Wednesday, January 1, 2003

Our recommended portfolio for 2003

on our in-depth analysis and market prices at the end of 2002, this is a portfolio that we believe should deliver a total return of 20% per annum over the long term:

Company weighting share price 31/12/2002
Sasol 22% R105
Investec 15% R113
Ceramic Industries 15% R77.20
Aspen 10% R7.70
Bowler Metcalf 8% R2.70
Altech 8% R24
Pick 'n Pay 6% R13.30
WBHP 6% R10.20
MTN 5% R12.25
Softline 5% R0.95

Newsletter Issue 3, January 2003

Editor: Kevin Yeh
Contact details: PO Box 71641, Bryanston, 2021; fax (011) 787 9888;

Issue 3, January 2003

Using this newsletter as a medium, we endeavour to provide you with quality investment advice that you can use to achieve long-term, sustainable equity investment success.

From the editor:

Welcome to 2003! It’s a new year, and with that comes new hope and a new beginning. We wish you and your family a prosperous 2003.

In this issue we have introduced downside risk analysis on our stock recommendation. Each investment opportunity has its good prospects as well as risks. It is important for us to point out the potential risks of an investment, so that you can make an informed decision.

With the war drums beating louder and a possible military action against Iraq, and the North Korean nuclear crisis, the world is full of uncertainties. But it’s time like this that you should keep invested on the stock market. The history has shown that, just before the breakout of a war, the stock market falls to a bottom. After the start of the war, the stock market rises significantly.

In this issue, we have:

Stock recommendation: Sasol - Although the largest South African company with primary listing in South Africa, it is a small fish when compared with the major oil companies such as BP and Royal Dutch (Shell) of this world. We believe that, instead of reaching the maturing stage like many of the largest companies, Sasol, with its various projects worldwide, has excellent long-term growth prospects.

Stock recommendation

Sasol is a company that is worth investing.

First, some facts about this company:

Full name: Sasol Limited
Nature of business: Production (from coal and crude oil) and marketing of liquid fuels, pipeline gas, waxes, detergent range alcohols, solvents, petrochemicals, plastics, fertilisers and mining explosives and the mining and marketing of coal
Classification: Oil & Gas – Oil & Gas – Exploration & Production
Founded: 1950
Listed on JSE: 1979
Market capitalisation: R70 billion as at November 2002
Vision: To be a respected global enterprise, harnessing our talents in applying unique, innovative and competitive technologies to excel in selected markets in the energy and chemicals sectors in Southern Africa and worldwide.

Why do we recommend this company?

ü It has excellent proprietary technologies (gas to liquids, coal to fuel), and it is able to commercialise them.
ü It has a range of exciting longer-term projects in Southern Africa and other parts of the world, which should increase future profits.
ü Executive management manages the businesses conservatively. It does not mindlessly go out and make acquisitions.
ü Strong marketing and a well-known brand
ü Strong cashflows generated by its operations
ü Its listing on the New York Stock Exchange (NYSE) in the first half of this year will raise its profile among foreign investors.

Readers should be aware of the following downside risks:

- Gas, oil and chemicals are commodities, and their prices fluctuate subject to supply and demand. Lower prices will result in lower revenue, leading to lower profits.
- The prices of these commodities are set in terms of US Dollars. Should the Rand strengthen significantly against the Dollar, the Rand prices of these commodities will be lower, leading to reduced profits in the shorter term.

Based on our valuation, the fair value of this company is R94.1 billion, or R141.30 per share. If you can buy Sasol’s shares at or below this price, you should be able to achieve a total return of 20% per annum over a period of three to five years. The total return consists of both dividend income and capital gains.

The current market value of Sasol is about R69.9 billion, or R105.00 per share. This represents a 26% discount to our fair value. We believe that, at the current share price, this company offers exceptional investment value.

How much should you invest in Sasol?

If you have a relatively small portfolio (R50,000 to R100,000), you may want to invest R10,000 to R12,000 in Sasol. If you have a bigger portfolio, you may want to invest between 12% and 15% of your portfolio in Sasol.

Table: Sasol compared with some of the major oil companies
Market Capitalisation (USD billion)
Royal Dutch (Shell)

We can see from this table that Sasol is a rather niche player on the world stage. We think that Sasol will be able to grow its global energy market share by leveraging off its unique world-class technologies. It has greater growth potential than its much bigger competitors.

Recent news

3 December 2002: Sasol expects April New York listing

Sasol, which is currently listed on the Nasdaq, is expected to list on the New York Stock Exchange in Apr 2003. CE Pieter Cox expects the listing to raise the profile of Sasol.

29 November 2002: Sasol appoints financiers for Qatar gas plant

Sasol and Qatar General Petroleum have appointed fifteen banks to finance their USD700m construction a 30 000 bbl/day Slurry Phase Distillate process facility in Qatar. The plant will be built at Ras Laffan in north-east Qatar, producing high quality diesel and naphtha.

25 November 2002: Sasol receives prestigious international award

Sasol has been awarded the International Coal Company of the Year Award for 2002 for its ability to uphold business and human growth prosperity. This prestigious award was handed over at the 2002 Platts/Business Week Global Energy Awards in New York.

6 November 2002: Sasol to build new plastics plant

Sasol has announced that it intends to build a R2bn plastics plant in Sasolburg. The plant will produce 220 000 tons of low-density polythylene per year. The new works will be supplied with gas from Mozambique via the company's USD1.2bn pipeline project.

10 September 2002: Sasol plans a new joint venture in Qatar

CE Pieter Cox announced that Sasol was considering a major new gas-to-liquids joint venture in Qatar. If the new Qatar investment went ahead it would be in addition to Sasol's existing R8bn joint venture with Qatar Petroleum, with a plant being built at Ras Laffan in Qatar and is expected to start up in 2005. The plant being built in Qatar would produce 34 000 barrels a day, but if the additional plant was built this would add a further 100 000 barrels a day.

14 August 2002: Sasol to enjoy benefits of Malaysian joint venture

Sasol is likely to enjoy the benefits of a R1.2bn Malaysian joint venture investment that was first launched by the companyys FD, Trevor Munday. Sasol has a 40% stake in the Petlin polyethylene plant and a 12% stake in the neighbouring Optimal Olefin facility, which produces ethylene. At the time the Malaysian plants were commissioned at the beginning of 2002, Munday said that there was no trouble in finding a market for the output. Malaysia is Sasol's first substantial foothold in Asia, although the SA multinational is looking at the possibility of developing a gas to liquid plant in nearby Australia.

Buying opportunities alert
Ceramic Industries: Since our recommendation in November 2002, this company has been trading at between R75 and R80 per share. It still presents an excellent buying opportunity. The interim results will be coming out in March, and we expect another good set of results from this company.

Pick ‘n Pay: Since our recommendation in December 2002, the share price has fallen back sufficiently to be slightly below our fair value of R13.40. It now presents a buying opportunity.

Which stockbroker is the best for you – Part 1
A word or two on stockbrokers

A stockbroker fulfills an important role in your equity investment. The basic functions of a stockbroker are:

l Order execution: The stock broking firm is set up to execute your order for the best available price in the appropriate market.
l Clearing: Every order execution has a long paperwork trail, most of which is necessary for legal reasons.
l Administration: This includes the safe custody of your scrip and all corporate actions such as name changes, unbundlings, dividends or share allocations.

There are two types of broking firms;

1. Full-service firms: A full-service firm provides its clients with considerable assistance, generally in the form of the following five types of service:

l Investment research
l Asset management
l Investment advice
l Order execution
l Clearing

2. Discount firms: Discount brokerage firms are exactly that – all they do is brokerage. They do not provide you with investment research and advice. They strive to provide broking services at the lowest prices. Some discount brokerage firms dress up as full-service firms by offering investment research and asset management, but in essence they are still discount firms as their investment research and advice is not quite credible.

Our investigations

We have compared no less than 9 stockbrokers. In our analysis we have considered many aspects of each stockbroker, and we have come up with our own recommendations as to which stockbroker is the best for you. This is part 1 of our analysis:

Stockbrokers selected for our investigations (in alphabetical order):

l Appleton
l Barnard Jacobs Mellet (BJM)
l BOE Personal Stockbrokers (BOE)
l Icanonline
l Investec
l SA Investor
l Tradek

Information on stockbrokers analysed in this issue:
Telephone number

011 836 8141

0860 001 652

0800 222 040

0860 33 11 44

011 286 4700
0861 00 30 20

Easy to apply for an account
User-friendly website
Handles admin
Financial backing
National telephone line
Real-time online access
Very strong
Not the best
Very strong
Not best
Very strong

Brokerage scale (excl. VAT)
Annual admin fee (excl. VAT)
0.7% for a trade from R0 to R100 0000.5% for a trade from R100 000 to R500 0000.4% for a trade from R500 000 to R1 000 0000.3% for a trade from R1 000 000 and higherBut with a R90 minimum fee
1.25% for a trade from R0 to R50 0001% for a trade from R50 000 to R100 0000.75% for a trade from R100 000 to R500 000
0.5% for a trade from R500 000 to R1 000 0000.35% for a trade from R1 000 000 and higherwith a R150 minimum fee, plus CSDP recovery fee of R26.32
0.75% for a trade from R0 to R250 000[3]0.5% for a trade from R250 000 to R1 000 0000.35% for a trade from R1 000 000 and higher
with a R120 minimum fee
R1 to R5 000
R5 001 to R10 000
R10 001 to R20 000
R20 001 to R30 000
R30 001 to R40 000
R40 001 to R50 000
Above R50 000
1.6% for a trade from R0 to R20 0001.25% for a trade from R20 000 to R50 0001% for a trade from R50 000 to R100 000
0.75% for a trade from R100 000 to R250 0000.65% for a trade from R250 000 and higherwith a R150 minimum fee, plus R15 safe custody fee

Note: In addition to the brokerage fee, the following regulatory charges are payable: marketable securities tax (0.25% of the value of shares bought), an insider trading levy (0.0007% of value of shares bought or sold) and levies for STRATE, the JSE’s new settlement system (0,005% of the value of the shares bought and sold, with a minimum levy of R10 and a maximum of R50 per transaction.)


What we like:

ü Low brokerage and administration fees
ü It provides very useful investment tools
ü Focus on private investors

What we don’t like:

û More geared towards traders rather than long-term investors

Best for:

l If you want good service, good online investment functionalities and discount brokerage.

Readers should be aware of the imminent takeover of Appleton by PSG, one of its largest shareholders.


What we like:

ü Largest independent brokerage in South Africa
ü Good investment research capacity
ü Offers managed equity portfolios in the US market
ü No administration fee

What we don’t like:

û Brokerage scale on the higher side

Best for:

l If you want quality service
l If you only do a few sufficiently large trades (1 to 3 trades of R20,000 to R50,000) a year

BOE Personal Stockbrokers

After the takeover of the BOE by Nedcor, it’s now part of the Nedcor Group.

What we like:

ü Strong financial backing of Nedcor
ü Low brokerage
ü It offers seminars to investors

What we don’t like:

û Mixed investment research track record

Best for:

l If you want discount brokerage by trading on the Internet
l If you are an existing customer of BOE / Nedcor


This is a joint venture between M-Web and BOE (now Nedcor).

What we like:

ü One of the lowest brokerage fees
ü Able to buy Kruger Rands at low broking fees

What we don’t like:

û It’s not catered for someone who just wants to have equity investments, and not banking, insurance and shopping.
û High administration fee, although it includes a subscription to Finance Week and a monthly R15 Icanonline voucher.

Best for:

l If you do a lot of trades
l If you are an existing Icanonline, BOE or Nedcor customer
l If you like the additional features of an Icanonline account, e.g. banking, online shopping and insurance.
l If you don’t mind the higher administration fees

Investec Securities

What we like:

ü Personal investment advice
ü Participation in new share issues, which could offer excellent investment returns
ü Structured and rigorous investment process
ü Quality investment research capacity

What we don’t like:

û High hurdle for someone to apply for a trading account – really catered for high net worth individuals
û One of the highest brokerages charged

Best for:

l If you have R250,000 or more to invest, and you don’t mind paying the higher brokerages for more personal, professional services.

In the next issue, we will analyse the remaining four selected stockbrokers.

Our recommended portfolio for 2003
Based on our in-depth analysis and market prices at the end of 2002, this is a portfolio that we believe should deliver a total return of 20% per annum over the long term:

Reason for investing
No. of shares
Well run, relatively low PE, technologies, a range of promising long-term projects, NYSE listing
Investec Ltd
Well run, low PE, operations geographically diversified
Ceramic Industries
High growth company, dominant tile and sanitaryware manufacturer in SA; establishing presence in Italy and Australia
Successfully reduces debt, developed generic AIDS drugs for SA; grows into UK and Australia
Bowler Metcalf
High ROE, high operating profit margin, consistent revenue and profit growth
Focused on telecoms technologies and services; brand names such as Autopage, Netstar, Mobile Direct
Pick 'n Pay
Excellent brand, very well run, Australian operations expected to break even soon; fair value
Well run, low PE, consistent revenue and profit growth, but price at a premium to fair value
Strong brand, future growth in telecoms sector
Very low PE, R&D should boost future sales
Total value as at 31/12/2002

At the beginning of next year, we will assess how this portfolio has performed relative to the general stock market.

Quotable quote

What to look for in a business: Business Tenets
1. Is the business simple and understandable?
2. Does the business have a consistent operating history?
3. Does the business have favourable long-term prospects?
- From The Warrant Buffet Way by RG Hagstrom

In the next issue:
l The second and last part of “Which stockbroker is the best for you?”

l At the beginning of this year we have put together a portfolio that consists of the following shares:

Standard Bank
Pick ‘n Pay
Alexander Forbes

We will compare the performance of this portfolio against that of the general stock market for the year 2002. We will also comment briefly on the prospects of individual companies.

[1] A minimum of R10,000 is required
[2] A minimum of R250,000 is required
[3] Internet trading rates
[4] Although this appears rather high, it includes a subscription to the Finance Week or Finansies & Tegniek magazine.