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Wednesday, 31 October 2012

Determining the value of a company

The first rule is...don't lose money.

Without profits a company cannot survive. Even the most dazzling accounting tricks can only keep a profitless company afloat for so long, as Enron and CS Holdings have proved, which is why earnings per share is such an important number.

Simply put, earnings per share are the amount of bottom-line taxed profit a company makes, divided by the number of shares the company has in issue.

In other words if a company makes a net profit of R1 000 000 in a year and has 10 000 shares in issue, the earnings per share number would be R1 000 000 divided by 10 000 which is R100 per share.

However, as always, there are complications and there is more than one version of the number.

In South Africa, most companies report at least two versions of earnings per share.

Traditional earnings per share, net profit divided by shares in issue, is reported but is overshadowed by its cousin headline earnings per share, found by taking headline earnings and divided by shares in issue.

Headline earnings are those earnings the company believes to be sustainable in the long term and is found by taking net profit and leaving out income flows or costs that will not happen again, or as companies put, stripping out the non-recurring items.

For example, Massmart, the company that owns the Makro chain of stores, was hit by fire. The company stripped out the cost incurred by the loss of stock and buildings in 2004 and then in the 2005 financial after the insurance claim was paid out after the fires was not included its headline earnings figure for that year. One wag suggested that fires are so regular at Massmart that they should not be seen as non-recurring.

There are also two other factors that often affect the eps figure.

The first of these is the number of shares in issue. This can vary from year to year as the company issues more shares in acquisitions or in delivering on share options given to executives.

Often share issues take place late in the financial year. In this case, the number of shares in issue for the eps calculation is "weighted" to reflect that the shares were not in issue all year.

As a conservative measure, some companies give a fully diluted earnings per share figure, in which no such weighting is made.

The other factor that affects South African companies is black economic empowerment.

Because BEE deals are often based on share issues on specially favourable terms, the fact has to be recognised. The "discount" at which shares are issued has to be expensed.

Other factors that can raise and lower published earnings figures are the writing down of goodwill, and the impairment of assets. The headline earnings figure aims to show the sustainable earnings in the given year and normally excludes such items.

It is the headline earnings figure that is used to calculate the price earnings multiple on the share page.

However, like all numbers, eps is meaningless in isolation and any company's earnings figure should be viewed in relation to comparable numbers both from previous years and the eps numbers from companies in its peer group.

Earnings as such have been criticised for forcing companies to expense items such as research and development in the year in which they occur - when the benefits accrue over many years. That is why most analysts do their own calculations, taking out or including items that they feel best reflect the picture.

Tuesday, 30 October 2012

Half of South Africans worried about retirement

Long-term savings is still a challenge for the majority of South Africans. According to the FinScope South Africa survey, half (48%) of South African adults are worried that they won’t have enough money for old age or retirement and 83% do not have any formal retirement product. Only 25% of adults claim to have enough money to save after covering all their spending needs.

The survey was released on Tuesday and tracks changes in terms of how South Africans aged 16 and older source their income and manage their financial lives.
One of the other findings was that strides to reach the unbanked population has had an impact with the banked population in the country in 2012 1.3m people higher than in the previous year. There are now altogether 22.5m banked adults in the country.
This amounts to about 67% of the adult population using StatsSA 2011 mid-year population estimates. This is 10m more adults in the banking system than there were in 2004.
Although a focus by the big transactional banks in the country contributed, the key banking development in 2012 was the roll-out of the new South African Social Security Agency (SASSA) MasterCard.
“Three in four (75%) social grant holders or 7.4m are now banked – up from 60% or 5m in 2011,” the FinMark Trust said in a press release accompanying the study.
Even though the big-four banks in South Africa are all, to some extent, trying to migrate their clients to cheaper digital banking channels, the study still shows that nine out of ten banked adults still claim to withdraw money from an ATM at least once a month, while only 25% claims to get their cash at a store till using their bank card.
Only 13% claim to use cellphone banking, which is the one digital avenue that reaches the most South Africans across all income categories.
“The big challenge is to get people, including banked people, to meaningfully engage financially by transacting frequently rather than withdrawing all their money at once. A third (34%) of the banked, or 7.3 million people, agree with the statement ‘as soon as money is deposited into your account, you take all of it out’,” the FinMark Trust said.
There are 9.8 million people in South Africa who have basic transactional bank accounts and no other kind of formal financial product.
Other highlights:
  • 28%, or 9.5m adults, claim to be a member of a burial society. This is up from 6m adults in 2004.
  • The number of adults who claim to have formal funeral cover in their own name has more than doubled since 2004, at 8.7m (26% of adults) in 2012 versus 4.2m in 2004.
  • One in ten (10%) claim to have cover with a funeral parlour, 8% with a bank and 7% with an insurance company.
  • Growth since 2004 in the penetration of pension funds (9% to 12%), provident funds (6% to 10%) and retirement annuities (6% to 9%).
  • Membership of informal savings or investment groups and stokvels has also grown from 7% in 2004 to 11% in 2012.
  • Since 2004, personal life insurance has increased from 11% to 13%.
  • In both 2004 and 2012, the percentage of adults in South Africa with disability insurance has been 4%.
  • Car or vehicle insurance is also stable at 7% as is medical aid at 10%.
Although South Africans are quite indebted, they seem averse to borrow with 76% saying that they don’t like borrowing money. Altogether 43% said they would be embarrassed to borrow. The study still shows that the main reason cited is to buy food, which has been highlighted as an area of concern.

In 2012, 26% claim to borrow from banks or formal places, or have some form of credit or store card or facility. Whereas at 18%, the percentage with personal store card ownership is the same as in 2004, credit card ownership has increased from 5% to 8% over this period. In 2012, 15% claim to borrow from informal sources such as stokvels, burial societies and mashonisas and 12% claim to borrow from family or friends. 

Thursday, 25 October 2012

Tips on painless ways to save.

Commit to future saving 

Looking at your monthly budget, you may think that there is really no room for savings at present. Don’t let that stop you from achieving your goal – commit to future savings now. Perhaps once you have paid off a short-term debt, such as a clothing account, you could channel some, if not the entire amount, of the monthly instalment into a savings plan.
Alternatively aim to cut down your expenses over the next three months until you have enough to start funding your savings. This could mean reducing your cell phone account or cutting down on take out, but before you know it you will have your savings plan on track.
Another way to achieve this is to make sure that your savings policies have automatic annual increases attached to them. This will mean that each year on the policy anniversary, the premium will increase by a set percentage. Try to aim for a percentage that is slightly higher than inflation to make sure that your real rate of saving is increasing; a round 10% is always a good bet. You won’t even notice the small increase, but it can make a big difference in the future value of your savings.

Pay yourself first 

Make a commitment to pay yourself first every month. This means that the first “bill” you pay every month is your savings. Leaving it to last, to see what is left over, after the other bills have been paid, is a recipe for disaster.
When the time comes for your annual increase, make sure that you consider your savings when you plan how to spend it. This is a great time to meet with your financial adviser and review your financial needs. Putting aside a portion of your increase into your savings is money you never had in the past, and you won’t miss it.
Consider taking even a small percentage of your annual bonus each year and use it to “top-up” your retirement savings. Think of it as a step towards funding your “bonus” once retired.

Save for a specific goal

Identify a specific goal and set aside separate savings to meet this goal. Not only will this keep you focused on maintaining your savings, but it will also motivate you as you watch your savings grow. Saving for short to medium term goals can be done very simply in a savings account or via the money market. However when your goal has a time horizon of more than 5 years, make sure that you discuss options such as endowment policies, unit trusts and other savings options with your financial adviser. These savings instruments can offer good tax savings as well as take into account your risk appetite.

Let the taxman fund your savings

Do not under estimate the amount you will need to save for retirement. Too many people put off saving for retirement believing the myth that they can start saving closer to retirement age or that the accumulated funds in their pension or provident fund will be sufficient.
One of the many advantages of a retirement annuity is that your contribution is tax deductible up to certain prescribed limits. This means that SARS is actually helping you fund your retirement savings. Coupled with the fact that there is no tax payable by the fund in which your retirement annuity is invested in, which provides you with better returns on your money, and the fact that the first R315 000 on retirement is tax free, makes a retirement annuity a very tax efficient savings tool.

Saving is addictive

Watching your money grow is an exciting thing. Once you start to see the benefits of compound interest or growth on growth, you will be a saver for life.

Tuesday, 23 October 2012

Why is it difficult for SA consumers to save?

In the latest Quarterly Bulletin published by the South African Reserve Bank, the national saving ratio as percentage of gross domestic product declined from 15,2%in Q1 2012 to 14,1% in Q2. 
While household saving did not actually decline (it remained at 1.7%), household debt as percentage of household disposable income increased from 75,6% to 76,3% over the same period.  This means that the rate of increase in consumer debt has surpassed the rate of increase in household disposable income. 

Household income affected by weak economy

The decline in household disposable income is in line with the weakness of the economy and high unemployment levels.  With the August inflation rate at just 5%, nominal1 wage increases are much lower than they were in 2011. 

Debt driven by unsecured lending

The increase in household debt can partly be explained by a surge in unsecured lending over the past few months.  While interest rates are at historically low levels, making borrowing seem attractive, there remains the danger that most consumers will be unable to service their debt when the interest rate cycle turns and rates rise. 

High debt repayment leaves less for consumption

Even when interest rates are low the debt repayment burden remains challenging for highly indebted consumers.  Debt repayment almost becomes a non-discretionary item that has to be paid before spending on other retail items.  Therein lies the problem; the consumer demand which has to remain strong in order to support economic growth; is being undercut by debt repayment. 
Consumer related data that came out in the past few weeks confirms that consumers are under increasing pressure when it relates to their spending ability.  Growth on household consumption expenditure by the household sector slowed from 3,1% (Q1 2012) to 2,9% (Q2 2012). For 2011 as a whole the growth rate was 5%, so clearly the trend is downward.  Retail trade sales for July also slowed sharply compared to the June figures. 

Why is it difficult for SA consumers to save?

This is complex question but these are some of the economic reasons:
  • The official level of unemployment is high; if we look at the numbers of discouraged workers; this increases even further.  Added to that, the rate at which the economy absorbs new entrants in the formal sector of the economy is low.  With a large number of economically active people without jobs, anecdotal evidence suggests that it falls to a few individuals who are employed to support the extended family. This leaves very little available for saving.  There is also no way of saving when one is unemployed; in South Africa too many potential savers do not have jobs.
  • Inflation is comfortably within the target range but some items within the basket still take a lot of consumers’ discretionary income.  A lot has been said in the past about administered prices but the point on petrol prices bears repeating because it has both direct and indirect impact on income.  The cumulative impact of the increase in petrol prices and other necessities means that the bulk of most people’s income is spent on consumption with little left to save.
  • Consumer debt is high and a substantial part of income is spent on servicing debt. It is important to pay off expensive short-term debt like store cards and credit card debt. Paying off short-term debt while interest rates are at historic lows is the best start towards ‘saving’.

Monday, 22 October 2012

Invest or increased mortgage payment? Which would have the greater impact on your balance sheet?

Improving your financial health requires you to pay attention to paying off your liabilities (debt) and building up your assets (investment). Paying off short-term debt could be the best investment you ever make, but paying off longer-term debt at the expense of long-term savings could also be detrimental to your financial plan.
Use short-term savings to pay off short-term debt (See table):
By using the money market savings to pay off the debt, you would effectively have a 20% return on your money: you would have saved 25% (paid to the bank) but lost out on the 5% interest on your savings.
20% is the best return you could hope to have on a short-term investment. You can then use the money you would have paid on your monthly credit card payments to top up your money market account. The most important rule however is to not take on further debt!
OPTION 1  Keep money market savings and credit card debt separate
R20 000: Money Market AccountR15 000: Credit CardNet positive financial position of R2250
5% (R1000) a year interest earned (R21000 year-end balance)25% (R3750) a year interest owed (R18 750 year-end balance)
OPTION 2 Use money market savings to pay off credit card debt
R5 000: R20k less R15k to pay credit cardR0: R15k paid off with money market accountNet positive financial position of R5250
5% (R250) a year interest earned25% (R0) a year interest owed
Increase your monthly short-term debt payments
By using the additional R600 to pay off the loan within just one year, you would have saved R2 000 in interest. The following year you would be able to use both your R600 savings and R800 from the loan repayment to start a savings plan of R1 400. Again it is important you don’t use this additional money to take on a further loan. Your aim is to improve your balance sheet.
OPTION 1: Save additional income and make minimum monthly payment on debt
R600 a month: Bank AccountR800 a month: to repay R15 000 Personal Loan at 25% over 24 monthsDebt paid and R14 400 in savings
OPTION 2: Use additional income to pay off debt in one year and then increase monthly savings
First year: R0 a month: Bank Account First year: R1400 a month: R600 savings plus R800 debt repaymentDebt paid and R16 800 in savings
Second year: R1400 a monthSecond year: R0
Cut four years off your bond
By increasing your bond repayments by 10%, you will pay off your home loan four years earlier. On a R1 million mortgage you would save yourself around R195 604 in interest. And when interest rates go up, you will already be paying the higher new minimum repayment amount so you won’t have to change your budget to accommodate the increase.
Don’t put all your money into your home loan
Your house is not a retirement asset but a life asset that needs to be paid off over time. If you save all your money into your home loan you may be debt free but you will have no retirement savings to meet your daily expenses.
OPTION 1: Pay extra into mortgage with no savings
R1000 additional payment into your mortgageMortgage fully paid, no other assets
OPTION 2: Invest money for long-term growth
R1000 a month investment that delivers inflation plus 5%R525 000: investment value
R380 000: still to pay on mortgage
R145 000: net positive
A long-term investment may have a greater impact on your balance sheet so find a balance between paying off your home and investing in assets other than your property. Your choice will depend on interest rates, investment markets and tax.

Friday, 19 October 2012

Company Culture

We at Procliviti recently started a project with a client incorporating several digital components: Website, Social Media, WebPR, etc. This company’s first interaction with us was a few months ago when we ran weekly sessions called Social Media 101. They were 1 (sometimes 2) hour sessions, and they were free. The aim was to educate people about the value of Social Media. The idea was founded upon a teaching from Chet Holmeswhich he called educational-based marketing. It works! It’s a Win-Win. Some of the companies we trained did not become clients, but we have built a good relationship and reputation with them, and that’s powerful. Other companies of course became clients and that’s even more wonderful.
As we were developing the strategy for this new client, we discovered their focus. It was not to win more clients. They were happy with the clients they had, and they actually wished for less clients. They wanted their digital strategy focused around two areas: building a reputable and distinguished brand, and communicating their company culture. I’d like to focus on the latter.
We have been destroying our planet (pollution, etc), we have been destroying our health (bad eating habits, etc), and we have been destroying our families (work stress, etc). We are rapidly trying to fix what we’ve broke. Interestingly, Anthony Robbins talks about a study that was done about people who died of heart attacks (yes, I know I’ve blogged about this before). The study showed that the common factor in patients that died from their very first heart attack was unhappiness in the workplace. This is really something to think about! I think every individual should ask himself / herself this question: Am I happy at work? Firstly, are we happy with the type of work we’re doing? Is it fulfilling? Does it fulfill our purpose? Then, are we happy in our work environment?
This is very important, and we’re all realising it. I picked up a photo of Pete Cashmore on Facebook the other day. He was showing a new treadmill desk at Mashable. Mashable is Social Media news website, and perhaps one day I’ll write a summary of their success, fascinating story. Pete didn’t have to share this photo. It has no intrinsic value to his business, or no impact on his bottom line. Why was he doing it?
I’d suggest he was doing it for the following reasons:
  1. Company culture is important, and Mashable wants to display it’s culture to the world
  2. Social Media is not about selling, only. Social Media is about personal and emotional interaction
  3. Pete Cashmore is a personal brand. Sharing such photos increases that brand and creates emotional attachment
I really recommend that companies – big and small – become personal, and use Social Media to communicate – and not only to sell and broadcast.

Thursday, 18 October 2012

Capitec is still the cheapest in terms of bank fees

Capitec (JSE:CPI) is still the bank with the lowest bank fees, according to the Solidarity Research Institute's third bank fees report. The report also shows that all the banks, with the exception of Nedbank (JSE:NED), have lowered their fees in 2012.

The reason for the lower fees is reported to be pressure from consumers.
"Four out of the five big retail banks in South Africa have lowered their fees in almost all their accounts in the last year," Solidarity said in a statement accompanying the report.
The banks that were compared are Absa (JSE:ASA), FNB, Standard Bank (JSE:SBK), Nedbank and Capitec.
Capitec's Global One account, remains the cheapest account for the second year running with an average cost for eight different user profiles of only R55.50 per month. This is a further 15.9% lower than last year.
In comparison, Nedbank's cheapest account is the Savvy Electronic account with an average cost of R112.61 per month, which is also 4.5% more expensive than the previous year.
FNB came second, Absa third and Standard Bank fourth, with Nedbank in last position.
Each bank’s cheapest account in 2011 and 2012
(Charges calculated as an average of eight transaction profiles, the effect of interest or forgone interest excluded.)
Cheapest account in 2011
Costs in 2011
Costs in 2012
Cheapest account in 2012

Global One Account
Global One Account

Smart – Unlimited
Smart – Unlimited

Silver Package
Silver Value Bundle
Standard Bank
Classic Cheque – Fixed Fee
Achiever – Electronic


Savvy – Electronic
Savvy – Electronic

Tuesday, 16 October 2012


Avoid paying interest that equals or exceeds the original cost of your house.

You’re comfortably making your bond payments at the end of every month and are looking for a sensible way to invest your surplus capital. What is the next step in making your hard-earned money work best for you?
Financial advisers will likely run you through a range of investment options with varying levels of risk and yield, some of which might have the potential to reap significant benefits down the line.
Yet, why look to diversify your investment portfolio when the best possible investment you could make is, in fact, in your existing bond? It is often tempting to invest an unforeseen windfall or additional monthly income into an investment class that might seem more exciting than a bond. The amount you’ll save by investing any excess capital into your bond will, in the long term, far outweigh the rate of return you could hope to achieve by investing elsewhere.
What does this really mean?
Paying off two loans
When you take out a bond, you are essentially paying off two loans every month – the first to repay the capital amount, and the second to pay off the interest charged over the loan period. Assuming you’ve taken out a loan of R3m, with an average interest rate of 10%, your monthly payment will be approximately R29 000. You need to be aware that a massive R25 000 chunk of this will go towards paying off the interest, with only the remainder actually being used to repay your bond.
This means that the total cost of the interest you pay back to the bank over a 20-year period will in fact equal, or even exceed, the original cost of your house. This is due to a phenomenon known as compound interest, a principle by which the interest that you are paying on your investment accrues interest of its own. Over the repayment period, you’ll end up paying a total amount in the region of R6m. This sum can be reduced significantly by investing additional money into your bond.
The two tables below from FNB will help illustrate the benefits of pumping spare cash into your bond.
Table 1
Bond Instalment
Interest Payment
Cap Reduction
Additional Payment
R 1 000 000.00
R 8 678.23
R 7 083.33
R 1 594.90
R 0.00
R 998 405.10
R 8 678.23
R 7 072.04
R 1 606.20
R 0.00
R 996 798.90
R 8 678.23
R 7 060.66
R 1 617.57
R 0.00
R 995 181.33
R 8 678.23
R 7 049.20
R 1 629.03
R 0.00
R 993 552.30
R 8 678.23
R 7 037.66
R 1 640.57
R 0.00
R 991 911.73
R 8 678.23
R 7 026.04
R 1 652.19
R 0.00
R 990 259.54
R 8 678.23
R 7 014.34
R 1 663.89
R 0.00
R 988 595.65
R 8 678.23
R 7 002.55
R 1 675.68
R 0.00
R 986 919.97
R 8 678.23
R 6 990.68
R 1 687.55
R 0.00
R 985 232.42
R 8 678.23
R 6 978.73
R 1 699.50
R 0.00
R 983 532.91
R 8 678.23
R 6 966.69
R 1 711.54
R 0.00
R 981 821.37
R 8 678.23
R 6 954.57
R 1 723.66
R 0.00
Table 2
Bond Installment
Interest Payment
Cap Reduction
Additional Payment
R 1 000 000.00
R 8 678.23
R 7 083.33
R 1 594.90
R 1 000.00
R 997 405.10
R 8 678.23
R 7 064.95
R 1 613.28
R 1 000.00
R 994 791.82
R 8 678.23
R 7 046.44
R 1 631.79
R 1 000.00
R 992 160.03
R 8 678.23
R 7 027.80
R 1 650.43
R 1 000.00
R 989 509.60
R 8 678.23
R 7 009.03
R 1 669.21
R 1 000.00
R 986 840.39
R 8 678.23
R 6 990.12
R 1 688.11
R 1 000.00
R 984 152.28
R 8 678.23
R 6 971.08
R 1 707.15
R 1 000.00
R 981 445.13
R 8 678.23
R 6 951.90
R 1 726.33
R 1 000.00
R 978 718.80
R 8 678.23
R 6 932.59
R 1 745.64
R 1 000.00
R 975 973.16
R 8 678.23
R 6 913.14
R 1 765.09
R 1 000.00
R 973 208.07
R 8 678.23
R 6 893.56
R 1 784.68
R 1 000.00
R 970 423.39
R 8 678.23
R 6 873.83
R 1 804.40
R 1 000.00
Interest reduction vs accrual
Whilst it may seem more appealing to watch an investment accrue interest, dividends or capital growth, you are essentially achieving the same end by paying off your existing interest. When taking into account the fact that your bond repayment is paid with post-tax income, you’re looking at a real interest rate of anywhere up to 17% (factoring in your earnings prior to taxation) - a rate of return you’d be very unlikely to find in any other asset class.
Simply put, by apportioning slightly more capital every month to help you to pay off your investment, you’ll end up saving significantly more than you could hope to earn by investing additional cash elsewhere.
For instance, by increasing your monthly bond repayments by just 10% on a R3m loan, you could end up paying off your 20-year bond in just 16 years, saving fours years’ worth of payments and interest in the process.
To achieve the same rate of positive return via an investment in a JSE traded company or a money market account on a guaranteed basis is simply not possible.
Risk-free returns
There isn’t any other investment that can guarantee you this type of return over the course of 20 years. Even high-yield asset classes like stocks only tend to produce a 4-6% annual dividend; even then there is significant risk associated with the investment.
On the other hand, property is relatively risk-free, with prices tending to increase year-on-year in the region of 6%. In uncertain economic conditions, the financial prospects for a company can rapidly deteriorate, whilst the property market has proven able to withstand fluctuating market conditions relatively well.
By negotiating a fixed interest rate with your bank, you will be able to ensure that your monthly amounts remain unchanged over the course of your repayment period, thereby further reducing your financial risk.
If your broker is able to guarantee you an equal rate of return for an alternative investment over a 20-year period, it’s likely to be in the form of a pyramid scheme, so be sure to exercise caution and seek out a second opinion should investment prospects seem to be too good to be true.
Save now, spend later
Not only will the investment of additional capital into your bond help you to eradicate your debt more rapidly, but will also leave you with a significantly larger savings pool from which to draw upon for further investment down the line.
By paying off your bond faster you will be afforded a far stronger financial foothold, and be able to accrue real profit from a diversified investment portfolio at a later stage.

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