Category: Uncategorized

Unilever is a British-Dutch consumer goods corporation. Its three divisions are beauty and personal care, food and refreshment, and home care. Around 2.5 billion people use Unilever products each day in about 190 countries. The company has over 400 brands and Unilever products can be found in nearly seven out of ten households on the planet. The company operates 310 factories in over 70 countries. Unilever’s most important brand is arguably Dove soap, the most popular soap brand in the United States and United Kingdom. Some other brands include Lux, Lifebuoy, Axe, Vaseline, Sunlight, Domestos, Omo, Surf, Knorr, Lipton, Magnum, Ben & Jerry’s, Joko, Glen, Marmite and Robertson Spices. Unilever also invented fish fingers, built a village called Port Sunlight in Liverpool and aired the first-ever television advertisement in the United Kingdom.

The global soap market is projected to grow by 11 percent per annum over the next five years on account of increasing personal disposable income, rapid urbanization, expanding populations and increasing hygiene awareness due to COVID-19 disease. As the largest producer of soap in the world, Unilever stands to benefit from this trend. In addition, sixty percent of Unilever’s revenue comes from its emerging markets business. It has a higher exposure to these markets compared to most other consumer staple companies. Countries such as India and China have a growing middle-income population; a demographic likely to drive Unilever’s sales growth.

The spread of the pandemic has led to significant changes in consumer demand patterns. More time spent at home and the critical importance of hygiene led Unilever to report resilient second quarter results that beat expectations. Cleaning and hygiene products saw the greatest double-digit increases in growth, while the food and personal care segments experienced slight declines. The sale of liquid hand wash grew 155 percent and sanitiser sales grew by more than twenty thousand percent. Parts of the business that have been negatively affected by the crisis, like away-from-home purchases and certain beauty products, should recover as the crisis fades and lockdown regulations ease. Accelerated growth in the higher-margin personal care and home care segments should enable Unilever to improve its profit margin over the coming years. It is also encouraging that Unilever is actively addressing operational issues that led to market share loss during 2019.

Unilever trades at a reasonable 20 times earnings, with a dividend yield of 3.2 percent. Its current valuation discount to its peers is at its widest in a decade. Its recent market share decline is likely temporary rather than permanent and insufficient credit is attributed to Unilever’s defensive profile and dominant presence in emerging markets. It has a portfolio of leading brands, relentless focus on cost-cutting and a solid balance sheet. Robust cash flows enable ongoing investments in its existing brands and in innovation, spurring on long-term growth. Unilever is a fine addition for investors that want to hedge against market cyclicality.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.

Tencent is the largest video game company in the world and operates some of the largest online social platforms in China. Prosus owns 31 percent of Tencent. Valued at $660 billion (R11.4 trillion), Tencent is the second-largest Chinese company after Alibaba. The company derives its revenue from online and mobile games, internet services, social network and music platforms, online commerce, and payment services.  Its social media app WeChat has over 1.2 billion users; close to 86 percent of China’s population. Tencent has also become one of the largest venture capital and investment firms globally. Management has a remarkable ability to identify and partner with entrepreneurs outside of its own circle of competence. To date, Tencent has invested in more than 800 companies, 160 of which are valued at more than $1 billion. Of the 800, 70 are listed on stock exchanges. Tencent owns 5 percent of Tesla and 9 percent of Spotify, for example.

Tencent cruised through the pandemic as more people stayed home and played games during lockdowns. It reported a healthy set of quarterly results, underpinned by smartphone gaming revenues growing 62 percent over the past year. All of its core business units were structurally resistant to the health crisis and generated double-digit revenue growth. Total revenue rose 26 percent on an annual basis. Early in August Tencent’s share price dipped after the Trump administration issued an executive order banning WeChat in the United States from 20 September 2020. Trump alleges that WeChat poses a threat to United States national security because the Chinese Communist Party may gain access to the vast amounts of personal information gathered by the app. The order prohibits any transaction that is related to WeChat by any person subject to United States jurisdiction. The order has caused interpretative uncertainty, but is primarily allegorical as American users of WeChat represent less than two percent of the total number of users. So, from a revenue point of view the impact is immaterial for Tencent. Although the administration could potentially increase its efforts to restrict Tencent and WeChat, this would be detrimental to American companies. For example, iPhone sales in China account for 16 percent of Apple’s revenue. If Apple is forced to drop WeChat from its Chinese App Store, this would effectively halt iPhone sales in China. Senior administration officials have, however, apparently been reaching out to some US companies, seeking to reassure them that they can still do business with Tencent’s WeChat app.

Tencent benefits from a dominant position in the Chinese internet and social media industries. It continues to prudently manage the growth and monetisation of its enormous user base. Tencent generates stable cash flows and is investing heavily in its gaming business, as well as payments and cloud computing. It maintains the relevance of its ecosystem through innovative upgrades and features. Tencent is a high-quality company with various growth drivers and multiple competitive advantages. Tencent is an attractive long-term investment and its share price has increased nearly 60 percent over the past year. It is not a bargain at nearly 40 times forward earnings, but its sustainable earnings growth arguably justifies the premium.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria. Tencent shares are held on behalf of clients.

Paris-based L’Oréal is the world’s most valuable cosmetics company. It manufactures 7 billion beauty products annually. At a market value of R3.2 trillion it is larger than Estée Lauder, Colgate-Palmolive and Beiersdorf combined. The company has over 497 registered patents and 36 global brands with thousands of products in fields focusing on hair colour and care, make-up, skincare, sun protection, and perfume. Brands include Garnier, Maybelline, Kérastase, The Body Shop and beauty products of Yves Saint Laurent, Lancôme and Giorgio Armani. Nestlé owns 23 percent of L’Oréal.

Since its inception 111 years ago, research and development have played a crucial rule in L’Oréal’s success. It has had many industry firsts, including soap-free shampoo and foam bath. The company has 21 research and development centres and 42 manufacturing plants across the globe. L’Oréal has been against testing products on animals and has spent at least R18 billion on research to find an alternative. They developed Episkin, which is reconstructed skin that acts as an alternative for testing on animals. L’Oréal does not test products or ingredients on animals. However, it sells cosmetics in China that are required by Chinese law to be tested on animals.

L’Oréal reported resilient bi-annual results last week. The consumption of beauty products over the period was strongly impacted by the closure of millions of points of sale as a result of the COVID-19 pandemic. This caused a crisis of supply, rather than demand, since consumers were temporarily unable to purchase products. As part of its solidarity programme, L’Oréal used its facilities to make and donate over 15 million units of hand sanitiser gel and moisturising cream for medical officials in need. Although L’Oréal’s revenue in the first half declined 12 percent, its sales in China increased by 17.5 percent and online sales grew 65 percent – a further sign that the pandemic is accelerating a digital shift among retailers worldwide. Online sales now comprise a quarter of its total revenue. CEO Jean-Paul Agon announced that L’Oréal will embark on an aggressive plan of new product launches and advertising campaigns to remain competitive in a market that has been reshaped by the pandemic.

The global cosmetics market has grown steadily at approximately 4 percent per annum. It is a market driven by the development of social media, increasing urbanisation and rising growth in online beauty spending due to the expected growth of the high-income class over the next decade. L’Oréal’s strong and diversified brand portfolio enables it to lead the industry in terms of margins and organic growth. It is also the market leader in research and development capabilities in the cosmetics industry. Increasing demand for cosmetic products in China offers significant opportunity, but also intensifies competition. The country’s animal testing policies remain a contentious issue. L’Oréal shares offer investors a defensive profile, but are currently trading at record highs and at a premium to peers and itself.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.

For over 4,000 years silver has been regarded as a form of money and store of value.

It is widely used in the production of coins, jewellery, silverware, chemical reactors, catalytic converters, photographic film, computers, solar panels and electrical conductors. It exhibits the highest electrical and thermal conductivity of any metal. Silver is more cyclical than gold due to its primarily industrial applications. Although silver is much cheaper than gold, the prices of the two metals often move in tandem. Gold and silver have historically been hedges against uncertainty, holding value well in economically challenging times. Given their popularity as safe haven assets, investor sentiment plays a substantial role in their price movements.

One of the most impressive rallies of 2020 has been the increase in the price of gold and silver. Gold is trading at price levels not seen since late 2011 and silver is trading around five-year highs. The recent silver rally follows a period in which gold significantly outperformed silver. The gold-to-silver ratio, which shows how much silver it takes to buy gold, best illustrates this. The ratio’s 30-year average is about 65, but spiked at 120 in April; the highest on record. This suggests that silver was extremely undervalued relative to gold, so the silver rally may not be entirely unexpected. The ratio is currently 80.

Anaemic global bond yields should support investment demand for gold and silver into the foreseeable future. Amazingly, $17 trillion in global debt bear negative yields. In addition, many positive yields are so low that it does not outpace inflation. Investors are increasingly turning to silver and gold as inflation hedges as opposed to bonds and cash. Bond yields will likely remain low, since the US Federal Reserve anticipates that it will leave its interest rate at rock-bottom until at least 2022. Simultaneously, many countries are drastically expanding money supply to promote inflation, which generally translates to higher precious metal prices. The COVID-19 pandemic has also led to various mine closures throughout the world, reducing the supply of metals, including silver. This is a positive shorter-term catalyst for silver prices.

The recent shift in the silver supply-demand curve has led to it becoming a popular asset choice for cautious investors. Its ability to hedge against inflation and currency swings, as well as its low historical correlation with shares and bonds offer investors portfolio diversification benefits. Local investors can consider the NewWave Silver exchange-traded note (ETN). It provides investors with cost-effective exposure to the spot price of silver in a listed instrument trading in rand. Alternatively, investors can invest indirectly in silver by buying shares in listed silver mining companies. This allows for possible dividends, the added advantage of experienced management teams and leveraged balance sheets. In this regard, the Global X Silver Miners exchange-traded fund (ETF) provides such exposure for offshore portfolios.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria. NewWave Silver ETN shares and Global X Silver Miners ETF shares are held on behalf of clients.

https://www.iol.co.za/business-report/opinion/opinion-silver-trades-at-five-year-highs-78a8ad44-3b10-4810-82ac-4cc501f17134