a significant rally in the market. During the week, the S&P 500 gained 5.9% and the JSE ALSI increased by 4%. This can be attributed to several reasons. Year-on-year inflation for October in the US came in at 7.7%. The market expected 7.9% and this lower-than-expected inflation pointed to potentially lower than previously expected interest rate increases by the US federal Reserve. Other news that could have also resulted in the market rally is that Russia have been forced to retreat from the major city of Kherson in Ukraine. This indicates that the war could end and possibly alleviate the energy crisis. China has also started to relax some of their Covid restriction methods. Certain measures such as the quarantine length for close contacts has decreased from 7 days to 5 days; and people that are secondary contacts do not need to quarantine anymore. Lastly, there is hope that US/China tensions could be eased at the G20 Meeting this month when Joe Biden and Xi Jinping have a face-to-face meeting to try and resolves these tensions. Other technical issues (like short-covering by traders) may also be the reason for the rally.

China still enforces a Covid Zero policy and could reverse course if they feel that these new measures aren’t getting them the results they want. Another risk the market faces is that inflation could remain high despite October’s lower than expected inflation. In the US, housing accounts for the highest weighting (33.8%) in determining CPI. Housing inflation is generally quite sticky and is often one of the trickiest to bring down. The war in Ukraine could also carry on for longer than people anticipate, which could result in pro-longing the energy crisis and further increasing geo-political tensions.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Novo Nordisk released their Q3 2022 results last week. Novo Nordisk is a health-care company that primarily focuses on producing treatments for diabetes, obesity and rare blood diseases. For the quarter, Novo Nordisk’s net sales increased by 28% to DKK (Danish Krone) 45,6 million compared to the same quarter last year. Net profit for the quarter was DKK 14,4 million, up 19% compared to the same quarter last year. Novo Nordisk’s Total Diabetes Care segment for the quarter accounted for 79% of their total sales. This segment also grew 26% compared to the same quarter last year. While their Total Obesity Care segment for the quarter accounted for 10% of total sales and grew by 81% compared to the same quarter last year.

On top of the solid growth metrics, Novo Nordisk remains very profitable. For the trailing twelve months (TTM), the gross margin for Novo Nordisk was 84%. This high gross margin indicates that Novo Nordisk has the ability to navigate a high-inflation environment without having to find significant ways to decrease their input costs. The net margin for Novo Nordisk was also strong. For the TTM, Novo Nordisk had a profit margin of 32%. Novo Nordisk also had a very high return on equity of 69%. This is partly due to high leverage through debt. Their debt-to-equity ratio is 217%. Their current liabilities are also greater than their current assets. If there were to be any significant impact to their operation, they could find it quite difficult to pay off their current liabilities for the year.

Another risk that Novo Nordisk faces is that they are in a highly regulated environment. Novo Nordisk also operates in multiple countries that will have their own set of regulatory requirements. The initial costs, in both time and money to develop and manufacture drugs can be quite high. There is always a possibility that a significant investment in a new treatment may not pay off.  Conversely, if they can develop a new treatment that works well and is approved by the health authorities; it can pay off handsomely. Our view is that the potential for their Total Obesity Care is quite significant.

Disclosure: Novo Nordisk is held in the Lunar BCI Worldwide Flexible Fund.
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Last week, Alphabet, Microsoft, and Amazon released their results for the quarter ended 30 Sep 2022. These companies have a huge focus on cloud computing, and see it as a major driver of growth for their companies. Alphabet, Microsoft, and Amazon, along with the other services that they offer, offer customers the server infrastructure and platform to build and run their companies on. Overall revenue for the quarter was lower than the market expected. For the quarter, Alphabet’s total revenue was $69.1 billion compared to revenue of $65.1 billion for the same quarter a year ago, revenue for Microsoft was $50.1 billion compared to $45.3 billion for the same quarter last year;. And for Amazon, revenue for the quarter was $127.1 billion compared to $110.1 billion for the same quarter last year. However, net income for these companies for the quarter was lower compared to the same quarter last year. Amazon’s net income decreased by 9%, Microsoft’s net income decreased by 14%, and Alphabet’s net income decreased by 27%.

The companies all noted that they have seen noticeable decreases in consumer spending for all their segments. The one exception is that their cloud computing segments have still seen significant growth. Alphabet, Microsoft, and Amazon expect to see consumers further dial back their overall spending as the US economy likely goes into a recession. The negative outlook resulted in the share price for all these companies decreasing during the week. During the week, Alphabet’s share price decreased by 4.8%; Microsoft’s share price decreased by 2.6%; and Amazon’s share price decreased by 13.3%.

Below is a table showing certain metrics of the overall cloud-computing segment for each company. Alphabet, Microsoft, and Amazon’s revenues all increased by between 22% and 41% for the trailing twelve month (TTM) period. Despite Alphabet having the highest cloud revenue-growth, they still managed a negative cloud operating margin of -13.8% compared to Amazon and Microsoft, who had healthy operating margins above 30%. Alphabet are aggressively trying to expand their cloud computing business. The majority of the Alphabet’s capital expenditure for the quarter went towards their cloud computing operation. Setting up the infrastructure for cloud computing requires a lot of upfront capital, and is one of the reasons this segment for Alphabet is currently running at a loss. If Alphabet maintain their revenue trajectory for this operation, and are able to be disciplined with their cost structures, they could likely add another strong segment to their overall business.

Disclosure: Alphabet, Microsoft, and Amazon is held in the Lunar BCI Worldwide Flexible Fund.
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
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The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.
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Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Last week, ASML released their Q3 2022 results. ASML is an innovation leader in the semiconductor industry. They provide chipmakers with hardware, software, and services to mass produce patterns on silicon through lithography. In simple terms, to manufacture chips. For the quarter, net sales were up 10.25% to €5.8 billion compared to the same quarter last year. Net profit, for the quarter remained flat at €1.7bl and ASML recorded a net margin of 29.4%. For the last 5 quarters, the orders received have surpassed net sales, reflecting growing demand for their machines. Their results have shown more resilience compared to some of the other semiconductor companies. During the week, the share price increased by 17.93%. However, the share price has decreased by 33.5% since the beginning of the year.

One of the main reasons that ASML’s results have been so resilient, is that ASML has an effective monopoly on the sale of lithography machines. The demand for their lithography products has remained above their current supply levels. Some of their current customers are decreasing their forecasts of capital expenditure. They asked ASML to delay the delivery time of their orders. Most of ASML’s clients, however, have urged ASML to get their machine orders as soon as possible. In 2021, around 67% of the sales were accounted for by 2 customers, and roughly 40% of the net sales were recognised in Taiwan. This poses a risk to ASML. If there were to be any sudden demand side shocks to these customers or Taiwan – it could negatively affect the short-term prospects of the company.

Before ASML released their results, The USA put severe export controls on the sale of advanced semiconductor products to China. While this has a negative outlook for certain US producers, ASML is not directly affected by it, as they are based in the Netherlands. A few years ago, the European Union had already put export controls on specific semiconductor equipment, which includes the EUV (Extreme Ultra-Violet) lithography machines that ASML sells. ASML is still currently able to sell the Deep Ultra Violet (DUV) machines to China. If the EU were to put more strict controls on semiconductor companies, ASML may likely not be as badly affected as some of the other semi-conductor companies. 85% of their current order-book is for their EUV and immersion technology, which they have already been banned from selling to China.

Disclosure: ASML is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

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Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Source: Iress

                                       The graph is for illustrative purposes only

Source: Iress

                                       The graph is for illustrative purposes only

There has been a lot of talk in the news about how poorly the South African Rand (ZAR) has done this year. We think that is a misconception since it doesn’t necessarily tell the full story if we only compare how the Rand has performed against the US Dollar (USD).

Over the last decade, the ZAR has depreciated almost 50% against the US Dollar, and approximately a third against the British Pound (GBP) and the Euro (EUR). Graph 1 shows this inversely since 31 March 2013. The USD/ZAR exchange rate has increased by nearly a 100% (i.e. 50% depreciation of the Rand), while the GBP/ZAR and the EUR/ZAR have both increased by just under 50% each (i.e. 33% depreciation of the Rand).

This year, the ZAR has also depreciated against the USD. However, Graph 2 shows that the ZAR currency isn’t the only currency that has depreciated this much against the USD. The British GBP, EUR and the Japanese Yen (YEN) have depreciated even more against the Rand. The main reason of the USD’s strong performance against all or at least most currencies this year is that the US Federal Reserve has been increasing interest rates in the USA at a much quicker pace compared to its economic peers. This is to try and tame high inflation in the US. The higher interest rates relative in US Dollar interest paying assets makes it more attractive to be invested in than interest paying assets in other currencies. Further, the dollar is considered as a safe haven and approximately 60% of globally disclosed foreign reserves is denominated in USD.

So, why has the ZAR held up better than other arguably stronger currencies? South Africa’s main export is mineral resources. Most mineral resources are priced in USD. When South Africa wants to export minerals to other countries, the other countries will pay the SA companies in USD. The South African companies will then need to convert the USD to ZAR. Which will result in the price of the ZAR increasing. Another reason the ZAR has performed relatively well, is that some of the long-term SA Bonds also have relatively attractive rates. For e.g. the R2044 offers investors current yield of 11.85%. This still gives holders of the bond a positive real return, when taking inflation into account.

Disclosure: The R2044 bond is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

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The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

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Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Semiconductors

Earnings reports for Q3 in the USA are starting to come in. Last week, AMD (Applied Micro Devices), a semiconductor (computer chip) manufacturer, released a preview of their Q3 report. We think it will be interesting to review the Q3 results and outlook for semiconductor businesses. Their results and outlook may provide insights into the status of the industry and their respective businesses.

Revenue for AMD for Q3 is expected to be approximately $5.6 billion, this is compared to their previous expectations of $6.7 billion. This large decrease in expected revenue is primarily due to decreased demand in their client segment (laptops, PC’s, gaming, etc.), down 40% year-on year. However data centre revenue was up 45% year on year. Data centres comprises of 28.6% of total revenue for AMD. At the end of August this year, Nvidia released their Q2 results which showed similar trends. Their gaming segment recorded revenue of $2.04 billion, which was down 33% from a year ago. While their data centre segment grew by 61% from a year ago to $3.81 billion. Micron, who also operate in these fields but focus more on memory and storage products, saw decreases in sales in all their segments. The decrease in personal computing revenue from these companies is an indicator of the effects of the recession on consumers’ wallets. Consumers are likely holding out with regards to immediately buying new products as both inflation and interest rates take effect on them. Another factor that could be playing into the decrease in personal computing revenue is that many individuals would have upgraded or bought new laptops or PC’s during the Covid-19 pandemic and would unlikely need to immediately purchase a new one. Companies also ensured that their staff were had adequately specified laptops at home to meet the work-from-home requirements during the pandemic. These machines are still adequate as workers come back into the office. Semiconductor companies have seen heavy decreases in their stock prices this year compared to the overall market. Micron’s share price decreased by 44.7%, and AMD and Nvidia’s share price decreased by 61.1% and 59.9%, respectively. With the on-going geo-political and economic tensions between USA and China, semiconductor companies are coming under increasing pressure to limit the sale of high-end semiconductors by Western countries to China.

Disclosure: Nvidia is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

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Lunar Capital Weekly Roundup

Source: iress

Company and Market News

A few weeks ago, we looked at FirstRand and compared their results to some of the other banks that it primarily competes with in South Africa. This week, we shall take a look at Capitec. Last week Capitec released their unaudited interim results for half-year ending 31 August 2022. Headline earnings increased by 17% to R4.7 billion for the interim. Capitec also increased the number of active clients by 13% to 19 million people with 10.8 million of their retail clients using their digital channels.

Capitec also boasted a healthy 25.49% return on equity for the trailing 12-months. For the interim period, Capitec declared a dividend of 1400 ZAC per a share. Compared to FirstRand, Capitec targets a completely different market. Capitec target the lower income groups and offer them loans at higher interest rates. These higher interest rates are charged to compensate for the higher risk taken by Capitec. For the current interim period Capitec had a credit loss ratio of 3.3%. This is 5.9 times higher than the credit loss ratio that FirstRand had. However, we can see that their return on equity is higher than FirstRand and the other banks in the table below.

Capitec customers, who have taken loans out with them, will be put under pressure in the current increasing interest-rate environment. Lower income groups are put under significantly more pressure than higher income groups in these environments. And there is a likely chance that Capitec’s already high credit loss ratio could increase further. Capitec is progressively attempting to reduce its loans to lower income groups, for example by stopping lending to the lowest tier, and acquiring Mercantile Bank to increase its foothold in the business segment of the market.

At these levels, the market expects Capitec to continue to outpace the other banks in earnings growth.

Disclosure: FirstRand is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

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Lunar Capital Weekly Roundup

Source: Iress

Company and Market News

Last week, we saw the central banks of the United States of America, United Kingdom and South Africa increase their respective interest rates. Their decisions were based on trying to tame inflation in their respective economies remaining at higher levels than where they each would like it to be. The US Federal Reserve increased its rates by 75 basis points which resulted in its Federal Fund Rates being in the region of 3.0 to 3.25 percentage points. The Bank of England increased its interest rate by 0.5 percentage points to 2.25 percentage points. The last time these interest rates were seen in the UK, was during the 2008 global financial crisis. Last year, the Bank of England interest rates were as low as 0.1%. Lastly, South Africa increased its repo rate by 75 basis points taking the SA repo rate to 6.25% with our prime lending rate now at 9.75%.

With the increase in interest rates in mind, it’s worth looking at how the components of the consumer price index are changing. And what is still driving the current CPI levels. Let us look at the US as an example. In the US, they break down the components of the CPI basket into 3 categories: Food, Energy, and All items less food and energy. Food prices in the US have increased by 11.4% year-on-year. Energy has been the main contributing factors to the higher inflation figures. Year-on-year, energy prices increased by 23.8%, despite a decrease of 5% for the month of August. All items less food and energy category, which includes medical services, transportation and shelter – has increased 6.3% year-on-year.

Overall year-on-year inflation in the US was 8.3%. And month-on-month inflation was 0.1%.

The central banks are effectively trying to decrease spending by making it more expensive for consumers to borrow. This in turn, should bring down the level of demand for certain goods as consumers would not be able to buy the same number of goods and services with their current wallet. Producers would then see where they can decrease prices so as to decrease their inventory levels and sell more goods.

A major concern is that aggressive interest rate increases to tame inflation and high energy prices could lead to a recession in many economies around the world. Central bankers fear that runaway inflation could pose a bigger problem than a temporary recession and hence the drive to bring inflation lower.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

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