Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	68 070	68 934	-6.50%
NASDAQ Composite	15 833	11 834	12 391	-21.74%
S&P 500	4 797	3 961	4 130	-13.90%
Prime Lending Rate	7.25%	9%	9.00%	24.14%
Lunar BCI WW Flexible Fund	165.68	148.08	145.24	-12.34%
USD/ZAR	15.96	16.85	16.53	3.57%
EUR/ZAR	17.95	17.21	17.00	-5.29%
Brent Crude	77.86	103.71	103.59	33.05%

Source: iress

Company and Market News

Last week, many of the big US companies released their quarterly results for the period. Overall, the companies released positive results compared to what the market was expecting. This resulted in the Nasdaq and the S&P 500 increasing by over 4% during the week. The major companies that released their results were: Alphabet, Amazon, Apple, Meta, Microsoft and Qualcomm.

Earnings this quarter were better than expected given the inflation and recessionary outlook. However, at Lunar Capital, we think that the next quarter’s earnings season will be more significant indicator with regards to the outlook of the economy. The economy would have been through a longer period of increased interest rates. Consumers would then be paying higher interest on their mortgages, for example, for a longer period; and thus, would have less discretionary spending. This arguably would be felt in the economy as a whole, potentially reducing the earnings of companies.

Below is a table showing some of the financial indicators of companies that released their results.

Company	Market Cap @ 29 July 2022 ($bn)	12m Earnings Change (%)	PE Ratio @ 29 July 2022	ROCE
Alphabet	1 519	14.44%	21.72	24.41%
Amazon	1 375	-60.57%	121.52	4.17%
Apple	2 630	14.78%	23.05	48.26%
Meta	428	15.79%	13.19	30.57%
Microsoft	2 095	18.72%	29.09	26.96%
Qualcomm	163	39.72%	12.86	36.55%

 

Disclosure: Alphabet, Amazon, Microsoft, Qualcomm, and Berkshire Hathaway (which has a significant holding in Apple) 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.

Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	65 089	68 070	-7.67%
NASDAQ Composite	15 833	11 452	11 834	-25.26%
S&P 500	4 797	3 863	3 961	-17.42%
Prime Lending Rate	7.25%	8.35%	9%	24.14%
Lunar BCI WW Flexible Fund	165.68	141.63	148.08	-10.62%
USD/ZAR	15.96	17.08	16.85	5.58%
EUR/ZAR	17.95	17.23	17.21	-4.12%
Brent Crude	77.86	102.60	103.71	33.20%

Source: iress

Company and Market News

Last week, ASML released their Q2 2022 results. Revenue and net income for the quarter both increased by 35% compared to the Q2 last year.

ASML have indicated that they expect net sales for Q3 2022 to be between €5.1 bl and €5.4 bl. And for the year they expect revenue growth to be around 10%. This is lower than they previously stated. They noted that it is due mainly to delayed revenue recognition from the fast shipments they are implementing. They noted that some customers are indicating signs of slowing demand from certain consumer-driven market-segments. However ASML are still seeing high levels of demand for their systems. They currently have strong net bookings for their systems. According to ASML, the strong demand is driven by global megatrends in automotive, high-performance computing, and green energy transition.

Due to the on-going supply-chain issues, ASML is using the process of fast shipment to deliver their products to customers. This means that ASML will skip some of the testing at their factories and will do final testing at their customers’ site. ASML will only then be able to recognise revenue at a later stage. Their customers, however, are able to test the systems they receive from ASML earlier and can begin production of microchips earlier.

With the ongoing geo-political tensions, ASML faces the risk of being forced to stop selling their DUV (Deep Ultraviolet) systems to China. Semiconductor companies require export licenses, as semiconductors are considered dual-purpose products that are used for general consumption and military use. Currently, they are unable to sell their flagship EUV (Extreme Ultraviolet) systems to China.

ASML is one of the leading suppliers to the semiconductor industry. The company provides chipmakers with the hardware, software, and services to mass produce microchips. Some of their clients include Intel, Samsung, and TSMC. ASML effectively has a monopoly on making equipment that uses photolithography (process of using light to print patterns on silicon) to produce microchips.

Below is a table comparing some of the rolling 12-month results for ASML.

Rolling 12-Month Period Ended	Net Income (€’bn)	Free cash Flow (€’bn)	PE at end of week Results Release	Return on Capital Employed
03-Jul-22	5.62	9.24	37.74	32.53%
04-Jul-21	4.78	6.55	55.64	25.09%

Source: iress

 

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.

Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	68 327	65 089	-11.71%
NASDAQ Composite	15 833	11 635	11 452	-27.67%
S&P 500	4 797	3 899	3 863	-19.46%
Prime Lending Rate	7.25%	8.25%	8.35%	13.79%
Lunar BCI WW Flexible Fund	165.68	144.63	141.63	-14.52%
USD/ZAR	15.96	16.90	17.08	7.02%
EUR/ZAR	17.95	17.21	17.23	-4.01%
Brent Crude	77.86	107.08	102.60	31.77%

Source: iress

Company and Market News

On Friday, 15 July 2022, MTN announced that they were in talks with Telkom, to acquire the entire share capital of Telkom in return for shares in MTN, or a combination of a cash pay-out and shares in MTN.

The mobile market in South Africa is primarily made up of 4 players: Vodacom, MTN, Telkom, and Cell C. For the period ended 31 March 2022, MTN had a total of 34.5 million subscribers in South Africa and Telkom had 16.9 million subscribers. For the most recent quarter, the mobile subscription Average Revenue per User (ARPU) for MTN was R93.26 and R89.94 for Telkom
Vodacom has the biggest share of customers in South Africa (45.4 million customers) with an ARPU of R90. And Cell C had 12.9m subscribers in South Africa (the lowest market share.) Cell C have not disclosed their ARPU.

If the MTN-Telkom deal goes through, MTN would significantly be able to close the gap between itself and Vodacom in the South African mobile market. MTN would also have further access to the fibre and other ICT (information and Communications Technology) markets. However the deal would still need approval from the competition commission. We are not sure whether the approval will go through. The outcome of the deal would likely result in 2 players (MTN and Vodacom) controlling more than 80% of the mobile market in South Africa.

The share price for MTN remained flat for the week and the share price of Telkom increased by 16.6%. Below is table comparing certain metrics of MTN with Telkom.

Company	Market Cap at end of week (R’bn)	Total Assets at Year End (R’bn)	PE at end of week	ROE
MTN	267	366	13.70	5.29%
Telkom	22	66	7.34	7.73%

Source: iress

 

Disclosure: Vodacom and MTN are 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.

Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	65 662	68 327	-10.92%
NASDAQ Composite	15 833	11 128	11 635	-28.87%
S&P 500	4 797	3 825	3 899	-19.74%
Prime Lending Rate	7.25%	8.25%	8.25%	13.79%
Lunar BCI WW Flexible Fund	165.68	137.95	144.63	-16.74%
USD/ZAR	15.96	16.34	16.90	2.45%
EUR/ZAR	17.95	17.00	17.21	-6.23%
Brent Crude	77.86	111.38	107.08	37.53%

Source: iress

Why Numbers Matter – Lunar Capital Virtual Event

Join us this Wednesday at 18H00 as we will be hosting our client event: Why Numbers Matter

Numbers were used to predict trends and influence decisions during the Covid 19 epidemic, and Ridhwaan Suliman was at the forefront of making sense of these. The numbers paved the way to helping the world understand the pandemic and how to handle it. Lunar Capital also use numbers to determine market trends and the valuations of companies they invest in. Join Lunar Capital as Ridhwaan and Sabir explore and discuss the relevance of numbers in their respective fields and how Lunar Capital uses these to manage risk and grow your investments.

Sign up for our free event here.

Please forward this to anyone else you think may be interested.

 

Company and Market News

ASML

On Monday last week, A Bloomberg article reported that there were rumours that the US Government wanted to restrict ASML from selling some of their older semiconductor equipment like the DUV (Deep Ultraviolet) lithography equipment to China. A spokesperson from ASML said that, “No decisions have been made, and we do not want to speculate or comment on rumours.” Shares for ASML U.S. dropped from $449.96 on the Monday before the article was released to $432.21 by the end of Tuesday. However – by the end of the week the share price for ASML was $452.95.

Lithography and semiconductor equipment require licenses to sell overseas. Since 2019,The Dutch Government in conjunction with the US Government have not granted ASML the license to sell their Lithography machines, that use EUV (Extreme Ultraviolet) light waves to make high-powered semiconductor chips, to China. However ASML were still able to sell older equipment, that uses DUV technology, to Chinese customers. Of the €18.6 bl revenue in 2021, 14.7% of revenue still came from China. It accounted for the third largest revenue figure behind Taiwan (39.4%) and South Korea (33.4%).

As of Friday 8 July 2022, ASML was trading $452.95 on the Nasdaq compared to $796.14 at the beginning of the year. This represents a decrease in the share price of just under 40%, compared to the tech heavy NASDAQ which is down 26.51% since the beginning of the year.

Since the begging of 2019, revenue for ASML have grown at a CAGR rate of 19.36%, and net profits have grown at a CAGR rate of 31.43%. The company has averaged a net-margin of 25.66% since 2018. The company was trading at a PE of 34.55 as of Friday 8 June 2022. At Lunar Capital, we believe that the company has strong fundamentals and is still really well positioned due to ASML effectively having a monopoly on selling Lithography equipment in an industry with a high demand for semiconductors.

 

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.

Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	66 349	65 662	-10.92%
NASDAQ Composite	15 833	11 608	11 128	-28.87%
S&P 500	4 797	3 912	3 825	-19.74%
Prime Lending Rate	7.25%	8.25%	8.25%	13.79%
Lunar BCI WW Flexible Fund	165.68	136.20	137.95	-16.74%
USD/ZAR	15.96	15.81	16.34	2.45%
EUR/ZAR	17.95	16.69	17.00	-6.23%

Source: iress

Company and Market News

Nike, one of the world’s leading designers, marketers and distributors of athletics wear, released their 2022 Q4 and full year results on the 27th June. The company’s share price closed at $101.18 on Friday last week. The stock is down 38.6% since the beginning of the year, compared to the S&P 500 which is down 20.26%.

For the year, Nike’s revenue grew by 5% to $46.7 billion, and had a net earnings of $6 billion (grew by 6%). The company did, however, return approximately $5.8 billion to shareholders through dividends and share buybacks. One of the struggles the company has been facing is the global supply-chain issues. Inventories for Nike increased 23% to $8.4 billion, mainly as a result of Nike having more unfinished products that they currently aren’t able to sell.

Generally, the more high-end a clothing company, the greater their gross margin. This means that companies with lower gross margins are more susceptible to inflationary price pressure as they could be forced to increase the price of their products if their costs increase dramatically. And that would lead to fewer people buying their products. The large decrease in the share price is likely due to the high levels of inflation in the US and Europe; the possibility of the US going into a recession; global supply chain issues; and Nike exiting operations in Russia. These factors are all likely affecting the near-term earning potential for the company. It is worth noting that one of the huge upsides for Nike, is that they have a really strong global brand with a large base of loyal customers that will only buy from them.

Nike’s competitors such as Adidas and Lululemon have also suffered similar fates to their share prices this year.  Below is a table comparing certain metrics for these companies as recorded on the 1st of July 2022.

Company	Market Cap ($’bn)	PE Ratio	Rolling 12 months Gross Margin	% Change in Price YTD
Nike	159.20	26.98	46.00%	-39.59%
Adidas	33.75	25.91	50.23%	-33.79%
Lululemon	33.62	35.98	57.68%	-33.94%

Source: Iress; Nike, Adidas and Lululemon financial statements

 

Disclosure: Lululemon 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.

Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	65 390	66 349	-10.00%
NASDAQ Composite	15 833	10 798	11 608	-26.68%
S&P 500	4 797	3 901	3 912	-18.44%
Prime Lending Rate	7.25%	8.25%	8.25%	13.79%
Lunar BCI WW Flexible Fund	165.68	131.69	136.20	-17.79%
USD/ZAR	15.96	16.06	15.81	-0.94%
EUR/ZAR	17.95	16.89	16.69	-7.02%

Source: iress

Company and Market News

Prosus and Naspers released their annual results for the year ended 31 March 2022. In the annual results, they announced that they would start a share repurchase programme for their Prosus and Naspers’ shares. This would be funded by regularly a selling small number of the Tencent shares. The idea is that they want to decrease the difference between their Market Cap and Net Asset Value (NAV), which has been trading at a significant discount.

As it currently stands, Prosus effectively owns 29% of Tencent. This is by far their biggest holding, which is currently worth $134 billion. Prosus also owns a multitude of small ventures in the E-commerce space such as OLX, PayU, and Movile. According to Prosus, on the 31 March 2022, the NAV per share of Prosus was ZAR 1,759 versus a closing price of R795.76, representing a discount 54.8%. post the announcement of the results, the closing price on the 27th of June 2022, was R1 039.48, increasing by 18% from the day before the results and announcement of the sale of Tencent shares and repurchase of Prosus and Naspers shares were published. This has reduced the discount.

Similarly, Naspers has also been trading at a discount to its NAV and its shares went up by 22.8% on 27 June 2022, from the day before the results were announced. The estimated NAV per share of Naspers on 24 June 2022 was R5 398.30 per share versus the closing price on 27 June 2022 of R2 348.69, presenting a discount to NAV of 56% despite the 22.8% increase.

The sale of Tencent shares will be done in an orderly way, with no more than 2-3% of the daily trading volume of Tencent shares on the Hing Stock Exchange being traded.

Over and above the share repurchase programme, Naspers and Prosus have indicated that they plan to continue investing in other ventures that have the goal of generating sustainable returns over the long term. However, for the current year none of their other ventures, apart from the classified portfolio in Prosus\’s books and Media portfolio in Naspers’ books, have generated a profit. These loss making businesses together with high management costs will continue to discount Nasper and Prosus share prices versus their respective NAV.

 

Disclosure: Prosus and Naspers are 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.

Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	67 803	65 390	-11.30%
NASDAQ Composite	15 833	11 340	10 798	-31.80%
S&P 500	4 797	3 901	3 901	-23.38%
Prime Lending Rate	7.25%	8.25%	8.25%	13.79%
Lunar BCI WW Flexible Fund	165.68	138.08	131.69	-20.52%
USD/ZAR	15.96	15.88	16.06	0.63%
EUR/ZAR	17.95	16.73	16.89	-5.91%

Source: iress

Company and Market News

Last Wednesday, The US Federal Reserve (Fed) announced that it will increase its benchmark interest rate by 75 basis points.  This comes after the announcement that the yearly US consumer price index for May increased by 8.6%, compared to expectations that it would only increase by 8.1%. The benchmark funds rate range now sits at between 1.5% and 1.75%. This is still a long way from giving investors in US treasury bonds a real positive rate of return (ie. a return after inflation has been accounted for).

A 75-basis points increase has not been seen since 1994. Jerome Powell (the Fed chairman) said that they expect that the rate will increase by another 50 to 75 basis points in the July meeting. The decisions will be made after the inflation figures for June come out.

The Fed is effectively trying to tame inflation by decreasing demand. But they do not want to push the US economy into a recession. Some market analysts believe that the rate increases have been too little and too late, and that the risk of a recession in the USA next year is very high.

At the June meeting of the Federal Open Market Committee (the committee that makes decisions about the interest rates and US money supply), at least half of the members indicated that the Fed fund rate might need to rise to around 3.375% by the end of the year. This is about 1.5 percentage points higher than what they expected in March. The market, through the rate that it wishes to earn on US Treasury bonds has been predicting a rate of around 3.5% in the FED funds rate by the end of the year.

The long-term goal of the Fed is to get inflation to a 2% level while keeping the labour market strong.

 

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.

Lunar Capital Weekly Roundup

Index / Fund / Rate	Start of Year	Last week	This Week	% change YTD
JSE ALSI	73 723	70 920	67 803	-8.03%
NASDAQ Composite	15 833	12 013	11 340	-28.38%
S&P 500	4 797	4 109	3 901	-18.67%
Prime Lending Rate	7.25%	8.25%	8.25%	13.79%
Lunar BCI WW Flexible Fund	165.68	142.61	138.08	-16.66%
USD/ZAR	15.96	15.54	15.88	-0.50%
EUR/ZAR	17.95	16.68	16.73	-6.80%

Source: iress

Company and Market News

Remgro Focus

Remgro is a holding company with several listed and unlisted investments. It has a market capitalisation of R70.3bl. As at the end of December 2021, it had a net asset value (NAV) of R114.2bl, giving it an estimated discount to NAV of approximately 38%.

Management has been attempting to unlock this discount to NAV, by cleaning up their portfolio through distributing certain listed investments to their shareholders, offering to acquire certain listed investments and delisting these, and bulking up some of their unlisted investments in joint ventures with other industry players. By acquiring listed companies and making them private, Remgro will have greater influence in the management and strategic direction of those companies. If this strategy is successful, then these companies could be brought back to the market at a later stage and provide substantial returns to Remgro shareholders.

One of the companies in their portfolio is Mediclinic, of which Remgro own approximately 44.5%. On 31 May 2022, Remgro together with MSC Mediterranean Shipping Company, offered to acquire the shares not already owned by Remgro at a price of 463 British pence per share. Perhaps, the consortium of Remgro and MSC viewed Mediclinic to be undervalued or that they be able to reposition Mediclinic’s strategic direction and grow its value faster. The take-over proposal for Mediclinic was rejected by the Mediclinic Board. The Mediclinic board (excluding Remgro representatives) believed that the bid undervalued the company. Remgro and MSC have until 7 July 2022 to decide whether to make another offer or withdraw any intention to do so.

Remgro was also a beneficiary of the unbundling of certain assets in the Rand Merchant Investment Holdings (RMIH) portfolio. At 31 December 2021, Remgro had a stake in RMIH valued at R21.2 bl. The RMIH unbundling would effectively unbundle Discovery and Momentum Metropolitan Holdings (MMH) from the RMIH stock. There doesn\’t seem to have been any indication from Remgro as to what they will be doing with their Discovery and MMH assets. Remgro has also unbundled most of its stake in FirstRand after the Rand Merchant Holdings (RMH) unbundling.

We believe that Remgro’s strategy is an interesting one to keep an eye on, and if they are successful in acquiring companies at good prices and repositioning their strategy, it may yield good returns over the long-term.

Inflation Update

On Friday, The US released inflation figures for May. The consumer price index increased 8.6% from a year earlier, compared to the expected 8.1%. Shelter, food and fuel were the biggest contributors to the increased prices. Due to the higher than expected inflation figures, the market anticipates that the US Federal Reserve will likely increase the US interest rates by more than they currently planned to.

On Thursday 9 June 2022, The European Central Bank (ECB) said it plans to raise key interest rates by 0.25% in July, and a further unspecified-increase later in the year. This would be the first time in more than 11 years since the ECB has raised rates. The ECB has been lagging the US in terms of interest rate hikes. The ECB\’s interest rate is currently -0.50%. And the latest inflation figures for the Eurozone are 8.1% (well over the targeted 2%).

On Friday the S&P 500 closed the day 2.91% lower.

 

Disclosure: Remgro 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.