Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 3rd, 2014.
- Brasil foods income grew with 38 percent in 2013.
- Warren Buffett cuts on bond allocation.
- Nestlé bulls pay record prices for call options, after L’Oreal stake sale.
- India’s BSE Sensex at all time High.
BRF SA INCOME GROWS 38% IN 2013:
Brasil Food S.A., (NYSE: BRFS) world’s largest poultry and a processed-food exporter, reported on Friday, February 28th, 2014, that it closed 2013 with net profit of R$ 1.1 billion, 38% higher than in 2012. Adjusted EBITDA totalled R$ 3.6 billion, an increase of 35.3%, with improvement in EBITDA margin, which reached 11.9%, compared to 9.4% in 2012.
Brasil Foods Brands
Highlights:
- Net revenue for the year reached R$ 30.5 billion, 7% higher than in 2012
- Net revenues on 2013 4th quarter (4Q2013) grew by 0.8% compared to last year´s same period and reached R$8.2 billions.
- Net income reached R$208 millions and Adjusted EBITDA reached R$954 millions, resulting in an adjusted EBITDA margin of 11.6%.
- In total the company exported in 2013, 2.5 million tons of processed food, an increase of 1.5% in relation to the previous year
WARREN BUFFETT CUTS ON BOND ALLOCATION:
Warren Buffett cut the allocation to bonds at Berkshire Hathaway Inc.’s (NYSE: BRK-A)’s insurance units to the lowest in more than a decade as the company warns that low yields will hurt results.
Fixed-income assets made up 14 percent of investments at the insurers as of Dec. 31, 2013, according to the company’s annual report. The year-end figure has typically been 20 to 25 percent since 2002, according to Berkshire documents. The US$186.8 billion portfolio included US$114.8 billion of stocks.
Buffett has said low yields mean that insurers and other bond investors are holding “wasting assets.” To counter that he struck private deals for higher-paying securities and added equities. Omaha, Nebraska-based Berkshire also made acquisitions and invested in its railroad and energy utilities.
Buffett has also been favouring shorter-duration bonds. As of Dec. 31, Berkshire had about US$8.5 billion of bonds that were due in a year or less. That compares with US$6 billion at the end of 2012. The holdings typically offer lower yields than longer-duration securities while providing more flexibility.
NESTLÉ BULLS PAYS RECORD PRICES FOR CALL-OPTIONS AFTER L’OREAL STAKE SALE:
In February of this year, Swiss food group Nestle (NESN.VX), the biggest food producing company on earth sold an 8 percent stake in L’Oreal S.A (OR.PA) to the French cosmetics firm for 6.5 billion euros (US$9 billion), loosening their 40-year partnership and allowing both firms to boost earnings per share.
L’Oreal will pay for the deal with 3.4 billion euros in cash and by selling to Nestle its 50 percent stake in their Galderma dermatology venture for 3.1 billion euros, including about 500 million of debt, which Nestle will pay for in L’Oreal shares.
One of the highlights of the deal for Nestle was the Swiss group’s commitment to grow its dermatology business as part of its drive to focus on health, wellness and nutrition.
As a consequence of this the company’s bulls Nestlé bulls, bid up the prices for the company’s call-options, convinced the food company will buy back shares and boost dividends after it sold a portion of its stake in L’Oréal.
Call prices linked to the company’s stock has risen 13% since June and have reached a record versus puts on February 26.
INDIA’S SENSEX INDEX AT ALL TIME HIGH:
On Friday March 7, 2014, India’s benchmark S&P BSE Sensex soared to new record high of 21,710.43 in opening trade on heavy foreign capital inflows, tracking positive domestic and global cues.
As can be seen from below chart, the 30-share index, which had gained over 567 points in the previous three sessions, zoomed to 21,710.43 by surging 196.56 points, or 0.91 percent.
The Sensex’s record high of 21,525.14 surpassed its previous historic milestone of 21,483.74 hit on December 9 last year. India’s CNX NIFTY ended only 0.2 percent off its record of 6,415.25 hit on the same date.
The strong rally has defied expectations that foreign investors would grow more cautious as the Federal Reserve continues to withdraw its monetary stimulus and ahead of the general elections set to kick off on April 7.
Instead, overseas investors have bought heavily into India as a sharply narrowing current account deficit and a more stable rupee have increased confidence in a country that only last year was in the midst of its biggest market turmoil since the balance of payments crisis of 1991.
PGM CAPITAL COMMENTS:
Brasil Foods
Based on its fundamentals, strong cash flow and ability to increase its dividend Year Over Year we have a STRONG BUY rating on the stock of Brasil foods.
As can be seen from below chart the shares of the company have appreciated with over 1,650 percent since it went IPO in October of 2003.
It is also worth mentioning that in accordance with the company’s policy it pays a minimum of 25 percent of its net income as dividend to share holders.
During the last 10 years the company’s dividend has increased from US$ 0.046 a share in 2004 to US$ 0.179 a share in January of 2014, an increase of approx. 290 percent during the last 10 years.
Below chart shows the dividend payout as a percentage of net income of the company during the last 10 years.
Buffett cuts on Bonds:
In several of our previous articles we have warned our readers, that with rising interest rates, bonds may become the cyanide pil for investors in 2014.
Due to this we have a SELL rating on all bonds and don’t hold any bond in our own personal portfolio or in those of our clients.
Nestlé and L’Oreal:
L’Oréal’s agreement to buy 8% of Nestlé’s stake in February for €6 bilion, for which about €3.4 bilion was paid in cash won the support of Nestlé’s biggest owners in part because it freed money to return to shareholders.
Due to this we believe that Nestlé’s investors, who are currently bidding the company’s call options, are betting on shares buy-backs and an improved dividend.
The deal will cut Nestlé’s holding in L’Oreal to 23.29 percent from 29.4 percent, while the Bettencourt Meyers family’s stake in L’Oreal will rise from 30.6 percent to 33.31 percent. The deal is expected to close in the first half of this year.
Explaining the deal, L’Oreal’s, chairman an CEO Jean-Paul Agon said:
“Nestlé’s stake reduction had to allow it to remain a strategic shareholder … while making sure that the Bettencourt family stayed below the 33.33 percent level.”
Beyond that level, the family will have to make an offer for the rest of L’Oreal’s share capital.
Based on their fundamentals, strong balance sheet and ability to increase their dividend Year Over Year, we have a BUY rating on the stock of Neslé as well as on the stock of L’Oreal.
India’s BSE SENSEX at all time High:
In India, the current account deficit has narrowed sharply, to 0.9 percent of gross domestic product in the October-December quarter, according to data on Wednesday, March 5th, improving sharply from the record high of 4.8 percent of GDP in the year ended in March 2013.
The improving current account deficit, and the strong foreign inflows, have also boosted the rupee, which is up 12.2 percent since hitting a record low in late August.
India’s blue chips have been the main drivers of the rally. On Thursday, March 6th, ICICI Bank (ICBK.NS) gained 3.1 percent and Reliance Industries (RELI.NS) rose 1.9 percent.
The gains were widespread with the BSE mid-cap index rising 1.21 percent, including a 3.6 percent gain in Crompton Greaves (CROM.NS) (CROM.BO).
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that emerging market shares, the price of (food) Commodities, as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Yours Sincerely,
Eric Panneflek