Where's the cash? (#420)

Simon Shares

• How to fix the JSE, some great ideas by Keith McLachlan.
• SARB buys R39.4billion of local government bonds in the secondary market in September.
• French Canal+ takes 6.5% stake in Multichoice (JSE code: MCG).
• Shoprite* (JSE code: SHP) says their loyalty program is a huge part of them gaining R4billion in market share? Launched a year ago it has over 5million members.
• Pick n Pay (JSE code: PIK) date saw "core retail sales - including food, groceries and general merchandise, but excluding liquor, clothing and tobacco - grew 8.7% year-on-year (6.4% like-for-like)."
• Sasol (JSE code: SOL) sells some LCCP for US$2billion, reduces debt burden to $8billion.
• Zeder (JSE code: ZED) keeps dividend and says conditions are improving. But no news on the new strategy.
• AdaptIT (JSE code: ADI) results after I recorded last Wednesday. The stock was at 120c and HEPS expected at +65c. The stock now 250c. The market gets it wrong sometimes, especially in the small-cap space.
• Fed chair Powell commenting Wednesday evening that more needs to be done and that the risk is not in doing too much stimulus, it is in doing too little. Trump has said no stimulus until after the election. The risk here is he loses and couldn't be bothered to do anything, so then we wait till late January to start talks again.

* I hold ungeared positions.

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Where's the cash?

Cash is always king. Not only is it why we invest, to make cash. But cash is easy to see in the form of dividends and very hard to fake (albeit we have seen businesses take debt to pay a dividend, and if you do see this - run).

I've spoken before about the flood of rights issues hitting the market and we've seen about R50billion so far this year. But now we're hitting the crunch.

Early in the lockdown I warned that investors should have a good hard look at their companies asking if they'd need to raise capital and if the announced capital raise would be enough.

Key for me is that tough times are often tougher in year two. I remember this very clearly from the 2008/9 crisis albeit offset a bit by the world cup in 2010. But for example, Standard Bank retrenched staff in late 2010, some 18 months after markets had bottomed.

The other key point is that this pandemic crisis is far from over. Not only risks of seconds waves (France second wave is way worse than the first and Paris is shutting bars again). Delayed stimulus in the US will hurt the worlds largest economy which is very much experiencing a K shaped recovery.

So take a hard look at a stock cash flow, sure dividends are down or even cancelled. But is there positive cash flow? Is it likely to be increasing or decreasing? How will a tough 2021 impact the cash flows?

In short, will the company survive without a rights issue? Is yes, then it's worth having a look at but they can still mostly expect another 1-2 years of tough trading conditions.

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