Tuesday, May 25, 2010

Karoo Wind Turbines (With Help from China)

De Aar in the Karoo is currently the focus of one of China’s largest power companies.

Over the weekend Zhu Yongpeng, president of the state-controlled electricity company China Guodian, accompanied by some of his top executives and the general manager of the Chinese wind-power company Longyuan, a subsidiary of China Guodian, got together in De Aar to meet the local authorities in the district.

China Guodian envisages establishing a 100MW wind farm in the De Aar area, in collaboration with South Africa’s Mulilo Energy. This is part of a portfolio of six to nine wind farms across the entire country with a capacity of more than 1 500MW.

The De Aar project can be expanded to generate 300MW to 400MW, said Mulilo chief executive Johnny Cullum. The first phase, with a capacity of about 100MW, involves an investment of R1.8bn.

China Guodian, together with Mulilo, has already erected a couple of anemometer masts, the data from which will be monitored in China.

China Guodian is considering building a wind turbine assembly plant and blade factory in South Africa if there is sufficient demand for wind turbines in this country and in the rest of Africa. Such plants could create more than 1 500 jobs.

China Guodian has power stations generating 85 000MW in China. These include nuclear power, coal and hydroelectricity plants. Its wind power subsidiary, Longyuan, each year builds new wind farms generating 2 000MW and it aims to become the world’s biggest wind-farm operator by 2016.

If everything goes according to plan, construction on the De Aar wind farm could begin by March 2011, and the first stage be completed by 2012 with 67 1.5MW wind turbines.

Sindisile Madyo, manager for local economic development at the Pixley ka Seme district municipality, said the region was focusing on solar and wind power as well as hydroelectricity and biomass in its strategy to become the future focal point for renewable energy in the Northern Cape.

- Sake24.com

See also:

South Africa Should Join the BRIC bloc - but needs better selling skills

South African needs to market its "highly attractive value offer" better and improve the country's brand so that it can be included in the Bric group of countries – Brazil, Russia, India and China.

So says Kuseni Dlamini, Old Mutual chief executive for South Africa and developing markets, implying the country can benefit a great deal from inclusion in this well-regarded group of developing countries with high growth rates.

The Bric countries enjoy increasing influence in world affairs as their economies assume a growing role in the global economy, especially after the massive negative impact of the global economic crisis on, for instance, the United States, Europe and Japan.

Although President Jacob Zuma at a recent Bric summit in Brazil issued a plea for South Africa's inclusion, a number of other developing markets - such as Mexico and Malaysia - equally want to become part of this exclusive club.

Dlamini believes South Africa has a great deal to offer the Bric group, which is reluctant to expand its membership. For instance, he says, South Africa played a key part in reaching an agreement at last year's Copenhagen summit on climate change by working together with the United States, Britain and China.

The country also earned respect when it was recently lauded by President Barack Obama of the United States for being the first country to voluntarily renounce a nuclear arms programme. This brought Zuma considerably closer to Obama, said Dlamini.

South Africa also has an important role in the rest of the continent, for example through its peacekeeping operations, trade and investments. The country exerts significant economic influence in Africa, occupying a decisive position.

There is a compelling and strong case for South Africa to play a more important and strategic role in world affairs. The country needs to state its case far more convincingly, and formulate its attractiveness better. South Africans don't sell themselves strongly enough.

Dlamini says that the perception of the country as a destination for investment and trade is declining. South Africans need to arrive at Heathrow without being regarded as fugitives from Africa or coming to demand unemployment benefits, but rather as people coming to invest and do business.

MTN's Mobile Money taking off in Uganda

MTN Uganda, a subsidiary of South Africa's MTN, expects users of mobile money services to grow by three-quarters by 2012 giving people in rural areas the chance to build businesses and safely transfer money.

"It has grown to a scale we never expected," Richard Mwami, head of mobile money at MTN Uganda told Reuters ahead of the GSMA's Mobile Money summit in Rio de Janeiro, which kicks off on May 24.

The expansion of mobile money is a trend that is being played out in developing countries around the world.

MTN Uganda expects more than 2 million users of its mobile money services by the end of the year and 3.5 million users by 2012.

"We currently have registered 890,000 mobile money users, around 16 percent of our subscriber base," Mwami said.

MTN Uganda has a market share of 60 percent. Kuwait mobile operator Zain and Orange also operate in east Africa's third largest economy.

Access to mobile financial services such as transfers for food, shopping or to send money home removes the need for long, costly and often cumbersome journeys to move money around and allows people to store cash as well.

It also helps village businesses thrive and gives entrepreneurs a safe way to transport money.

Aletha Ling, executive director of Fundamo, the world's leading provider of software and services for mobile money to network operators such as MTH Uganda and banks, said the use of mobile financial services "changes the entire ecosystem of a village.

"A woman who has a fishing boat, smokes the fish, (moves) the money up and down the country would get robbed on the way and that nearly wiped out the business," she said, adding such problems are eliminated with mobile money.

Some $195 million have passed through the platform since its launch in March 2009 with around 11.8 million transactions since then, Mwami said.

Juniper Research has estimated that more than 500 million people around the world will use mobile money transfer services by 2014, principally in developing countries.

The telecom trade body GSMA has predicted that operators could make $5 billion from financial services by "banking" 364 million unbanked people by 2012.

In Kenya 11 percent of the country's gross domestic product is moved via mobile money through Safaricom's mobile phone based money transfer service known as M-Pesa, said Greg Reeve, head of mobile payment solution at Vodafone, which partners with Safaricom.

"We will be launching in South Africa and you will see some other announcements soon," he added.

Vodafone also offers M-Pesa mobile money in Afghanistan and Tanzania.

In Kenya, it has also introduced a new service known as M-Kesho, which is available to M-Pesa users and Kenya's Equity Bank's account holders, allowing users to gain access to credit, earn interest on deposits and buy insurance.


Monday, May 24, 2010

Seth Klarman is worth listening to, especially when markets go mad

Mr. Klarman is president of the Baupost Group, an investment firm in Boston that manages $22 billion. His three private partnerships have returned an annual average of around 19% since inception in 1983—and nearly 17% annually over the past decade, as stocks went nowhere.

To measure Mr. Klarman's importance as an investor, you need only see the value his rivals place upon his words. You could have earned at least a 20% average annual return since 1991—better than twice the performance of the market—merely by buying and holding Mr. Klarman's book, "Margin of Safety": Published that year at a cover price of $25, hard copies now fetch up to $2,400.

But the professorial Mr. Klarman speaks in public about as often as the Himalayan yeti. He made an exception last Tuesday, when I interviewed him in front of a standing-room-only crowd of 1,600 financial analysts at the CFA Institute annual meeting in Boston. He then made another exception, speaking with me over the phone later to clarify points that he feared had been misconstrued.

Mr. Klarman specializes in buying securities that nauseate other investors. As the credit crisis exploded, he put more than a third of his assets into high-yield bonds and mortgage-related securities. I asked him what he had meant, in a recent letter to his clients, when he compared the financial markets to a Hostess Twinkie. "There is no nutritional value," he said. "There is nothing natural in the markets. Everything is being manipulated by the government." He added, "I'm skeptical that the European bailout will work."

Some members of the audience gasped audibly when Mr. Klarman said, "The government is now in the business of giving bad advice." Later, he got more specific: "By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can't stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate."

"We didn't get the value out of this crisis that we should have," Mr. Klarman told the audience. "For our parents or grandparents, it was awful to have had a Great Depression. But it was in some ways helpful to carry a Depression mentality throughout their later lives, because it meant they were thrifty with their money and prudent in their investment decisions." He added: "All we got out of this crisis was a Really Bad Couple of Weeks mentality."

You could have heard a pin drop as Mr. Klarman proclaimed, "I am more worried about the world, more broadly, than I ever have been in my career." That's because you can make good investing decisions and still end up with bad results if you reap your profits in currencies that do not hold their purchasing power, he explained.

"Will money be worth anything," asked Mr. Klarman, "if governments keep intervening anytime there's a crisis to prop things up?"

To protect against that "tail risk," said Mr. Klarman, Baupost is buying "way out-of-the-money puts on bonds"—options that have no value unless Treasury bonds plummet. "It's cheap disaster insurance for five years out," he said.

Later, I asked Mr. Klarman what he would suggest for smaller investors who share his worries. "All the obvious hedges"—commodities and foreign currencies, for example—"are already extremely expensive," he warned. Especially gold. "Near its all-time high, it's a very hard moment to recommend gold," said Mr. Klarman.

Mr. Klarman pointed out that his own ideas "on bottom-up opportunities in undervalued securities are more likely to be accurate than my top-down views on what's going to happen in the world at large." In other words, while you might want to insure against a disaster scenario, you shouldn't bet the ranch on it.

And, said Mr. Klarman, one of the best ways to protect against a decline in purchasing power is to buy whatever is "out of favor, loathed and despised." So forget about gold or other trendy hedges. Instead, wait patiently for markets—European stocks, perhaps—to get so cheap that they turn most investors' stomachs. Then you can pounce.

As Mr. Klarman put it, "Sometimes, when you can't figure out a good defense, the best thing to do is to go on offense."

Friday, May 21, 2010

The African Century

I WON’T go back to Dar es Salaam for a long time,” said one prominent South African after returning from the World Economic Forum Africa meeting that was held in the Tanzanian city earlier this month.

I’m certain she wasn’t serious. Dar es Salaam is a bit chaotic — highways without proper storm-water drains and a power supply held hostage to a recent drought can be annoying — but hospitable, gentle people, five-star hotels, and an air of excitement and achievement make it more than worthwhile if you are there for business. If you are on vacation, there are many more rewards.

The World Economic Forum meeting had a slightly schizophrenic tone. Some Africans and Afrophiles continued their pleas for the foreign investors and donors to take an interest in Africa, to increase foreign aid and to consider investments. Others, the Afro-optimists (Kenyan Prime Minister Raila Odinga introduced the term), were a little embarrassed by these old-fashioned views.

For the Afro-optimists, Africa’s future is much brighter, and it is in our hands. Africans’ correct posture, for the Afro- optimists, is not on our knees, but shovel in hand, building our own future. The donors and the investors will respond accordingly. During the depths of the economic crisis, many believed that African countries were the most vulnerable. Indeed, the leaders’ statement at the London Group of 20 summit made special provision for measures to protect least-developed countries.

These measures were welcome, and some were well used. As it turned out, however, African countries escaped the economic crisis remarkably unscathed. In fact, other than SA and a few damaged states, very few countries in Africa actually experienced an economic recession.While the world’s economy shrunk by about half a percent last year, Africa’s grew by 2%, on average.

One explanation is that a significant number of small African economies are not well integrated into the world economy, and therefore escaped its ructions. But this raises the question: on what basis were they growing if not for the production of exports? We will leave that question for now and get back to it. More important is that fact that many African countries have adopted prudent macroeconomic policies over the past 20 years. If one looks at budget balances, government debt, inflation, and foreign reserves — African policies are in a different, far better place, compared with the haphazard policies of the early postcolonial decades.

But it is not only good macroeconomics. Regulatory reforms have greatly improved the investment environment. African economies are starting to diversify quite rapidly into manufacturing and services. Prices for key inputs such as communications services have fallen fast in a several African countries that have adopted good policies.

And — getting back now to the earlier point about delinking — domestic production and consumption is increasingly contributing to economic growth in Africa. This points to effective microeconomic reforms, and bodes well for economic and social development. Is this a flash in the pan? Will African economies revert to (caricatured) type? In the pre-crisis decade, African growth averaged nearly 5%. A few oil exporters grew faster and a few weaker or crisis-ridden states, such as Côte d’Ivoire, Zimbabwe and Somalia, grew much slower or shrank.

But the general performance was steady and strengthening. For the medium-term future, sub-Saharan Africa will be the third-fastest growing region in the world, after China and India, according to the International Monetary Fund. Africa is expected to grow at nearly 5% this year, and at 5,5%-6% next year and beyond. Good macroeconomic policies allowed many African countries to use stimulatory fiscal and monetary policy measures to steer through the crisis.

There is no doubt that Africa’s performance through this crisis has been more impressive than at any other time since colonialism. During colonialism, Africa was usually used as a source of cheap finance by the colonial powers during economic crises. So, its performance in the 2008-09 economic crisis is probably better than at any time since Africa was integrated into the world economy. Why is it better now? One important factor is that African governments are more accountable today than they have been before.

According to the Freedom House index, a particular view of political freedom in Africa, less than one-third of African countries were free or partially free in 1990 . Today, two-thirds of African countries are free or partly free. It’s not surprising that more accountable governments got through the crisis better. The Harvard economist Dani Rodrik found, against many presumptions, that accountable governments get countries through crises better than authoritarian governments. The evidence for a link between democracy and long-term growth is not as strong, but Africa does seem to be providing that evidence right now.

Can these economic and democratic gains be reversed? Of course they can, but the link between democracy and better economic performance does seem to have had an effect on the thinking of African leaders and the citizens of African countries. The positive gains of democratic policy reforms underwrite their own future.

The 2010 World Economic Forum Africa in Tanzania was very well attended. It is not surprising. While most of Africa remains less than a straightforward proposition for business, the returns and the potential returns remain high. Now the risk is slowly declining, and yet the rewards remain very attractive. With a population of more than 1-billion , and with incomparable natural resources, the odds on this being the African century are steadily strengthening.

- Hirsch is deputy director-general: policy in the Presidency.

Thursday, May 20, 2010

Nigeria: Taking Steps to Improve the Economy

Nigeria aims to fully or partially privatise its steel sector within 12 months, the country's new mining and steel minister said on Wednesday.

"We are going back to the drawing board on the whole issue of privatising the steel sector. This is why we are asking interested parties to come in," Musa Sada, who took over the post about a month ago, told Reuters Insider television.

"I think in the next one year we should be looking at a new arrangement - a concession, joint venture or outright takeover," he said on the sidelines of the World Mining Investment Congress.

Nigeria's state-owned steel complex has a capacity of 2.6 million tonnes a year and this will hopefully be boosted to 5.6 million, a Nigerian government official told the conference.

Nigeria is seeking to give more focus to its mineral deposits, which have been largely neglected and overshadowed by the massive oil industry.

The nation is particularly seeking investors for iron ore, planned to feed a renewed steel sector, and coal, which is due to be used in power plants to reduce shortages in electricity supply, Sada said.

"The committee that is working on this (coal for power generation) is directly headed by the president because of the importance he puts on this problem," he told the conference.

- Reuters

See also:

Wednesday, May 19, 2010

Buffett's Recommended Reading

Over time, he has recommended various books and here is the comprehensive list:

Common Stocks and Uncommon Profits by Phil Fisher: Regarding this book, Buffett said that, "I sought out Phil Fisher after reading his Common Stocks and Uncommon Profits and Other Writings. When I met him, I was as impressed by the man as by his ideas. A thorough understanding of the business, obtained by using Phil’s techniques . . . enables one to make intelligent investment commitments."

The Smartest Guys in the Room by Bethany McLean: This was recommended in Buffett's annual letter from 2003 and details the rise and fall of Enron.

The Intelligent Investor by Benjamin Graham: This is an obvious choice as Buffett has said that this is "the most important investment book" and in particular has highlighted chapters 8 and 20 as essential.

John Bogle on Investing: The First 50 Years by John Bogle. This book is more aimed at the fund investing crowd given Bogle's expertise (Vanguard funds). In the past, Buffett has advocated investors who don't have much time on their hands to invest in index funds.

The Essays of Warren Buffett
by Warren Buffett & edited by Larry Cunningham: There's no better way to learn from Buffett than through his own words. Buffett would agree as he says "The most representative book on my thinking is what Larry Cunningham put together."

Sam Walton: Made in America by Sam Walton: Another read Buffett recommended back in 2003, this book details how Walmart was built from the ground up.

And while this next pick is not from Buffett, we wanted to add it to the list because it is an in-depth biography of him. Those of you interested in the investing legend himself should check out The Snowball: Warren Buffett and the Business of Life by Alice Schroeder.

Seth Klarman: Investing is like Chess

Investing, says Seth Klarman, used to be like checkers. Now it's like chess–a lot more complicated.

Mr. Klarman runs Baupost Group, a Boston-based investment firm with about $22 billion under management. For the uninitiated, he's a conservative value investor and one of the most highly regarded in the market. He doesn't share his market insights that often, so when he does it's worth listening. Tuesday morning he spoke at a conference for financial industry professionals at the CFA Institute in Boston, in a session hosted by my colleague Jason Zweig.

On the issue of checkers or chess, Mr. Klarman said he was trying to illustrate the way successful investing today involves complicating new factors and dimensions.

In particular, he is looking at the deluge of government interventions to prop up the financial system in the past couple of years and what those may mean down the road. And he is talking about the danger–not a certainty, merely a danger–that governments around the world will trash their currencies in a continuous free-for-all of "handouts and no taxes." The near-$1 trillion bailout in Europe is just the latest worry.

Where does this leave the ordinary investor?

Anyone rushing to throw more money into shares or high-yield bonds today should think twice. And anyone with a lot invested, especially if they are risk averse, might want to think about taking some chips off the table. Mr. Klarman warns that asset prices have risen too far, too fast, and returns from these levels may be poor. "Given the recent run-up, I would worry that we will have another 10 to 12 years of zero or nearly zero returns," he said. His firm is holding a remarkable 30% of its assets in cash.

On high-yield bonds, Mr. Klarman's group found terrific bargains during the financial crisis but that window has long since closed. "The rally's been indiscriminate," he said. "On the credit [i.e. bond] side it's been overblown. Things are now being priced for almost perfection." (In other words, the prices are already assuming rosy future scenarios. If things get worse investors will be in trouble.)

Most investors, Mr. Klarman warns, have rushed to embrace risk again as if the financial crisis never happened. "The lessons haven't been learned," he said. "People are back drinking the Kool-Aid again. It's very troubling." By keeping interest rates low and juicing stock markets with liquidity, the government is basically pushing people to speculate, he said. If there were another serious collapse, he said, many investors would be caught out–again.

On the macroeconomic outlook, Mr. Klarman is remarkably gloomy–even by the usual standards of conservative value managers. "I'm more worried about the world, broadly, than I have ever been in my career," he says. Governments are spending, borrowing and printing money far too freely. Whereas the Great Depression generation learned to live within their means, the Great Recession generation is taking the easy way out, he says. The Greek bailout is just the latest example. Inflation looks like the easy way out. "It's not clear that any currency is all that trustworthy," he says. "I worry about paper currencies."

He goes further, mistrusting some official data and actions. "We don't know the extent to which we have been manipulated," he says. He believes the official figures–particularly on inflation–are suspect. "We are being lied to."

Such sentiments have led to a stampede for gold, of course. But Mr. Klarman repeated cautions he has made before about investing in all commodities, including gold: They generate no cashflow, and so they are extraordinarily tricky to value.

Gold has also just hit new highs, he added. That should make value investors–who tend to look for assets that are on sale–very nervous.

Instead, to insure his clients' portfolio against the dangers of runaway inflation he has been using complex derivatives. Baupost, says Mr. Klarman, has been buying "out of the money" put options on long-term government bonds. These are bets that long-term interest rates will eventually rise sharply. Mr. Klarman says he is using the put options to buy cheap insurance in case long-term interest rates go into double-digits.

These things are far too abstruse for most ordinary investors, though perhaps not for the sophisticated. It's a shame that very few mutual funds open to the ordinary public are able to take these kinds of sensible steps.

So where does Mr. Klarman see opportunities for investors now? Very few, it seems. He said his firm is finding some bargains in the distressed area of commercial real estate. But he warned these were just in the private market: Publicly traded Real Estate Investment Trusts that invest in commercial real estate have mostly risen too far for his tastes, and offer poor value.

Investors always want to know what a sage like Seth Klarman thinks about assets today, but his most valuable advice is perennial. "We are highly opportunistic," he says. "I will be buying what other people are selling. I will be buying what is loathed and despised."

Hmmm. Europe, anyone?

Direct Link

Tuesday, May 18, 2010

Hans Rosling: Let my dataset change your mindset

Talking at the US State Department this summer, Hans Rosling uses his fascinating data-bubble software to burst myths about the developing world. Look for new analysis on China and the post-bailout world, mixed with classic data shows.

Click here for Hans' website

A Door to Africa: Standard Bank Reaps the Benefits of Old Thinking

To understand where Standard Bank is today, says its boss, Jacko Maree, you have to go back to South Africa in early 1987, when Standard Chartered, its original parent, sold out completely. Most South African firms were not welcome in the rest of Africa, he says, and “it wasn’t entirely obvious” that Standard Bank’s priority should be there or indeed in emerging markets at all. When South Africa moved to majority rule in the 1990s, plenty of South African firms shifted their domicile to London and tried to diversify into developed markets, but Standard Bank stuck to its guns. Something of this determination is reflected in its choice to keep its headquarters in downtown Johannesburg even though most financial firms moved to Sandton, a safe but dull suburb where adventure is a bar named the Bull Run.

Mr Maree, at the cuddly end of the spectrum of South African bankers, has been pretty astute. He became chief executive in 1999 after a failed takeover bid for his bank, which he says “was a big kick up the backside”. That meant making more of its main activities abroad: an African presence built from branches bought from Australia’s ANZ in 1992; an investment-banking unit in London (originally put there because of foreign-exchange controls in South Africa); and small operations elsewhere, including Russia, where natural-resources banking, an obvious specialism for African firms, is important.

The result has been solid, with compound annual growth in profits per share of 8% since 2003 and only a small dent in earnings from the financial crisis. In 2009 almost a quarter of profits came from abroad, either the rest of Africa or indirectly linked to the continent—for example, currency trades executed in London.

South Africa has had two lending booms since the end of apartheid. The first was driven by the opening of the economy to foreign capital, the second by lending to the rising black elite over the past decade. As a market it is fairly mature. But Africa as a whole is set for a “tectonic shift”, says Goolam Ballim, Standard Bank’s chief economist. The proportion of Africa’s trade with China, Brazil, India and Russia rose from 5% in 1993 to 19% in 2008. Much of this, inevitably, is in resources, but governments are getting better at saving the proceeds of the good times for the less good ones, reckons Mr Ballim.

Old Africa hands who used to roll their eyes at this kind of analysis got a surprise in 2007 when ICBC, now the world’s largest bank, spent $5.5 billion on a 20% stake in Standard Bank in what was then China’s largest ever corporate foreign investment. Mr Maree and Mr Jiang, ICBC’s chairman, stitched the deal together after spending a day in Cape Town together. There is still a wow factor about it, says Mr Maree. Although the revenues generated from working with ICBC are modest—some $78m in 2009—co-operation is being stepped up. Standard Bank has 30 bankers in Beijing now, as well as a main board director in an office close to ICBC’s, who help clients of the Chinese bank interested in expanding in Africa.

For China’s banks the deal is a test case of whether “treading softly” overseas will work. The combination ticks every box, bringing a presence in key markets for Chinese clients and exposure to a sophisticated foreign firm with skills in areas like investment banking and foreign-currency funding. Yet ICBC has limited influence with Standard Bank, with only a couple of directors on its board. A full takeover looks unlikely. ICBC would need permission from Standard Bank’s board to buy more shares, and South Africa’s government would probably not approve.

For Standard Bank the merits of the deal are clear: more capital, and kudos, to build a bigger presence in Africa and elsewhere. It is mulling buying a bank in Nigeria (where the government is opening up more to foreigners). And it is eyeing India, which Mr Maree says is “the missing link”, given that Standard Bank already has an operation in Brazil and a stake in a Russian investment bank, Troika Dialog. With Standard Bank’s complex history and relatively isolated position, explains Mr Maree, “we’ve had to think in a much more out-of-the-box way.”

Link to The Economist article, part of a Special Report on Emerging Financial Institutions

TED Talks: Euvin Naidoo on investing in Africa

Naidoo provided an inspiring, energizing and mind-altering delivery focusing on investment in clearly a continent full of potential and opportunities waiting to be utilized. The metaphor used of coming from Darkness to Lightness captures the spirit of investment opportunity drives focus from the negative to the positive.The high return on investment from the Africa economies should be a motivator to attract investment.

Monday, May 17, 2010

Valuing Stocks Using Dividends

A stock represents a small part of a company. It is part of the equity (ownership) of the underlying company and provides the holder with a vote (usually one per share) and potential capital appreciation, as well as dividends. This ownership stake fluctuates and is valued daily in the market. But how does one determine what the correct stock price valuation is?

The value of a stock in its simplest sense is the present value of the cash flow expected to be provided by that stock. Cash flow usually takes the form of a dividend, declared by the company’s Board of Directors. It follows that a stock can then be valued as the present value of future dividend payments.

The rate at which the dividend is discounted is called the discount rate. Assuming dividends grow at a constant rate to eternity (a rather absurd assumption – investors usually use this model for certain time periods of say ten or twenty years), the stock can be valued using this growth rate and the discount rate.

The dividend discount model, a formula used widely in stock valuation, uses the future value of dividends to determine the current value of a stock. The formula to produces such valuation says that price is equal to the dividend divided by the discount rate less the growth rate of that divided. It can be written P=D / (k-g), where k is the discount rate and g is the dividend growth rate.

The discount rate is the measure of risk that must be assumed when purchasing a stock. For example, if one is buying shares of Coca-Cola (KO), which has predictable cash flows and dividends, the discount rate will be low, say 10%. However when one is buying a company with uncertain cash flows and dividends, the rate will be high, say 15%. This rate is a subjective measure and is effectively the rate required to assume the risk of investing in the stock.

Now for an example:

Johnson & Johnson (JNJ) currently trades at $64.90. An investor in search of a dividend yield wants to know if this is a fair value for the stock, in order to avoid over-paying. The current dividend on Johnson & Johnson is $1.93. If an investor, being conservative as he is, decides that a dividend growth rate of 7% annually into eternity is appropriate, then g would be 7%, or 0.08.

As for the discount rate, Johnson & Johnson is a great company with strong historical dividends and cash flows, and it’s almost certain the business will continue to generate cash in future years. As such a discount rate of 10% is probably appropriate (in the formula this would be 0.1).
Using the dividend discount model, P=D / (k-g), we substitute the above variables as: P=1.93 / (0.1-0.07). Solving this equation produces an answer of $64.33, or almost exactly the current stock price. Using this logic, Johnson and Johnson is a good purchase at the current price for dividend-seeking investors.

This model also allows investors to protect themselves from overpaying for expected dividend streams. Assume Merck’s (MRK) dividend to increase at 5% per annum from the 2009 payout of $1.52. Given the risks facing Merck of increased competition from generic producers, a cautious investor would use a higher discount rate, say 15%, to compensate for the increased risk of owning the company. Using the formula, P=1.52 / (0.15-0.05), and therefore P=15.2. Compare this to the current Merck price of $33 and one can see that this dividend stream may be expensive.

The dividend discount model is in no way a sure-fire guaranteed way to accurately value stocks. It does, however, provide the cautious dividend seeking investor some idea of the true value of a future dividend stream and can prove valuable in not overpaying for this stream. Conservative estimates should always be used ahead of more optimistic appraisals, and of equal importance is the financial strength of the company, which can be attained by a quick look through the balance sheet.

Rising Markets are Bad for Dividends

To the speculator and day trader, rising markets are a form of euphoria that generate excitement and further speculation. Markets that rise give the feeling that one is wealthier, regardless of the paper nature of the profits or the underlying business value, which may not have increased at an equivalent rate.

Conservative investors who look for safe and sustainable high-dividend yields in order to produce income have a different view on rising market. A rising market makes dividends more expensive. As general securities prices increase, a larger increase is required in an underlying dividend just to maintain parity...

Read the rest of my article here.

Sunday, May 16, 2010

Wesco AGM Notes: Golden Advice from Charlie Munger

Notes from the 2010 Annual General Meeting of Wesco Financial, chaired by Charlie Munger.

I recommend reading the document as it's filled with genius that only Munger could provide.

Key Comments:

Who else failed us? The academic types thought that diversification was the secret to success. Diversification may be a way of avoiding disaster but does not represent a path to success. A person is not much of a teacher if all he or she can do is prevent disaster. This is why he calls it de-worsification. BRK owns things they know a lot about [instead of blindly. The concept of beta or volatility is asinine. It isn’t always bad ideas that cause bad outcomes but good ideas taken to excess. Obviously if you own very volatile stocks your returns can be volatile day to day. The main problems in life can only be solved when you know what works, what doesn’t and why.

Gilford Glazer [a longtime friend of his], came back from the war and went to HBS. But his father’s little machine shop needed attention and he asked them to defer acceptance for a year so he could help his father. After a year he contacted HBS and asked for another year. The guy from Harvard then asked him how many employees he had last year at this time. He answered 50. Then, when he asked him how many employees he had now, the answer was 900. The Harvard guy laughed and told him he didn’t need to go to business school. That kind of approach is no longer present at HBS. They were probably wiser then than they are now.

Charlie thinks GS has the best morality and best wisdom of all of the banks. Accordingly, the government should not jump on the bank that is the best. The government just stumbled into this SEC investigation and it is not an appropriate response. He thinks the world would work a lot better off without this stuff [derivatives]. It worked well without them before.

The George Washington of Singapore, Lee Kuan Yew, decided to marry the smartest girl in his class. Their son is now the PM of Singapore. He was a very practical man. He didn’t want people dying of Malaria so he drained all the swamps and didn’t care if a little fish went extinct. He didn’t like the drug problem and he looked around the world to solve the drug problem. He found the solution in US by copying the US Military’s policy. Any time you can be tested and if you fail you go to jail. If something was going to grow like cancer he would check it hard with the wrath of God. He turned a country with no resources or agriculture into a prosperous country, starting from 0 mph. We need to pay more attention in our country to the Singapore model.

There is Alice and Wonderland and nut case accounting in the US. These people need to be thrown out and people who think more like Lee Kuan Yew need to be installed. Jamie Dimon of JP Morgan is actually complaining about this but he is the only one. Charlie takes his hat off to him but his derivative book needs to go away. He should not run a gambling parlor next to a legitimate business. Actually, in recent years, some of our banks actually bought casinos. “Why run a casino in drag when you can run a real casino?” When it comes to casinos, maybe we should have these things but we should minimize them. Casinos work so well--no inventories and no accounts receivable. It’s like god gave you the ability to print money. But real casinos have huge CAPEX and asset requirements. On the other hand, on Wall Street they can create a casino without those requirements. How many of us could resist those temptations to print money?

Don’t go where the big boys have to be. You don’t want to look at the drug pipelines of Merck and Pfizer Go where there are inefficiencies in which you can get an advantage and where there are fewer people looking at the stocks. Go where the competition is low.
Read the full notes here (courtesy Inoculated Investor)

Thursday, May 13, 2010

Africa the Final Frontier for Franchisors

Many South African franchisors see opportunities in other African countries as they seek alternative growth markets.

JSE-listed fast food giant Famous Brands, which owns the likes of Steers and Wimpy, is now represented in 17 other African countries, while Yum! Foods (brands like KFC and Pizza Hut) is growing by more than 1 000 restaurants a year, many in emerging markets including China, India and Africa.

"Five years ago, South Africa was our only prospect in Africa. Today we are building on our rapidly growing South African 600-unit infrastructure and have just opened up in Nigeria, with more countries in the wings," said Yum! Foods CEO David Novak in the company's most recent annual report.

"With Debonairs, Nandos and Subway really pushing into the market, franchises are far more prevalent in the African market than two years ago and set to pick up,” says Chris Delport, chief risk officer at financing firm GroFin.

Riaan Fouche, who heads up the franchise solutions division of First National Bank (FNB), says more South African companies are looking to expand into Africa.

"In some instances you will see [established] South African franchisees approaching the franchisors in South Africa for the master licences in other African geographies."

GroFin investment analyst Dave Davies agrees that franchising in African markets is picking up.

He told Fin24.com: "This is largely owing to the increase of shopping malls modelled on South African centres, and pioneered by South African developers. These centres, which were not common in African cities a few years ago, are modelled on the South African concept of 'anchor tenants', and host a number of well-known South African clothing stores such as Mr Price and Truworths."

He also pointed to the rapid growth in quick service restaurants in new shopping developments. In Nigeria, for example, this industry recorded an average real growth rate of 23% from 2003 to 2008.

"This rapid growth can be attributed to changes in lifestyle brought about by increasing urbanisation, fast-paced city life and a gradual increase in disposable income," said Davies.

GroFin has seen first-hand some of the successes in the sector. It was involved in financing the opening of two Chicken Republics (formerly Chicken Licken) and one Debonairs outlet in other African countries.

"This model offers the same advantages enjoyed by South African franchises in terms of franchising support, training, a proven business model and marketing support,” said Davies.

FNB did not consider perceived regulatory risks in Africa as a reason not to support franchise expansion onto the continent, said Fouche.

However, he said that would-be franchisees should ensure that they adopt a hands-on approach to managing the business.

"Owner-operated franchising is key and another important aspect to identify is what support the franchisor has to offer the franchisee [in a new country].”

Tuesday, May 11, 2010

The Move to Alternate Energy - Wind Turbines in Port Elizabeth

The skyline of the fledgling Port of Coega north of Port Elizabeth starts changing on Tuesday as construction begins on the first of twenty five 100-metre-high wind turbines.

The first turbine will be able to generate electricity for the first game of the World Cup at the Nelson Mandela Bay Stadium in just a month.

Electrawinds, a major windfarm builder based in Belgium, will fund the beginnings of the windfarm itself, says local manager Emil Unger.

He adds that Electrawinds will supply at Eskom's Renewable Energy Feed-in Tariff (Refit) of R1.25/kwh.

Each turbine puts out 1.8MW of power at a windspeed of 7.5 metres a second (27km/h), which is the average for the area. Each turbine puts out enough energy to power about 1.700 households

The wind turbine is a VESTAS V90 with a 95-metre tower and a 90-metre rotor.

Luc Desender, Managing Director of Electrawinds says the company has already laid the foundation work for the wind turbine. This consisted of the placement of the embedment unit and the pouring of concrete.

When completed the wind farm will generate 45MW of green power for the eastern Cape. The turbines will be built on shore.

The first wind turbine units arrived in South Africa from Denmark on Sunday, May 9 2010 on board the Red Cedar at the Port of Ngqura. A R70m special crane will be used to erect the wind turbines. It is one of only seven of its kind in the world.

Link to Press Release

Charlie Munger on China, BYD

Monday, May 10, 2010

The World's Fastest Growing Economies - 2010

According to EconomyWatch.com, four of the top ten countries leading economic growth (as measured by GDP at constant prices) are in Africa.

Interestingly, Qatar is expected to shoot the lights out, while Botswana follows a close second. China is down in eighth place and India, Brazil and Russia don't even make the top ten.

Country Growth Rate

1. Qatar 16.4%
2. Botswana 14.4%
3. Azerbaijan 12.3%
4. Republic of Congo 11.9%
5. Angola 9.3%
6. East Timor 7.87%
7. Liberia 7.53%
8. China 7.51%
9. Afghanistan 7.01%
10. Uzbekistan 7.00%

Friday, May 7, 2010

Africa's first high-speed rail line, will launch on June 8

The Gautrain, Africa's first high-speed rail line, will launch on June 8 in South Africa three days before the opening match of the 2010 football World Cup, the developers said Friday. French construction giant Bouygues said the train's first segment, linking OR Tambo International Airport and the posh Johannesburg suburb of Sandton, will open in time for the June 11 kick-off of Africa's first World Cup.

The segment "will be handed over on June 8, three weeks ahead of our original schedule," said Christian Gazaignes, Bouygues' executive director. For 100 rands (13 dollars, 10 euros), World Cup visitors will be able to ride the 15 kilometres from the airport to the Sandton hotel district in less than 15 minutes. In rush-hour traffic, the same trip takes more than an hour by car.

When finished in mid-2011, the 80-kilometre regional express train will link the capital Pretoria with national economic hub Johannesburg, running at speeds of up to 160 kilometres (99 miles) an hour and enabling commuters to make the trip in 42 minutes.

"It's going to give the country a beautiful image of modernity," said Laurence Leblanc, international director of RATP Dev, a subsidiary of French group RATP, the company awarded a 15-year concession to operate the train. The Bombela Consortium, an international group that includes Bouygues, Canadian firm Bombardier and two South African companies, began construction on the project in 2006.

The Gautrain is the first high-speed rail line in Africa. The north African cities of Casablanca, Algiers and Cairo all have metro lines, but none runs as fast or as far as the Gautrain. South African transportation officials say the train will form the backbone of a new public transport network that will help take traffic off the notoriously congested roads of the greater metropolitan area.

To get them to the train, the company plans to roll out a network of shuttle buses serving the population centres around the train stations.

Officials hope the price scheme will help turn South Africans onto public transport, in a country where mass transit systems languished for decades under apartheid policies designed to keep whites and blacks apart. RATP also promises tight security on the trains, using closed-circuit TV cameras, 400 security guards and 50 police officers to convince South Africans to abandon the protective shell of their vehicles.

Thursday, May 6, 2010

Kenya and World Leading Sports Betting Technology

John Powers Kenya announced a major innovation in Sports Betting in Kenya, with the release of its MPESA betting system, which now allows clients from all over Kenya to place bets on international football events using only their mobile phone.

"The system has been specifically designed for the Kenyan market, and utilises Safaricom’s MPESA system. Customers simply MPESA their stake to the dedicated number, and then make their bets from advertised coupons using a simple code. For example, Manchester United against Liverpool is advertised as Match number 101. A home win (i.e. Manchester to win) is identified as #1, an away win (i.e. Liverpool to win) as #2 and a draw as #0. Following this the client identifies how much they want to stake with a * and the sum they want to stake. Thus, 100 shillings on Manchester to win becomes in this example 101#1*100. Reference numbers are issued via SMS and the bet is trackable. To collect their winnings, winner simply text W and the amount they wish to withdraw, which is settled via MPESA."

Wednesday, May 5, 2010

South Africa Seeks Investment - From China, Brazil, India & Russia

South Africa has targeted some of the world's fastest growing economies, such as China, to reach a minimum target of R115 billion ($15 billion) in foreign investment projects by 2013, Trade and Industry Minister Rob Davies said on Tuesday.

"Targeted potential sources of FDI (foreign direct investment) will include China, India, Russia, Brazil, Japan, the USA and Middle East," Davies said in his budget vote speech to parliament.

"We anticipate that the work programme will translate over the next three years into an investment pipeline of 115 billion rand (worth) of projects," he said.

Direct Link

Tuesday, May 4, 2010

Jeremy Grantham on China's Red Flags

Key Points:

"The trouble is that China today exhibits many of the characteristics of great speculative manias. The aim of this paper is to describe the common features of some of the great historical bubbles and outline China’s current vulnerability."

"Real wages will likely rise if the fl ow of rural labor dwindles, which would allow workers to consume more. But for an export-oriented economy like China, this may be double-edged, since the country’s international competitiveness might be harmed. In recent years, urbanization has been a major source of China’s productivity growth. If this slows, then future economic growth will have to come from a more efficient use of the factors of production."

"Economic theory and history, however, argue against the notion that central planning is the optimal mode of economic development. China has certainly developed rapidly over the past three decades. But under the direction of Beijing’s visible hand, its economy has become lopsided. In the years up to the credit crunch, China’s economic growth was largely dependent on rising exports. China’s exports to the West are already at twice the level achieved by Japan in its heyday. The country cannot continue growing its trade surplus with the West without inviting protectionism. This threat has become particularly acute since the onset of the Great Recession"

"Beijing imposes a GDP growth target on local governments. The problem with targets imposed by a central authority is that they are liable to being gamed. Goodhart’s Law states that whenever an economic indicator is made a target for conducting policy, then it loses the information content that would qualify it to play such a role.16 In China, GDP growth is no longer the outcome of an economic process; it has become the object."

"Roughly a quarter of all investment was government-directed. Many projects, however, were clearly intended to meet the government’s GDP growth target. A news clip on YouTube (originally from Al-Jazeera) shows the newly constructed “ghost town” of Ordos, in Inner Mongolia. An interviewee suggested that building this empty city, with housing for a million, had enabled local officials to meet their growth targets."

"It beggars belief that lending could have expanded so rapidly without some decline in underwriting standards. In fact, many accept that China’s banking system is threatened by another surge in nonperforming loans, as occurred in the late 1990s. However, conventional wisdom holds that if China maintains its phenomenal economic growth, then last year’s loans need not turn bad."

"China’s current situation is reminiscent of the late stages of the dotcom bubble, when investors extrapolated past rates of growth into the future and were bedazzled by the size of the prospective market. As with the Internet frenzy, a surge of investment creates a demand that appears to justify the most optimistic predictions."

"When the China juggernaught eventually stalls... [proponents] will face a rude awakening"

Click here to read this excellent White Paper, written by GMO's Edward Chancellor (registration required)

South Africa to Spend R750bn ($100bn) on new Transport Network

A three-quarter trillion rand transport master plan ($100 billion), which includes linking Johannesburg to Durban and Polokwane via rapid train networks, was presented to parliament.

Natmap transport planning consultant Paul Lombard recommended to the committee that studies be done on whether it was feasible to extend the Gautrain project to the Durban-Johannesburg and Pretoria-Polokwane lines.

He recommended the immediate institution of a rail infrastructure-owning entity, similar to the Airports Company of South Africa, that would "eventually absorb" the country's entire network and "allow existing freight and passenger agencies to operate on the network".

The plan, which includes expanding the port of Saldhana, doubling the Huguenot tunnel outside Paarl and expanding the port of Cape Town as other vital projects, would cost about R750bn should it be launched today, financial project manager Themba September told Sapa.

He said part of the plan was to form partnerships with the private sector to help fund the project and lower the burden to taxpayers.

"Overall, between now and 2050, the cost of the project will be around R750bn," he said.

South Africa could qualify for foreign funding for the rail project as it had voluntarily agreed to reduce its carbon dioxide emissions by 46%.

"If you build a railway or a train, you are going to be cutting down the emissions from the road because there will be less vehicles emitting carbon on the roads. Because of that, we will qualify for funding which other people are getting. That money is readily available."

Direct Link

The Upgrading of Transport in Emerging Markets

China and the Bullet Trains:

Ernst & Young Leads Africa Expansion

Global accounting giant Ernst & Young says it expects rapid business growth in Africa with its initiative to expand the firm’s practices across the continent.

The African Investment Programme is intended to grow the firm’s practices in Africa both in terms of revenue and resources over the next three years.

Philip Hourquebie, CEO of Ernst & Young Africa, said: “It is a quantum leap aimed to confirm Ernst & Young as a market leading African firm.

“We have the support and backing of the global firm.”

Ernst & Young Sub-Saharan Africa achieved revenue of nearly 270m for the 53 weeks to July 3 last year, amounting to 18% growth in local currency terms.

The African Investment Programme comes in the wake of Ernst & Young’s successful integration into one area in 2008 of 87 countries from across Europe, the Middle East, India and Africa into one unit.

That move was seen as one of the biggest changes in the professional services industry since the demise of accounting firm Arthur Andersen.

Rivals PricewaterhouseCoopers, Deloitte and KPMG have not yet come up with their full integration plans or devised alternative plans to fully interpret their business across geographies.

Jim Turley, global chairman and CEO of Ernst & Young, said that continued growth on the African continent would create “needs and opportunities for our services”.

Assurance and tax services led the service-line growth in SA, achieving a 20% revenue increase, reflecting the firm’s involvement in some of the largest deals over the period.

Turley said the firm was investing aggressively in human resources to back up its ambitious business plans.

Other accounting firms had put on hold plans to recruit as a result of the economic slowdown, but “we have continued to recruit”, he said.

Hourquebie said the African Investment Programme would be three-pronged.

First, the firm would be prioritising its investment in financial services, public and utilities sectors.

“We also need to focus attention on the oil and gas, mining and metals, and the telecommunications sectors,” he said.

Second, in terms of geographies, the firm would be investing in expanding its growth in Nigeria, west Africa, Angola and SA, he said. As Zimbabwe stabilised, the investments would be made in that practice.

“Lastly, our advisory, transactions and tax service lines would be the primary beneficiaries of the investment with limited attention going to our assurance service line,” Hourquebie said.