Polymetal - reiterating the stock as my second favourite gold miner

I last wrote about the Polymetal back in March.  Back then I wrote positively about the Russian focused but (at least for the shares I hold) the London-listed precious metals producer. Unsurprisingly given the fall in precious metals prices the shares have fallen since then and my previous observation that below 500p indicated value has been tested...although not by that much:

The fundamentals for the company remain akin to those I have observed previously in terms of good cash cost control and free cash flow generation...  

....as the company noted in supplementary charts in the presentation document. First on cash costs (where ruble costs and US dollar revenues were clearly a helpful combination)...

...and then on the cash flow / dividend payment side (on the latter aspect the company's board will decide at the end of the financial year whether another special dividend will be granted to help boost the total shareholder yield to 4-5%).  

I even note as per the above that Polymetal at least on the free cash flow yield during the first half of 2015 even bettered the superlative (and my #1 gold sector holding Randgold - who I last wrote up here noting their scope for a 5%+ free cash flow yield generation).  You always have to be slightly careful with a very short-term period (Kinross for example is not a gold company I am very excited about) but nevertheless consistent with the aforementioned dividend policy and ok-to-good balance sheet (even adjusting for future exploration/development spend) Polymetal is a good cash flow generator. 

They also gave solid guidance which historically they have slightly low-balled on.  

 Overall I still remain comfortable with Polymetal as my second favourite gold play.  On any reasonable recovery of the gold price the shares will trade nicely above that aforementioned 500p level.

Carlsberg - Russia, profit warnings and levels

It is almost a year since I last wrote specifically about Carlsberg the Danish brewer (link here) when a big dump in sentiment around the Russian/Eastern European business led me to write:

'A day for a starter position?  Despite the scary technical look of the Carlsberg 3 year chart sub DKK500...yes'.

That actually proved to be a reasonable call with the share ending up nicely above the DKK600 level as recently as a quarter ago.  But as the far right of the graph shows this is not the case now.

Now the reason for this fall is relatively easy to understand.  The company cut profit hopes...

'Carlsberg said it expects "organic operating profit" to decline slightly, versus a previous forecast of growth in the mid to high single digits, with growth in Asia unable to offset weaker performances in Europe exacerbated by instability in Ukraine and Russia'.

...and it is easy to see the Eastern European lag:

With Eastern Europe being just under 30% of profits (and Russia c. 20% alone) issues here have impacted.

Look closely at the geographic chart above again.  I note that the company's price-mix remained excellent at 5% but this hid a non-FX offsetting shift in the Eastern European price-mix.  Let's not forget that the fall of currencies like the Russian ruble have been phenomenal: 

By contrast Asia was phenomenal.  Part of the reason for this latter occurrence is the continued growth of strong emerging brads such as Tuborg.  

If you factor in the new 'organic operating profit' to decline slightly then Carlsberg will end the year generating around a DKK8bn operating profit (with probably over DKK5bn in free cash).  That puts the company's EV/ebit prospective rating around x14 with a free cash flow of around 4.2% (current dividend yield c. 1.7%).  That's not super cheap...but given the low sentiment towards emerging market and related companies currently it is getting there especially given Carlsberg's good brands.  

You know what I am going to conclude?  If you can buy (at least for a trade) Carlsberg shares below DKK500 you should - just as I noted a year ago.  

A few thoughts this morning (GMT)

Not a particularly interesting day in the Asian markets today...generally down but after the recent run not amazingly so.  I do note that the yuan is at its lowest level against the US dollar since June...got to continue to watch the FX markets into 2015.

Two stories of note in the region include the phenomenal implied valuation of Xiaomi.  Personally I would see much greater relative value in Lenovo as observed in this extract from today's Financial Times:

Also I note that China are continuing to use the oil price volatility to enlarge their Middle East interests in this observation from Reuters which makes perfect sense: 

'China will speed up free trade talks with six countries on the Arabian peninsula and begin trade negotiations with Israel next year, state media said on Tuesday, as Beijing accelerates efforts to sign such agreements'.

A few general charts to finish off.  The 'Buffett Indicator' looks full although not maxed out versus recent history: 

Greek equities took a further tumble yesterday and as per this chart have hit an important retracement level: 

Meanwhile at least the Eurozone's newest member (from Thursday) are happy with their decision - they are even paying to join! 

Finally Russian economic data unsurprisingly remains very mixed as this latest output from Markit  notes.  

A few further statistics from this release:

Composite Output Index falls to seven-month low of 47.2

Services business expectations slump to record low

Output price inflation hits series record high

Clearly going to be a difficult couple of years for the Russian economy.

Asia today and charts today

The pre-Christmas slowdown is increasingly becoming apparent despite the S&P 500 bringing its tally of record closing highs this year to 50 (fourth highest total since the 1920s).

Certainly we have the second Greek Parliamentary Presidential vote and various US economic statistics including GDP but insufficient votes/a fairly good print seems pretty factored in.

Not too much of interest in Asia especially as Japan was closed for a public holiday.  I see that Hong Kong's largest IPO of the year Dalian Wanda is not having the greatest first day...

Otherwise I like this graphic via Reuters on the Chinese shadow banking market.  At first glance the top chart indicates other shadow system are larger...but these are in bigger economies.  Also note the lower portion of the chart and the wonderful 'other financial intermediaries' reclassification...

Staying with China I am also not surprised to see the People's Daily confirming that for the time being the country will not be selling US Treasuries. Too many exports to the US for the time being!  

Also no surprises that  China is proving a rouble swap facility to Russia (link here). 

Some other interesting charts/graphics...

Global M&A highest since the financial crisis.  Amazing what you can do with effectively zero interest rates! 

Fascinating UK politics graphic showing the current malaise...

And the potential perils of volatility trading nicely captured in this chart.  So far during 2014 it has been a friendly area for me...

Asia today - the yuan, Chinese inflation, oil/Russia, singles day and APEC

So on the day that Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe are holding their first meeting interesting that China lifted the fix on the yuan by 0.37% today (the biggest daily move since June 2010) placing it at its strongest valuation since mid-March against the US dollar.  So at the moment no 'currency war' against the recently sharply weaker Japanese yen. That may be to come if economic conditions dictate.

The rationale for a weaker exchange rate for China is potentially seen in the latest inflation numbers which are also out today and which remained weak:

The producer price index fell 2.2% from a year ago, its 32nd consecutive decline, as sluggish demand curbed the pricing power of companies. 

Another interesting development - this time more structurally positive - was the announcement that the exchange link between Hong Kong and Shanghai will debut in a week's time and which will aim to 'give foreign investors unprecedented access to China’s $4.2 trillion equity market. To augment this is this interesting link here about burgeoning ETF flows which notes two important facts:

• The success of the $457 million Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), which has lured more money than any other China-focused ETF since it was launched a year ago
• The CSI 300 has a weighting of about 18 percent in consumer-related companies, versus 5 percent for the Hang Seng China Enterprises index of Hong Kong-listed shares. 

Demand and a strong theme (in the rise and rise of the Chinese consumer).  How's the Chinese index performed against the S&P again over the last five years?

A few other snippets from China.  Anticipated investment increases over the next year are proportionately the highest in the region...

...also chat about a new Russia-China deal:

'OAO Gazprom is discussing the supply of as much as 30 billion cubic meters of gas annually from West Siberia over 30 years'.

Recall that Putin called the earlier agreement between state-run Gazprom and its Chinese partners “epochal.” and that under the agreement earlier this year, China will import 38 billion cubic meters of gas from Russia annually over three decades starting as soon as 2018.

Tomorrow is 'double 11' or 'singles day' in China (for everything about the celebration see the
link here):

Why mention this in a business-related website?  Well it is also the biggest postal gifting day of the Chinese calendar. Sorting rooms look like this:

Great news for Alibaba amongst others.  Anticipate seeing some amazing e-commerce growth numbers out of China later this week.  

Finally I enjoyed this via @Thats_Beijing with reference to the ongoing APEC summit:

You know Obama is in town when…2nd Ring is virtually empty at 9:30am this morning 

Asia today - China & Russia, Chinese property market, gold, miners and the Japanese sales tax

Quite a few stories to think about in Asia today despite the Japanese market being closed for a national holiday.  I liked this in the Financial Times about the realities of China-Russia relations:

From the same source I was intrigued by this article starter on the Chinese property market:

'Models dressed as imperial concubines, discounts for people who lose weight, appeals to patriotism and 1,000 live chickens for prospective buyers of apartments.' Link here (paywall).

Otherwise I see that China continues to buy gold (an asset class I continue to like).  This from GATA:

'China's annual non-government gold consumption has been officially confirmed as having reached 2,000 tonnes, gold researcher and GATA consultant Koos Jansen reports. That figure is close to annual world gold mine production...The figure, Jansen writes, was repeated several times by the chairman of the Shanghai Gold Exchange, Xu Luode, in an address to the London Bullion Market Association conference in Singapore in June'

Meanwhile in the markets continued volatility although one area I talked about last week as growing in interest (especially with regard to Billiton) was showing some form on higher commodity prices hopes:

Finally, Japan may be closed but the challenges continue:

'The Japanese government should decisively raise the consumption tax rate to 10 percent in October 2015 as planned to tackle its massive debts, Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said'

That sounds like between a rock and a hard place call to me.

Russia - panic, reality and what stocks to consider (part 2)

To augment part 1 earlier today (link here) here are a few more stocks I am thinking about in terms of 'Russia overspill' opportunities.  Unlike the 'core' Carlsberg, Polymetal and BP (and an honourable mention for Danone) list in part 1, this part is more on the edge for differing reasons (price, size, etc).

The first stock is Coca Cola Hellenic Bottling which has significant carbonated and soft drink sales exposure in eastern European exposure as I discussed here.  At this linked note I talked about the 1250p level as an interesting one and I stick with this view making the stock currently a watch for renewed weakness (early August-esque) opportunity:

The second stock is the cosmetics and related direct sales company Oriflame which I have written about before (see here for example).  I thought I was being clever in buying the stock at the SEK150 level in February on the Crimea incidents but after an early summer good performance the stock has fallen back to ten year lows:

Unsurprisingly - and using the Q2 data cited in August - the headlines were pretty shabby...

...unsurprising given Russia and closely bordered countries accounts for over 40% of sales and over a third of operating profits.

From a completely clear-headed perspective two good points and two less good points.  One of my favoured metrics - price-mix - is strong...

...but whilst net debt has reduced at near x2 it is not exactly very low and interest cover has fallen to under x5 (generally below x4 the alarm bells start ringing for me).

Reflecting the above the dividend has been debased to under 2% (looks more sustainable) but still the valuation at less than x5 EV/ebit FY14e looks too low to me taking all this into account.

A final observation is the sub Euro1bn market cap of the company.  This makes it less attractive to the mainstream and more prone to volatility.  I think aspects of this will persist but at a forward x6 EV/ebit multiple I get a target of something in the SEK150s without too much trouble.

So an interesting mid-cap play at prevailing?  I think so...

Part 3 will look at a US ADR listed entity.

Russia - panic, reality and what stocks to consider (part 1)

So new sanctions...and hence new uncertainty.  Did you notice the rouble slipping to a new record low against the resurgent US dollar?

Not good for Russia earners...although for those denominated in Europe it is not quite as problematic due to general currency declines here:

So how about embracing your inner John Templeton and buying into such uncertainty.  Does not sound a terrible idea...given my observation about the EUR-RUB rate above and also my expectation that some element of new stabilisation will be worked out before the winter really kicks in.  After all both the Western European powers and Russia have a shared interest in not slicing their GDP and mutual trade - respectively as consumer and producer/supplier - in the energy markets.

The EU may be building up reserves (but just how much is normal seasonal build?)...

...but dependence ex these remains high.

(both charts h/t @steve_hanke)

So which stocks?  Three immediately come to mind.  

First, Carlsberg which I wrote about here last month and also picked up a starter position near DKK500. It is interesting how the stock has pushed up off that level despite the continued mixed Russia/related newsflow - of course whilst Russia/Eastern Europe are hugely influential in the company's . In the DKK510s or below I am adding again.  

The second stock is the gold miner Polymetal who again I have written about recently (see here) and interestingly - for some equivalence with Carlsberg above - I also look to buy in the 'low 500s' (pence this time as the company is London listed or at least how I access it).  The stock is just above this level not 'helped' by the current malaise in gold / related.  A buy here...and US$ centric revenues.  

Finally...BP.  As I noted here earlier in September Russian exposure and litigation has caused an overhang.  Got to like the 'buy-on-a-bad-day' 460p odd level...

They are the slightly easier larger cap names that immediately come to mind (I could also make a case for Danone - link here - where Russia is the largest market but a lot lower influence proportionately than the three above).  In part 2 I will consider a selection of more tricky names...

Carlsberg - do you buy today?

I titled my last Carlsberg report 'the inevitable Russian rouble impact' (link here) and opined that:

the shares trade on x11.6 EV/ebit for FY14e with a 1.1% dividend yield (some progression was announced here but still a c. 20% payout ratio only).  The valuation is getting there and improvements are being seen...but the more compelling opportunity to buy remains at DKK530 and then DKK500 given general volatilities (the Russian rouble at a 5 year low today for example) and the slightly shabby cashflow generation recently'

Well the chance is undoubtedly going to come today to play given where the share is...

...and today's Q2 statement which observes reasons for why to pull back reported operating and adjusted net profit hopes.  

Here is one other quick observation though.  The positive price-mix continues apace...and with the flat price-mix in Western Europe, in Russia (!), Eastern Europe and Asia they are all high single digit.  

 That is interesting...and why the above advice still holds.  A day for a starter position?  Despite the scary technical look of the Carlsberg 3 year chart sub DKK500...yes.

Charts today - high yield flows, FX changes, German exports to Russia, global property prices and...radical US weather

Charts today has to start with the bond market.  On a day when sovereign bond yields in the US and Germany continue to compress...but high yield fund flows continue to worsen.  That's risk-aversion for you.  Amazing that it was just a few weeks ago that 'cov-lite' bond sales were rampant...

So more volatility in the bond markets, what about the currency markets?  That bout of recent US dollar strength is not so material (yet), ditto euro weakness.

(h/t @ReutersGMF)

Nice chart from Berenberg Economics today on the trend in German exports to Russia...I think we can guess the next iteration here...

The South China Morning Post was feeling a bit sore about selected Hong Kong property prices BUT on average the HK property market is not as crazy as certain others...step forward London in particular in my view

Finally, I like this autumn weather chart prediction - all that is missing is pestilence I think!