Category: Uncategorized (Page 1 of 4)

The proposed sale of a 20% shareholding in a new entity to be created to hold the commercial rights and interests of the South African Rugby Union (SARU) to an obscure USA private equity outfit called Ackerley Sports Group (ASG) has elicited major criticism by some.  The meeting to vote on the deal was scheduled for 17 October 2024 but has been postponed to December 2024 amidst backlash from inter alia, the Bulls, Sharks , Golden Lions and the Stormers franchises, the Minister of Sport, Arts & Culture, the Honorable Mr. Gayton McKenzie, and SARU’s major broadcast partner, Supersport. Imagine constructing a deal that pisses off your major partners being the RSA  unions participating in the United Rugby Championship and Supersport? This could be a fascinating ‘business school’ case study how not to do a deal.

For those who have not read and/or reviewed the proposed SARU/ASG deal, as leaked by Business Day on 14 October 2024, the key elements of this imaginative corporate action include :

• A new company, SARU Commercial Rights Company (CRC), will be formed to own all the commercial rights of SARU including the invaluable Springbok brand
• SARU and ASG will own 80% and 20% equity interests in CRC respectively
• Upon closing of the deal, ASG will advance a $35 million loan to CRC
• ASG undertakes to advance a further loan tranche of $15 million 18 months after deal closing
• ASG undertakes to advance final two tranches of $15 million and $10 million in 18 month intervals after the first $15 million advance but subject to undisclosed performance metrics
• The board of directors of CRC will consist of 7 directors of which ASG and SARU will each be entitled to appoint 3 directors. An independent chairperson will be appointed by ASG [sic]
• 90% of the net cash flows generated by CRC will be first applied to repaying ASG’s loan account together with 8% compound interest
• Once ASG’s loan (and interest) has been fully repaid, SARU and ASG will each presumably share in 80% and 20% respectively of the dividends declared by CRC

An interesting aspect of the above deal structure is the scheduled loan repayments to and loan advances by ASG. The leaked PowerPoint presentation included forecast cash flows to and from ASG.

So ASG could be funding some of its loan advances using the proceeds of loan repayments from CRC – excellent negotiating and structuring by ASG. Private equity players, take note of this innovative investment structure, it could make you billions using other peoples’ money.

Tiisetso Motsoeneng, writing in the Business Day on 22 October 2024, launched into a scathing attack on the proposed SARU/ASG deal. Inter alia, Motsoeneng alleges that “…the valuation of the Springbok’s commercial rights at $375 million is a glaring underestimation…”. He further criticizes the deal for giving up control over the Springbok brand and legacy.

The Sharks, Bulls, Golden Lions, Stormers, Cheetahs, Boland Rugby Union and the Griquas prepared and signed a 7 page letter detailing their objections to the proposed ASG deal. There were compelling arguments against the deal and they questioned the potential value add of ASG. The proposed transaction fee payable of $7.5 million to Eddie Jordan, erstwhile F1 racing driver, also elicited a strong rebuke. What value could a transaction adviser add to justify a 10% transaction fee?  PS note to self, next time I bid for a corporate finance mandate, refer to Jordan’s 10% fee structure in justification for my paltry 5% success fee.

I decided to trawl through SARU’s annual reports for the years ended December 2019 through to December 2023. I expected to find some trauma relating to the COVID-19 pandemic lockdowns. Turns out, SARU encounters drama most years, battling to breakeven and not incur operating losses. Mark Alexander, the SARU chairperson, in the FY2023 annual report refers to the malaise facing SARU stating “…at the onset of 2023, our organization was confronted with a budget shortfall of R254 million, a direct consequence of the enduring impacts of the pandemic, our departure from Super Rugby, and our strategic investments in the north to preserve the professional game at home…”.

My analysis of SARU’s financial performance and position over the period FY2019 to FY2023 is included in the attached Excel spreadsheet. SA Rugby Analysis (October 2024). SARU managed to pull off miracles in FY2021 when the British & Irish Lions tour (without spectators) managed to generate R396 million in revenue for SARU. In FY2023, SARU managed to increase its grant income from World Rugby from R36 million in FY2022 to R291 million in FY2023. Without these two windfalls, SARU may have had serious going concern issues.

Frankly, having reviewed SARU’s historical financial performance, I would not invest my own money in SARU. The organization has reported operating losses in the past two years and pressures seem ongoing. Any business is only worth what it can produce in profits and free cash flows in the future. In SARU’s case, I applaud the executive for finding a private equity fund who is prepared to value the commercial rights of SARU at circa $375 million. Perhaps that’s why the deal structure was so overwhelming structured in favor of ASG?

Perhaps the debate should be whether SARU should be a capitalistic entity seeking to  maximize profits for its shareholders or it should be a non-for-profit organization?  The proposed CRC aiming to generate increasing profits and cash flows for ASG and SARU seems fraught with agency costs and conflicts of interests?

I was eagerly watching the Wimbledon mens final this past Sunday (14 July 2024) and cheering on Carlos Alcaraz  – I am not a Djokovic fan. I am not sure what it is about Novak that irks me, perhaps I should ask many of the Wimbledon fans who seem to take a similar stance. While watching the tennis I recalled Roger Federer’s recent Commencement Address at Dartmouth College. Roger said in his speech that he had won ±80% of the matches he had played in professionally but had only won 54% of all the points he had played.  That’s seems absurdly low but true. Roger continued…

“…When you’re playing a point, it has to be the most important thing in the world and it is. But when it is behind you, it’s behind you. This mindset is crucial because it frees you to fully commit to the next point and the next point after that with intensity, clarity and focus…You want to become a master at overcoming hard moments. That is to me the sign of a champion. The best in the world are not the best because they win every point. It’s because they lose again and again and have learnt how to deal with it….”

Profound words indeed.

Intrigued, I downloaded some statistics on Federer, Djokovic and Nadal’s record in major finals. Federer appeared in 31 finals and won 20 of those, a 65% win record. Djokovic leads the pack, appearing in 37 finals and winning 24 titles, also a 65% win record. Nadal, well he is just the ultimate warrior, winning all 14 French Open finals that he has played in and 8 other major titles.

Federer, Nadal and Djokovic have won a combined 66 major titles since 2003 out of a possible 84 titles over that period – that is incredible dominance given that Nadal first won the French Open in 2005 aged 19 years and Njokovic won his first major in 2008.

Federer won every single match in the first ten major finals he played in. Then Nadal and Djokovic ruined those stats. Djokovic beat Federer in 4 out of the 5 finals they played in. Similarly, Nadal beat Federer in 67% of the final matches they played against each other. The average number of games won in their major final matches makes for interesting reading.

Federer clearly did not go down without a fight.

Deon Gouws, the chief investment officer of Credo, a London based wealth management business, mentioned Federer’s comments about losing 54% of the time in his opinion piece in the Financial Mail (11 July 2024). Gouws related this to equity markets stating the equity indices generally go up 50% of the time and down on the other days. Needing no incentive to download data and model in Excel, I proceeded to check Gouws’ assertion. He was not far off – it transpires that the S&P500 (index of the largest 500 listed companies in the USA) had a positive daily return 53% of the time from January 1971 to June 2024. On 47% of the 13,489 trading days in that period the S&P500 declined. Good luck with predicting what will happen tomorrow but over the long run, it will “even stevens”.

The All Share Index of the JSE (ALSI) followed an identical trend, up 53% of the time on a daily basis. I analyzed the ALSI over the period January 2000 to June 2024 (5,015 trading days) – refer attached for Excel file ALSI TopBottom 25 days (June 2024) Pondering about whether it is better to stay invested all the time or try to guess whether the market will go up or down is an interesting conundrum. If you had invested in the ALSI in January 2000 and held onto the index until June 2024, your annual compound return would have been 10.9% excluding dividends. Certainly, a positive real return (after inflation) however, not as enticing as investing in Nvidia.

If hypothetically you had Nostradamus’ foresight, and could predict which would be the 25 worst trading days on the overall JSE and the 25 best days, what could your returns have been? In other words, you had the foresight to disinvest out of the ALSI a day ahead of each one of the 25 worst trading days over the period January 2000 too June 2024 and then reinvest a day after the “blood bath”, your compound annual returns would have 24.2%. If you lacked that foresight and instead divested ahead of the best 25 trading days on the ALSI, and then reinvested a day later, your compound annual returns would have dwindled to 4.0%.

Einstein apparently said that compound interest is the 8th wonder of the world. As mentioned above, the ALSI return over ±24 odd years has been ±10.9% excluding dividends. Investing R1,000 back in January 2000 would translate into ±R7,878 today. If you missed the 25 worst trading days over that period, your R1,000 would have grown to R76,204. If you had missed the 25 best trading days, your initial investment would have limped in at R2,199 in June 2024. What’s the lesson here? Perhaps ask your financial advisor.

Stay safe, be warm and all the best from BeechieB.

I have decided to put my research into bank failures on hold for a while. Instead, I will share my thoughts on Andre′ de Ruyter’s book “Truth to power”. The publishing world clearly has not been collaborating about the timing of releases of non-fiction books in South Africa. There have been some crackers recently and all released within weeks of each other. Justice Malala’s book “The plot to save South Africa” provided some interesting facts regarding Chris Hani’s assassination back in 1993. The conspiracy theories surrounding this tragic event still circulate today. Michael Cardo’s book “Harry Oppenheimer Diamonds, gold and dynasty” is an enthralling biography. It should be on the reading list of undergraduate economics and politics students in South Africa. I am currently engrossed in Jonny Steinberg’s book “Winnie & Nelson, portrait of a marriage”. Phew, some explosive reveals in there.

De Ruyter’s book surreptitiously slipped into bookstores on 14 May 2023, apparently to avoid any preemptive action to prevent publication thereof. The first couple of chapters of “Truth to power” reminded my the infamous eye surgeon, lots of “I, I and I’s” in there and some curious management lessons. De Ruyter certainly won’t be sharing these management lessons in any of South Africa’s prestigious business schools any time soon – he may be assassinated upon venturing back into the rainbow nation. Page 95 of “Truth to Power” (yes, I purchased a hard copy of the book and did not access any pdf’s online) reveals a forensic investigator’s comment to  De Ruyter in January 2020 “…Congratulations, you are now head of the largest organised crime syndicate in South Africa…”.

De Ruyter reveals a lot about the workings of ANC appointed members of parliament. Mantashe is lambasted for his obsession with coal and all things Russian. Gordhan’s reputation as one of the good guys and corruption busters also takes a serious knock. De Ruyter identified early on in his brief reign that Eskom needed to procure four to six additional gigawatts soon. Mantashe’s response to De Ruyter was “…stay in your lane..” whilst Pravin cautioned Andre′ “…you can’t say these things in public…”. It has become increasingly apparent to literate South Africans that the ANC is all about protecting it own turf at the expense of what may be good for the country. Barbara Creecy, the serving Minister of Environment, Forestry and Fisheries, apparently said to De Ruyter “…this loadshedding has nothing to do with Eskom…its all about politics in the run-up to the internal ANC election…”.

De Ruyter reveals that Mantashe was outflanked by Ramaphosa in July 2022. Ramaphosa had surprisingly lifted the cap on private generation of electricity to 100MW in June 2021. Mantashe remarked in July 2022 that despite lifting the cap on private generation there was not even a sign of 1 MW on the grid. Ramaphosa apparently immediately responded that perhaps the cap should then be lifted entirely. Mantashe is reportedly an enigma amongst foreign politicians and financiers. Eskom had managed to raise ±US$10 billion in climate financing deals during De Ruyter’s tenure despite the ANC’s forked tongues. “…Mantashe had a scathing interaction with a senior German minister, who made it clear that if South Africa was not prepared to play ball, the funding would be withdrawn. Bullying tactics aren’t a great way to persuade people to do business with South Africa. Privately, the funders expressed their cognitive dissonance to me, especially energy minster’s palpable hostility towards decarbonization. It was clear that government was suffering from what Aristotle called akrasia: the unerring propensity to always make the worst possible decision…”.

De Ruyter is pro renewable energy. He makes it clear that one of the reasons he took the Eskom head honcho position was to reduce South Africa’s dependence on coal. He makes strong statements such as “…The notion that we can release in the space of 250 years the carbon that has been trapped in fossil fuels over millennia, without it having any impact on our environment, surely borders on stupidity. The science is incontrovertible. Climate change caused by carbon emissions is a fact…”. Phew, the last time I heard such emphatic statements was during Covid-19 lockdowns exhorting us mere mortals to follow the science.

De Ruyter touches on something I have often pondered upon whilst imbibing the nectar of the gods. “…The intermingling of unions with government just doesn’t work. It can’t work because government can’t act against its own allies. Whoever cooked up that unholy alliance deserves to be locked in a room with Jim and Mabapa (union leaders of NUMSA and NUM respectively) for day or two…”. Interesting thought. A  tripartite alliance between a purported liberation movement, trade unions and communists running a country? Wonder how that ends?

I wonder why De Ruyter decided to publish his recollections of his brief time at Eskom? Was it because of his perceived patriotic duty to wash dirty linen in public? Did big business look for a convenient spokesperson to reveal the rot of the ruling party? I guess motive doesn’t matter now. As they say in Afrikaans “uit, uit, die storie is uit”.

Stay safe out there and keep smiling. Hope is a wondrous thing.

There are banking jitters out there at present. Even Warren Buffett had a few things to say about this to his ±30,000 loyal followers who attended the annual jamboree in Omaha recently. Credit Suisse announced on 19 March 2023 that it was merging with UBS, another Swiss behemoth, in order to avoid potential bankruptcy. Credit Suisse was worth US$45 billion at the end of 2017 and now has declined to a paltry US$3.5 billion. That’s value destruction par excellence. The loss of trust in a bank is usually a fatal occurrence – people do not like the thought that their hard earned or grifted cash is not safe in the bank. This fear is often followed by hasty online withdrawals or lengthy queues at the bank’s door. Credit Suisse had been dogged by many scandals over the past decade, some worthy of a novel or two. Imagine a public spat between the incumbent CEO and the head of the Wealth Management division of a banking group making headlines in the staid world of Swiss banking? Well it came to a head in 2019 and the latter departed for UBS (now, there’s shadenfreude). The CEO of Credit Suisse in his wisdom employed a surveillance firm to spy on the departed executive’s activities and public revelation of this made for some juicy reading.

I have had some professional dealings with banks over the years. I was deployed as a trainee decades ago to be part of the teams auditing two of South Africa’s leading banks. I had no idea what I was doing at the time but I loyally followed the audit programs and tried to appear smart and hard working to my superiors. After completing my articIes, I worked in investment banking for a while, learning a lot and not sleeping much. I later in my career veered into corporate training and inter alia, delivered finance for non-financial management training programs in-house for a major RSA bank. In this programme, I tried to explain personal and business banking in layman’s terms and to induce a love of numbers and all things finance. I hope I succeeded.

Banking is both a simple and complicated business. Simplistically, banks accept deposits (or actually borrow money) and on lend to customers. Banks typically hope that you and I leave our money in current accounts for extended periods, earning no interest, whilst this is lent to credit worthy individuals and corporates at market related interest rates. Sounds simple, banks earn an interest margin by lending money at higher rates than they pay for the privilege of being protectors of savings and surplus cash. Obviously, banking is a far more complicated business than that and involves a significant investment in people, processes and systems to provide critical services to the economy. No doubt they employ artificial intelligence in identifying risks and grey money but let me not digress into ChatGPT et al.

Credit Suisse was founded in 1856 and became a global leading banking group delivering financial solutions and wealth management services to private, corporate and institutional clients. I analysed Credit Suisse’s financial performance over the period 2017 to 2022 per their published annual reports to see whether I could identify any red flags – refer attached Excel file for my workings and analysis.  Credit Suisse analysis (May 2023)

There are a couple of key ratios that pertain to banks:

1. Net interest margin
2. Non-interest revenue to total revenue
3. Credit loss ratio
4. Cost-to-income ratio
5. Return on equity (ROE)

Net interest margin provides an indication of the extent to which banks earn higher rates on their lending than they pay depositors for their capital. Credit Suisse’s net interest margin was between 1.6% and 1.7% until the wheels came off in 2021. Crudely, that means that Credit Suisse was earning 1.6%/1.7% more interest on its loans to customers than it was paying to depositors. (Note to self – please update analysis of Capitec and ascertain what their net interest margins have been. Also check what happened at SA Taxi Finance aka Transaction Capital)

Non-interest revenue to total revenue refers to the percentage of total revenue that a bank earns from providing services as opposed to lending activities. Banks earn non-interest revenue from multiple sources from monthly banking fees to ATM withdrawal fees to advice fees. Credit Suisse’s non-lending activities represented 74% of total income in 2021, which in my opinion is a warning sign. Non-interest revenue is welcomed but if it is too high it may be a sign of volatile earnings. Lending revenues tend to be stable over time but non-lending revenue can vary depending on economic conditions. For example, customers may be reluctant to purchase new vehicles when economic conditions deteriorate and hence, fees earned from such new financing activities may decline. Existing vehicle finance loans may not grow but existing loans will still bear interest.

The credit loss ratio refers to the % of total loans that a bank expects not to recover in full. Some refer to this as bad debts but do not mention this word in the presence of accountants, who will immediately go off on a spiel about stage 1, 2 and 3 expected credit losses. Sounds like load shedding but quite normal in banking parlance.

Credit Suisse’s credit loss ratios were around 0.1% in 2017, 2018 and 2019 and then increased significantly in 2021. A quick question to ChatGPT and a review of Credit Suisse’s 2021 annual report revealed some reasons for the worsening of the credit loss ratio in 2021. Credit Suisse incurred credit losses (actual and estimated) of ±US$4.8 billion relating to its exposures to Archegos Capital Management. Archegos was a private firm founded by Bill Hwang that invested (speculated?) in shares and derivatives. Credit Suisse lent Archegos money to pursue these capitalistic activities and unfortunately Archegos was not able to beat the market all the time and succumbed to liquidation in 2021. Imagine lending to a ‘hedge fund’ and then losing US$4.8 billion, which represented almost 10% of Credit Suisse’s total shareholders equity? PS Some people were fired post this discovery.

The cost-to-income ratio refers to the percentage that total operating costs (employee costs, IT costs etc.) represent compared to total revenue. There tend to be banking industry benchmarks – in South Africa, cost-to-income ratios of more than 60% are frowned upon. Credit Suisse’s cost-to-income ratio declined from 88% in 2017 to 77% in 2021, all too high in my opinion. Bank’s costs are largely fixed and overheads need to be kept as lean as possible.

The last ratio is ROE, meaning what return is the bank generating for its shareholders? Credit Suisse’s ROE varied between 4.6% and -16.1% prior to is demise. Harley enticing returns for long suffering shareholders.

So, was Credit Suisse’s demise predictable? Their key ratios were a bit off for years but the information in the public domain about management spats and lending to ‘hedge funds’ should have set off alarm bells. There is an infamous saying accredited to Ernest Hemingway, “…how do you go bankrupt? Slowly, slowly and then suddenly…”. Deposits at Credit Suisse declined from CHF393 billion in December 2021 to CHF166 billion in March 2023, a decline of CHF227 billion. Loans to customers remained largely unchanged leaving a funding hole to be plugged. Credit Suisse’s shareholders and lenders were not keen to take this risk and the rest is history.  Au revoir Credit Suisse.

Hope to post soon about Silicon Valley Bank and First Republic Bank who have also gone out of business recently.

Stay warm amidst all this load shedding.

I recently attended the Johannesburg launch of the book “The age of menace” written by David Buckham, Robyn Wilkinson and Christiaan Staeuli. I bought the book and devoured it in a weekend. There were some cracking chapters dealing with Microsoft’s and Amazon’s market dominance, Facebook’s missteps, Sam Bankman-Fried, The Federal Reserve’s (the Fed) money printing experiments and the infamous Bill & Melinda Gate Foundation. I struggled to find the common theme amongst the 45 chapters in the book but perhaps that is because of my search for meaning rather than the authors’ faults. Despite this lack of thread, it was an absorbing read. I do hope they follow up with book 3 in the series (book 1 was “The end of money”).

I decided to download the Fed’s monthly money supply (M2) data over the period 1970 to August 2022. I then compared this to the monthly movements in the S&P500 index (the stock market tracking index of 500 large listed USA companies) over the same period.

The correlation between M2 money supply data and the movements in the S&P500 index over the ±52 year period was 97%. I know, I know, I know. You are taught at university that correlation does not equate to causation. But a 97% correlation is no coincidence.

Some interesting observations about the M2 money supply data:

• The Fed increased money supply from US$15.3 trillion In February 2020 to US$21.7 trillion in December 2021, presumably in response to Covid-19 lockdowns. That’s a 40.8% increase in money supply in the world’s largest economy. I am no economist but there has to be some consequences of the Fed’s actions? Perhaps an inflationary jolt to the USA economy? The Fed then steps in and raises interest rates to curb rising inflation, which in turn impacts on consumer spending and increases debt service costs of the government? We are currently seeing both occurring in the USA, with inflation rising from 1.5% in March 2020 to 7.7% in October 2022. Average USA 10-year government bond yields have increased from 0.9% in March 2020 to current 3.5%.
• The Fed started tightening money supply in January 2022 and what have we seen in 2022? Huge reverses in stock market gains, with the S&P500 down 9.7% so far in 2022.

I stumbled upon some interesting research performed by Hendrik Bessembinder of the W.P. Carey School of Business, Arizona State University and his fellow researchers (Te-Feng Chen, Goeun Choi and K.C. John Wei). Bessembinder analysed the long-run shareholder returns of over 64,000 global listed companies in 42 different countries over the period January 1990 to December 2022. The results were astonishing:

• Only 48.2% of the 64,000 odd listed companies produced a positive return for shareholders over the 30-year period;
• 57% of these companies failed to beat the USA one-month Treasury bill rate;
• The top 5 global companies by wealth creation accounted for 10.3% of the total increased shareholder value from 1990 to 2020; and
• 2.4% of the global companies researched accounted for all the net shareholder value creation (the remaining companies either produced negative returns or were immaterial in terms of wealth creation).

The top 10 wealth creators are hardly surprising.

As referred to in my pervious blog post, 2022 has been a rollercoaster ride on global stock markets. The above table would need to be adjusted for the events of 2021 and 2022. Apple, Microsoft and Alphabet (Google’s holding company) have held up pretty well but Amazon, Facebook and Tencent have got clobbered. Amazon’s market capitalization is down to US$960 billion and Tencent’s has retreated to US$378 billion in early December 2022.

The countries that produced the most wealth per company were Switzerland (US$5.3 billion on average), the Netherlands, Saudi Arabia, USA and Denmark. South Africa was way down the list in 30th place. Japanese companies, on average, managed to destroy US$557 million on average but that’s probably due to their banking crisis in the 1990s. You can review the detailed research results here Bessembinder 2020 global research should you be interested.

So what are the takeouts from Bessembinder’s research?

• Overall stock market returns are highly skewed – a few companies produce fantastic returns and the remainder have mostly average to negative returns
• A strong case for passive investing (invest in index tracking funds with a bit of speculation in individual stocks, but please not in bitcoin)?
• The asset management industry may be at significant risk of disruption?

Happy holidays and all the best from BeechieB.

I loved watching the TV series Billions which had as its main character Bobby Axelrod, a hedge fund manager with questionable morals. Insider trading was the norm in Billions and many other misdemeanors were perpetrated. I believe season 7 is coming soon, can’t wait. Talking about billionaires, recognize this dude below?

The dude’s name is Sam Bankman-Fried (pronounced “Freed” and not like Kentucky “fried” chicken), a 30 year old who founded and controlled a cryptocurrency exchange called FTX. He was also CEO of Alameda Research, a quantitative cryptocurrency trading firm. FTX filed for bankruptcy on 11/11/22 (a rather symmetrical date). Forbes has estimated Bankman-Fried (SBF) was once worth US$32 billion but earlier today reported that he only had US$100,000 left in the bank. Hard to believe that, I am sure that he has many millions hidden away in offshore tax friendly jurisdictions.  SBF’s parents are both law professors at Stanford University. His father is also a clinical psychologist who specializes in treating young adults suffering from anxiety and depression. I am sure Professor Bankman-Fried will have some comforting words for his son. SBF’s mother is reportedly a tax expert, and focuses on moral philosophy and distributive justice. I had to google the last term, never heard of it before today. Mrs Google tells me that “distributive justice” is about socially just allocation of resources. I am surprised the ANC has not cottoned onto “distributive justice” but give them time. Their last election slogan “building better communities together” did not translate into reality with load shedding, crumbling water infrastructure and sewerage flowing into rivers and oceans. I digress.

It has been a year like no other in recent history on stock markets. There have been some unbelievable gyrations in share prices and market capitalizations. Market darling, Amazon, has endured some pain and suffering in 2022. Or shall I say, its shareholders have seen value evaporate faster than the morning mist in the Kalahari desert. Amazon had a cracking time in financial year (FY) 2020 and 2021 as we spent more time online than in shopping malls. Amazon’s revenue (excluding that from Amazon Web Services) went from US$245 billion in FY2019 to US$408 billion in FY2021. Amazon reported a rather pedestrian 6.0% increase in revenue for the 3 months ended 31 December 2021 as compared to the comparable period in FY2020. What do you think the stock market’s reaction was? I would have expected some weakness in Amazon’s share price. The results were announced on 3 February 2022. The next day Amazon’s share price jumped by 13.5%. That created a new record of an increase in market capitalization of US$191 billion in one day. Take that online shopping fanatics.

Amazon also became the first listed company in history to lose more than 1 trillion US dollars in market capitalization in a year. Its market capitalization peaked at US$1.89 trillion in July 2021. By 9 November 2022 the share price had plunged to US$86.14, wiping just over US$1 trillion dollars of shareholder value. This is probably due to Amazon’s poor financial results recently as its core platform incurred losses of US$8.1 billion in 2022 so far. Amazon is blaming higher shipping costs and inflation for its woes.

Talking about calamities, how about Meta Platform’s (aka Facebook) share price over the past year? Meta’s market capitalization has declined by over US$600 billion over the past year. It set a new record of a US$232 billion decline in value on 3 February 2022 after it released its annual results for FY2021. The stock market was seriously unimpressed, particularly with Meta’s obsessive focus on virtual reality and augmented reality. The Reality Labs division is focusing on the metaverse, a virtual reality world where one can interact with family and friends. Meta is betting the house on this technology platform, spending significant amounts on creating and enhancing its virtual reality centered metaverse. The Reality Labs division has incurred a cumulative operating loss of US$21.7 billion over the past two years. The stock market is not convinced about this strategic move.

Meta’s fortunes were also not helped by Apple’s move to improve user privacy. Apple now requires apps to ask users for permission before tracking them across other apps and websites. Meta announced in February 2022 that Apple’s increased privacy settings may reduce Facebook’s revenue by US$10 billion annually. Good on you Apple, I am growing increasing disenchanted with Facebook and its tracking of my internet activities. I recently did some research on a USA listed biotech company. Lo and behold, the next time I logged onto Facebook, there was an advert about the self same aforementioned biotech company. Eish.

Take care out there and all the best from BeechieB.

PS I will be posting again soon dealing with US money supply and fascinating stock market research I recently stumbled upon.

There is tremendous pressure on aspiring young rugby players to perform on the field and get spotted by talent scouts. It seems as if you have to play Craven Week rugby and get a contract with a major union straight out of school in order to make it to higher honours. SA Rugby has an Elite Player Development (EPD) programme which identifies talent from the under 15 age group level onwards and then monitors these kids over the next 5 years as they hopefully graduate to play for the Junior Boks in the World Rugby U20 champs. Louis Koen, the ex Springbok flyhalf, is the current high performance manager at SA Rugby and oversees the EPD programme. Talented youngsters such as Damian Willemse and Evan Roos were picked up by this programme and have gone onto to become Springboks. Louis Koen may have some conflicts of interest as his son, Liam, was recently selected to play for SA Schools in the junior internationals against England and France.

Talking about the Junior Boks, who dominated in the Summer Series in Italy in June/July 2022, there were some outstanding performances by them. I watched all the Junior Boks’ games and was particularly impressed by Sacha Mngomezulu (captain and flyhallf), Ruan Venter (lock), Tiaan Lange (hooker), Cameron Hanekom (loose forward), Imad Kahn (scrum half) and Suleiman Hartzenberg (centre/wing). Canan Moodie (wing) was in the squad but then had to withdraw due to injury. Moodie went onto to make his Springbok debut against Australia in September 2022, scoring a majestic try. Watch out for Mngomezulu, I hope he will entertain us for many years and make the Springbok jersey proud.

See below for the Springbok team announced to play against Argentina this coming Saturday at Kings Park and the schools they attended.

There are some familiar rugby factories in the above list such as Grey College, Paul Roos, Maritzburg College and Paarl Boys High. But what about Jim Mvabasa Secondary, Hoerskool Upington, Paulus Joubert, Brits and Milnerton? Certainly not schools renowned for producing Springboks. As a matter of interest, Makazole Mpimpi’s alma mater is in Mdantsane and Kurt-Lee Arendse attended school in Paarl.

So perhaps one does not have to attend a prestigious rugby school to be identified as a talented player and be given opportunities to develop? With my interest piqued, I researched Springboks selected since 1992 (refer attached file Springboks since 1992 by school should you wish to delve into the details). Analyzing Springboks selected prior to 1992 and the schools they attended would produce biased results given the Apartheid regime and the historical concentration of players in certain areas such as Cape Town, Kimberley, Stellenbosch and Paarl from 1891 to the mid 20th century.

373 individuals have been selected to play for the Springboks from 1992 to date (September 2022). Grey College has produced 29 Springboks since 1992, the most by far of any school. Paarl Gimnasium and Paul Roos have also played their parts. There are however, some surprises in the top 10 Springbok producing schools. I would not immediately think of Waterkloof and Louis Botha (Bloemfontein) as being significant rugby factories but they have each produced 6 Springboks, an impressive record.

Which province you attended school in may have a bearing on the chances of becoming a Springbok. The Western Cape schools have produced 104 Springboks since 1992, 28% of all those capped in that period. Gauteng is not far behind at 76 Springboks. Schools in Mpumalanga, North-West, Northern Cape and Limpopo have produced a combined 47 Springboks, the same as the Eastern Cape province.

It warms my heart to hear of schools such as Spine Road in Mitchell’s Plain which has produced 2 Springboks since readmission. Adelaide Gimnasium has produced some formidable specimens such as Os du Randt, Gary Pagel and Anton Leonard. Klerksdorp can be proud of its 3 Springboks in recent times, including that man mountain Andre Esterhuizen, a loose forward parading as a centre. Owen Farrell probably rues Brackenfell’s influence on Cheslin Kolbe, who he might have wished played soccer as opposed to rugby.

Being appointed as captain of the SA Schools rugby team does not appear to be a shoo in for becoming a Bok. Of the 39 captains between 1982 and 2019, only 9 went on to represent South Africa at senior level. Some of these included Salmon Moerat, Rudy Paige and Bakkies Botha. Corne Krige is the only SA Schools captain to subsequently captain the Springboks.

Going to a good rugby school in Bloemfontien or Paarl certainly helps but it is no guarantee of success in professional rugby.

Be safe and enjoy the rugby. Go Bokke on Saturday, hoping for a huge win against Los Pumas and a small miracle of a Wallaby win at Eden Park.

Reading the Pfizer annual reports and browsing their website triggered my curiosity about the links between Pfizer, BioNTech and the Bill & Melinda Gates Foundation (BMGF). Dr. Susan Desmond-Hellman, a Pfizer non-executive director, proved to be an important link between Pfizer and BMGF. She was president of Product Development at Genentech between 2005 and 2009. Genetech is a biotech company owned by Roche which seeks to discover and develop groundbreaking medicines for life threatening diseases. Dr. Desmond-Hellman subsequently became CEO of BMGF until 2020 when she stepped down to join the Pfizer board.

BioNTech is a German based biotechnology group which focuses on developing immunotherapies for cancer and other diseases. It was founded in 2008 by the husband and wife team of Professor Ugur Sahin and Dr. Ozlem Tureci and backed by the Strugmann brothers. The latter are serial entrepreneurs who have built and sold numerous pharmaceutical companies and made billions in the process.

BioNTech is Pfizer’s partner in developing the COVID-19 vaccines, each party receives 50% of this vaccine’s revenues. BioNTech had been working on various mRNA therapeutics for years and had a relationship with Pfizer since 2018, developing a flu vaccine for them. Pfizer and BioNTech started working on a COVID-19 vaccine in January 2020, way before us mere mortals knew about a once in a lifetime pandemic. By April 2020, Pfizer had agreed to fund 100% of the development costs of the BNT162 vaccine program to prevent COVID-19. Pfizer astonishingly committed up to US$748 million to this vaccine development whilst BioNTech had no liability to contribute or repay any of the funding in the event that the vaccine was unsuccessful. If the vaccine was successful, BioNTech agreed to repay 50% of the development costs out of its share of vaccine revenues. Pfizer initially paid US$185 million to BioNTech which included subscribing for BioNTech shares to the value of US$113 million. Those shares are currently worth US$326 million, not a bad return over two years.

BioNTech’s major shareholders are the Strugmann brothers through their investment vehicle AT Impf GmbH (47.3%) and Professor Ugur Sahin (17.3%). BioNTech shareholders have been very patient, watching the company clock up significant losses over the years but their patience has been rewarded with BioNTech’s current market capitalization of US$33 billion on Nasdaq.

Reviewing the above table, a couple of things may be evident:

• The majority of BioNTech’s revenue pre 2021 (December year-end) was derived from Pfizer and Genentech
• The German government advanced €239 million in 2020 and €89 million in 2021 to BioNTech to develop a COVID-19 vaccine
• BioNTech is due to release its audited results for FY2021 on 30 March 2022. Year-to-date operating profit for the 9 months ended 30 September 2021 was €10.6 billion, a massive turnaround from losses in prior years

The stock market is clearly skeptical about the sustainability of BioNTech’s profitability. A market capitalization of US$33 billion versus operating profit of US$11.6 billion? Seems a very low earnings multiple.

BMGF entered into an agreement with BioNTech in August 2019 for them to develop immunotherapies for the prevention and treatment of HIV, TB and infectious diseases. To seal their relationship, BMGF acquired ±3 million BioNTech shares for US$55 million. So the circle is complete, ex BMGF CEO (having previously worked with Genentech) joins Pfizer board in 2020, BioNTech collaborates with Pfizer to develop a COVID-19 vaccine in less than a year, BioNTech is in cahoots with BMGF and Genentech. Happenstance?

I suddenly remembered that BMGF was the second largest contributor to the WHO in 2020. How eerie is that?

I tend to avoid conspiracy theories, but I am left wondering about BMGF’s involvement with all these COVID-19 role players. Are you aware that the John Hopkins Center for Health Security, in partnership with the World Economic Forum and BMGF, hosted a high-level simulation exercise for pandemic preparedness and response in New York on 18 October 2019? Too many coincidences me thinks.

Stay safe and all the best from BeechieB.

I am a numbers man. I love scrolling through annual reports and analyzing the financial performance of companies, from Apple Inc. to my clients. USA annual reports are so much easier to analyze since they don’t follow all these incredibly complicated international financial reporting standards (IFRS). Those rules are going to be the death of the chartered accounting and auditing professions! Apple Inc. has a September year-end and in 2021 it managed to release its audited results by 28 October 2021. Can you South African accountants and auditors imagine that? Anyway, I have been waiting for Pfizer’s 2021 annual report (December year-end) to jump into their numbers. Most of you would have heard of Pfizer. They are those guys who have been manufacturing and selling a whole bunch of drugs since 1849 and famously little gems like Viagra. They also produced and sold 2.2 billion COVID-19 vaccines in 2021.

I downloaded their annual and financial reports for the financial years (FY) ended 31 December 2016 through FY2021. What a treasure trove of information these contained. Pfizer’s total revenue had been stagnating until FY2021. These pharmaceutical giants like doing deals, buying and selling companies and acting as if their main business is mergers & acquisitions. Perhaps Pfizer had been selling more than buying recently? And then came the COVID bonanza.

Pfizer, in collaboration with BioNTech, started jointly developing a vaccine to save us from COVID-19 in January 2020. They obviously knew something the rest of us didn’t since the WHO only declared a global pandemic on 12 March 2020. Pfizer worked at lightening speed and managed to get the Food and Drug Administration’s (FDA’s) approval for the emergency use of their Comirnaty vaccine in December 2020. What a boon that proved to be as their COVID-19 vaccine sales of USD36.8 billion represented 45% of their total revenue in FY2021.

The above chart depicts Pfizer’s stagnating revenue until FY2021. Revenue in FY2020 was USD41.9 billion, in 2021 it increased by 94%. Not too shabby at all. And there is more good news to come since management are forecasting to produce 4 billion COVID-19 vaccines in 2022. They also have a new oral COVID medication called Paxlovid coming onto the market, having received FDA emergency use approval in December 2021. December seems to be a very good month for them. Management are optimistic that Paxlovid will deliver USD22 billion of revenue for the group in FY2022.

I have analyzed Pfizer’s financial performance in some detail – here is the link to my Excel spreadsheet Pfizer analysis (Feb 2022). For those of you who have never inspected these pharmaceutical companies’ financial results, their margins are staggering. Pfizer’s average gross profit margin for the 5 years prior to FY2021 was 78.8%. In layman’s terms that means manufacturing a drug for USD21.2 and then selling it for USD100. These groups claim that they incur significant research & development expenditure to develop, patent and then get products to market and hence, the need for high margins. Um well, they still consistently make enormous profits. Refer below for Pfizer’s earnings before interest, taxation, depreciation and amortization (EBITDA) for the past 6 years.

Eish, that’s an average EBITDA/revenue margin of 41.6% over the past 6 years. Sounds like a good business to be in.

Pfizer has some concentration risks – two of its vaccines (Comirnaty and Prevnar) represented 52% of total revenue in FY2021 and its top 10 products made up a staggering 76% of sales. At any good business school, they would teach you that over-reliance on too few products or customers may be a very bad thing. Apple Inc. has ignored that advice for years as its iPhone sales have consistently represented more that 50% of total revenue.

The stock market’s rating of Pfizer has been interesting. Its share price was USD36.81 at 31 December 2020 and increased to USD59.05 a year later. That’s a tidy 60% return. It has since retreated to USD48.65 as of 4 March 2021.

There is all sorts of speculation about the efficacy and side effects of the Pfizer vaccine, so expect share price volatility for a while. But with significant growth in revenue and profits expected in FY2022, it should be smelling like all roses?

As an aside, Dr. Susan Desmond-Hellman, is a non-executive director of Pfizer. She was the Chief Executive Officer of the Bill & Melinda Gates Foundation from 2014 to 2020, and remains a senior advisor and board member of the Foundation. She joined the Pfizer board in 2020, so coincidental. She has also been a non-executive director of Facebook (2013 to 2019) and Proctor & Gamble (2010 to 2017). So, Dr Desmond-Hellman has experienced some interesting times in corporate America.

A follow up blog post will be out later next week. Be safe and take care. We live in interesting times. All the best from BeechieB.

I recently read “Power play: Elon Musk, Tesla and the bet of the country” written by Tim Higgins. It provided fascinating insights into the history and rise of Tesla. It also contained some rather juicy tidbits about Elon Musk and his management style. Musk has distanced himself from the contents of the aforementioned book and when asked for comments by the author he simply stated “..most, but not all, of what you read in this book is nonsense…”. A strong rebuke indeed.

Musk is by all accounts an interesting character. He grew up in South Africa and matriculated from Pretoria Boys High School in 1988. He apparently spent 5 months at the University of Pretoria before traveling to Canada, his mother’s homeland. He was reportedly a coding genius in his teens and subsequently started a a software company in 1995 which was later sold to Compaq for US$307 million in 1999. Musk was also a key shareholder in PayPal, which was sold to eBay in 2002 for US1.5 billion. It follows that he had plenty of capital which allowed him to pursue opportunities such as SpaceX, Tesla and SolarCity (subsequently acquired by Tesla). Forbes reported on 23 November 2021 that Musk was the world’s richest person with an estimated net worth of US$295 billion. Not bad for a boykie from Pretoria.

I follow Elon on Twitter and he can’t stop himself from tweeting some outrageous stuff at times. In July 2018, he offered to provide a submarine to be used to rescue those Thai teenage soccer players trapped in a cave. Vernon Unsworth, an experienced cave diver, took issue with Musk stating that “…Musk’s submarine had no chance of working, its just a PR stunt…”. This sparked a Twitter war with Musk eventually losing his cool and calling Unsworth a pedo.

Tesla’s share price has increased from US$86 at the start of 2020 to US$1,145 at the end of November 2021, a staggering annualized return of 287% over that period. Tesla manufactured and sold 25,202 electric vehicles in 2015. In the 2020 financial year, it managed to increase deliveries to just under 500,000 vehicles. In the nine months ended 30 September 2021, that number increased to 627,572. Until 2020, Tesla had incurred operating losses as it failed to generate sufficient revenue to cover research & development expenditure and operating costs. That changed dramatically in 2020 when Tesla reported EBITDA (earnings before interest, depreciation, amortization and taxation) of US$6 billion. No wonder the stock market richly rewarded Tesla shareholders with a dramatic rerating of the share.

I have analyzed Tesla’s financial performance for 2015 to 2020 – refer attached excel file   Tesla Financial Analysis (November 2021).  Despite all those operating losses, Tesla managed to survive the cash burn by borrowing more and more and also taking customer deposits for new vehicles ordered. It is a miracle that the group avoided bankruptcy. If lenders had lost confidence in Tesla’s ability to trade out of its predicament, it would have been game over.

Unlike most automotive groups, Tesla sells directly to its customers bypassing third party dealerships. It sells vehicles through its website and its own retail locations. Tesla also has its own vehicle service centers, mobile service technicians and supercharger stations. Tesla vehicles’ software is often remotely and automatically updated, with occasional glitches. In November 2021, Tesla recalled ±12,000 vehicles because of a communication error that may cause a false forward collision warning or unexpected activation of the emergency brakes. Later in the same month, hundreds of Tesla drivers were locked out of their cars after the manufacturer’s mobile app suffered an outage. That would have been rather inconvenient if it happened on a road trip.

Getting back to Musk’s Twitter escapades, he tweeted about taking Tesla private in August 2018.

The US Securities Exchange Commission (SEC) filed a compliant against Musk and Tesla alleging that Musk had lied about securing funding for the buyout of Tesla. It is extraordinary for a CEO of a listed company to divulge his intentions about buying out other shareholders on social media. There are clear rules about listed companies and their executives communicating potential corporate actions since these are price sensitive matters. The buyout price of US$420 was alleged related to the infamous time that many marijuana smokers light up their first joint of the day. Anyway, Musk’s misdemeanour cost Tesla a US$20 million fine and Musk agreed to step down as chairman of the company but remained on as CEO.

This did not stop Musk having a dig at the SEC later in 2018, referring to it as the ‘Shortseller Enrichment Commission’.

Tesla’s market capitalization (total value of the group on the stock exchange) is currently US$1.15 trillion. The Volkswagen group’s market capitalization is currently US$112.5 billion, roughly 10 times smaller. This is despite the fact that the VW automotive division sold 9.2 million vehicles in 2020 compared to Tesla’s ±500,000. The VW automotive division’s profitability is also over 9 times larger than Tesla’s. Clearly, investors are expecting electric powered vehicles to be ubiquitous in the next decade. Eskom better sort out its nonsense before that happens in sunny South Africa.

Stay safe and all the best from BeechieB.