Podcast: When bad news is good news

“This week’s episode of JSE Direct is courtesy of IG, our preferred supplier in trading products.”

Simon Shares

Day 139 of lockdown and Covid-19, new cases definitely on the decline.

Clicks (JSE code: CLS) trading update again shows that this company is a machine. Revenue +10% for the 49 weeks to 9 August 2020.
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US WeChat ban.
Tencent (Hong Kong share code: 0700) beats expectations. Revenue up 29% YoY. Profit surges as growth hits the fastest pace in two years.
Tesla (Nasdaq share code: TSLA) 5:1 split via a special dividend.

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When bad news is good news

The Sasol (JSE code: SOL) trading update reports write-downs of R112billion while the market cap was R95billion and a loss per share (EPS) of around R140 while the share price was R155. Yet the stock rushed up over 4% by the close.

The important point is that data is relative to expectations. It may look like a horror show, it may even be a horror show. But if it better or worse than the market expected? If worse stock will fall and if better then it will rise.

Same applies to really good data, how was it relative to expectations?

In the case of Sasol they’re writing down assets all over and this is a non-cash issue as they write it down. Now, of course, it was paid for with cash when they did the deal or built the project – but that cash is now gone.

Writing down is essentially saying that you paid to much and it is now worth less than the cost. The reason for the write-down is that it sits on your balance sheet as an asset and it will impact ratios such as Return on Equity (RoE). Buying writing down the asset to a lower price you depress the asset side of the balance sheet and at the same time the equity within the balance sheet (equity = assets – liabilities). So now a lower equity value and now your return relative to the equity looks better.

Sasol still has a ton of debt and a potential rights issue and results on Monday will hopefully resolve these outstanding issues, for better or worse.

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