2002 SOME OF OUR* LATEST RECOMMENDATIONS

Investment Newsletter March 4, 2002

BoE Personal Stockbrokers

MARCH 2002

SOME OF OUR* LATEST RECOMMENDATIONS

SHARE PRICE (c) ACTION COMMENT Large Caps (Alsi40)

Sasol 10720 ADD The oil price has rebounded off its post Sept. 11 lows of circa $18/barrel and since the Rand collapse we have our heps forecast up to 1500c.

Nedcor 1224 BUY Cheap relative to market and on a Fpe of 6.5x. Heps (F) of 1860c to FY 12/02 implies growth of 18%. Pe relative to ALSI 0.58x (average 0.89x).

Alex Forbes

1395 ADD Reported heps FY3/01 of 123.2 cents; we forecast growth of 25% heps for FY3/02 of 154c, and Fpe of 9.1x, well below its historic pe of 17x.

Barworld 6440 ADD Eps growth for FY 9/02 should exceed 20% which implies a Fpe of 10.5x, heps of 615c. Discount to global peers; 70% hard currency earnings.

Comparex 950 SELL Due to lack of corporate IT demand, margins have reduced from 10.5% to 5%.

Shoprite 690 BUY The target market will benefit from the Budget. Other African operations remain profitable. Feps 70c. Fpe 9.8x to 6/02.

Mid Caps Hiveld 1750 SWITCH Turnover down 2%, heps of 25.9c, stocks up and the taxman rescued heps

yet again, reflecting tough times in the industry. Switch to Iscor or Kumba. Clientele 1100 BUY Telesales and Mailshots success is expected to continue. This will underpin

new business and recurring premiums. Feps 150c. Fpe of 7.3x to FY 6/02. Tiwheel 1490 BUY This is an opportunity to buy relatively new world-class assets at NAV with

a business tossed in. (See Snippets) Aspen 710 BUY In interims heps were up 42% for a rolling heps of 56.4cps, our FY2002

heps forecast remains 62c and for FY2003 is increased 3c to 79c, reflecting an extended growth phase. Results exceed expectations and this is a free call option on provision of HIV drugs.

Small Caps Metorex 280 SPEC

BUY Poor interims (10.8c v 40.5) but expect a spike (see p.8)

Outsors 400 SELL Negative cash flows, strain on working capital, no major contracts signed plus litigation proceedings are the concerns; until some turnaround is evident we recommend a SELL.

Grindrod 600 BUY Results showed the benefits of the "tidy up" of the fleet with heps of 121.3cps (R128m) up 85% yoy. Given that the average R/$ 8.62 applied, more can be expected. Our preliminary heps forecast for 2002 is 160c.

Bowler Metcalf

230 BUY Forecast growth 33%, heps 34c implies Fpe of 6.8x Competitors are exiting as trading conditions become difficult.

WBHO 690 ADD Interims to 12/01 were firm with turnover up 46% and heps up 33% for a rolling heps of 129.7cps and PE of 5.1. The order book stands at R2.4bn, which at 1.2x rolling annual turnover is one of the healthiest in the local industry.

Cashbuild 405 BUY The internal focus and back to basics strategy is moving them from being traders to becoming retailers. Their 10% market share can be expanded,

with a push into urban areas. * All recommendations are those of BoE Personal Stockbrokers regardless of source material.

March 4, 2002 Investment Newsletter


THE BUDGET - 2002 Treasury’s budget confirmed that fiscal policy remains expansionary. The budget proposals appear supportive of domestic demand in this fiscal year. With respect to the budgetary framework, our ‘fears’ of higher borrowing were confirmed. Increased expenditure would imply increased borrowing given systematic economic underperformance’ i.e. the proposed expenditure plans are based on significantly higher growth forecasts than actual outcomes, lower inflation, as well as a stronger currency than is currently the case. So, in spite of the short-term stabilizing effect that an expansionary budget should have on the economy, and the groundwork being laid for future ‘success’, we maintain that the effect of the budgetary framework as a means of expanding output (potential) on a longer-term horizon as for now remains fairly limited. In addition, while the outlook is favourable for consumption, as expected the benefits from a production perspective are limited. The budget, in as far as its stimulation of demand may exceed the production benefits, causes further complications for monetary policy, at a time when these policy tools appear to be in conflict. This suggests that the dilemma for producers remains. Whether they will increase prices relative to rising costs, particularly should demand be enabling, or whether they will continue to cut supply because the demand conditions are not favourable, remains to be seen. As stated in the budget preview, in looking at the budget, there are two aspects to our outlook. The first is that expected trends in allocations and the implications are examined in the context of the government’s immediate objectives, as voiced in the state of the nation address. The budget is expected to mirror the achievement of these goals. Secondly, based on the premise that the fiscal position should remain expansionary, we discuss the trends that are likely to emerge, and the consequences for output in particular (aggregate as well as sectoral), particularly at a time when fiscal and monetary policy appear to be in opposition. It seems somewhat of an anomaly that the budget seeks to stabilize demand while the interest rate outlook suggests a fall-off in gross domestic demand. As such, the final outcome will be a function of how these influences balance out.

The improvement in the fiscal position during 2001/2 has set the stage for the maintenance of an expansionary budget into 2002/3. In the current fiscal year, revenue is set to be R15bn more than budgeted at R248.4bn, with spending at R262.6bn, the implied budget deficit is a much lower than anticipated R14.1bn, or 1.4% of GDP. As expected, the budget allocations reflected the government’s priorities as set out in the presidential address. The major proposals are included below. The main thrust of the 2002/3 budget from a stimulatory perspective are the following points: Tax cuts of R15bn are expected to feed into the economy. These should mainly accrue to middle to lower income households, although higher income earners do get a respite. The lowering of the top marginal rate provides support as a

“supply side” incentive (40% from 42%). Individuals earning R27 000 and below a year are exempt from taxes, that is what the threshold level has been raised to. The interest income exemption has been raised to R6 000 and to R10 000 for those over 65. VAT is to remain unchanged. Main budget provides for spending rising at a faster rate than revenue. Expenditure should increase 9.6% to R287.9bn in 2002/3 while revenue should rise 6.7% to R265.2bn. This implies a budget deficit of 2.1%. These revenue proposals are consistent with the government’s intention to cut taxes across the curve so as to narrow the gap between corporate and personal taxes, thus easing the disproportionate burden on income over corporate tax. These proposals are based on the following economic assumptions: Economic growth slowed to 2.2% in 2001/2 (BoE estimates at 2.1%) rising to 2.3% in 2003 (BoE estimates at 2.3%). Stronger global growth should see domestic growth at 3.3% in 2003. CPIX inflation is anticipated to average 6.9% in 2002 (BoE estimate is 6.8%) but is anticipated to fall back to 5.8% in 2003 (BoE estimate of 6.1%). Government does not give estimates but sees a recovery in the rand for the next two years. The NOFP should continue to fall from its current R3bn level, and likely to be eliminated in this fiscal year. Privatization proposals include an additional R12bn to be raised from the restructuring of state assets during the fiscal year 2002/3. The main Medium Term Expenditure proposals over the next three years are as follows: Overall expenditure is expected to rise from R286bn in 2002/3 to R316bn in 2004/5 and revenue from R265bn to R313bn over the same period. The deficit before borrowing will rise slightly to 2.1% in 2002/3 before falling back to 1.7% in 2004/5. So far, R27bn will be raised from the restructuring of state assets, mainly from international equity partners, of which R17bn has been used to reduce debt. At the end of 2001/02, total net loan debt will amount to R425.1 bn, or 42.9% of GDP, down from over 48% five years ago. Debt will steadily decline as a share of GDP to a projected 37.4% by the end of 2004/05. The shortfall in revenue over expenditure will be funded in the following way: The budget deficit in 2002/3 will rise to R22.7bn or 2.1% GDP. Given the accelerated pace of implementation some R12bn from the restructuring of public enterprises is expected in 2002/03, decreasing the net borrowing requirement to R12.2bn. An additional R4bn will be raised in short-term loans next year, contributing further to the liquidity of this market. Net foreign borrowing to the value of R16.2bn is proposed. This will allow long-term domestic debt to be reduced by about R11bn. The increases in expenditure include some key areas: Almost a quarter of the non-interest expenditure is dedicated to education, with provincial education departments receiving almost 7% more at 59.8bn in 2002/3. The health budget rises sharply from R31.7bn to R34.4bn Total HIV/AIDS related spending will rise from R343m this year to R1bn in 2002/3. Welfare and social spending will also increase. Social grants for the elderly /disabled will rise to R620 per month. Child support grants will also



increase. The Defence budget rises from R18bn to R20.6bn of which R6.3bn will go to the arms procurement package. The budget estimates the total cost of the arms package at R52.7bn, with yearly payments reaching a peak of R7.7bn in 2005/6. The South African Police Services should receive an additional R1.6bn, raising the total to R20bn. An additional 16 000 police men and women will be deployed over the next 3 years at an expense of R5bn. Investment incentives are mainly targeted towards SMMEs and include the extension of tax relief to smaller businesses by raising the threshold at which small business is defined from R1m to R3m. There is an introduction of accelerated depreciation. Asset depreciation can now take place over four years in contrast to the existing five. Tax allowances, as opposed to a higher skills levy as we anticipated, were launched to encourage spending on training. Other features include the usual increase in sin taxes. The price of tobacco products on average increases 12%, while that on alcohol 10 – 12%. Duties have been abolished on soft drinks. The general fuel levy remains unchanged although the Road Accident Fund levy will increase 2c/l. Implications include the ability to provide a lowering of the top marginal rate will boost domestic expenditure. The importance of personal saving featured strongly in the budget with further tax relief on savings. However, the exemption levels remain far to low to begin to impact significantly on the economy. Continued spending in the important areas of crime prevention and health will provide a more stable societal framework as the economy moves forward into 2002/3. More significantly, it is the perception that the government isn’t doing anything that should be changed as a result of this budget, which is not to say that they haven’t all along. In that sense this has been a populist budget.

Our major concern remains over how the government intends to pay for its increased expenditure, particularly given a worse than expected economic performance. The restructuring of debt implies that long-term debt will be substituted for shorter-term debt. Of more significance is that over this fiscal year, this will be to the benefit of the domestic bond market, as domestic debt is ‘substituted’ with foreign borrowings and the overall amount of domestic debt falls. However, after this period the Public Sector Borrowing Requirement rises, but from debt that is raised domestically, which should have an impact on yields in that period. This effect should also be exacerbated by the perceptions about meeting inflation targets in 2003 in particular.

Gross fixed capital formation forecasts

0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004

%, q

-o-q

saa

r

Budget 2001 Budget 2002

Export forecasts

0

1

2

3

4

5

6

7

8

9

2000 2001 2002 2003 2004

%, q

-o-q

saa

r

Budget 2002 MTBPS

Final household consumption forecasts

2

2.2

2.4

2.6

2.8

3

3.2

3.4

3.6

2000 2001 2002 2003 2004

%, q

-o-q

saa

r

Budget 2002 MTBPS

* MTBPS – Medium Term Budget Planning Scenario



PORTFOLIO STRATEGY – GEMS emerging from shadows Short term: Neutral Medium term: Positive Long term: Positve

Flagship Portfolio

Six Pack Portfolio

ALSI Weighting

%

Stratcom Weightin

g % R1m R40,000 to R100,000

RESOURCES 53.0 34 38 Diamonds 0.1 0 Gold 7.9 3 Harmony 4.5 Harmony 15 Platinum 9.9 5 Angloplat 6 Metals & Minerals 1.6 5 Kumba 4 Mining Houses and Holdings

26.2 13 Anglo Billiton

8 8

Chem, Oil & Plastics 4.7 6 Sasol 7.5 Paper & Steel 2.3 2

FINANCIAL 17.5 21 18 Investment Trusts 0.1 0 Banks 9.0 12 RMBH

Stanbic Investec

4 5 2

Stanbic 15

Financial Services 1.7 4 Corohold 3 Corohold 15 Life Assurance 5.9 5 Sanlam 4 Short Term Insurance 0.7 0 CONSUMER 14.1 16 16 Beverages 4.3 2 Food 1.6 2 Tongaat 3 Retail, Furniture & Appliances

3.3 4 Truworth Steinhoff

2 3

Hotels & Leisure 0.3 0 Media 1.2 0 Packaging & Printing 0.6 0 Healthcare 0.6 6 Netcare

Aspen 4 2

Netcare 15

Telecoms 2.2 2 Venfin 2

GDFI 2.6 10 10 Building Cons.& Eng. 0.6 4 Aveng 4 Electronics 0.6 4 Reunert

Delta 3 3

Information Technology

1.4 2

OTHER INDUSTRIAL

11.9 14 14

Diversified Industrial 9.7 9 Remgro Richemont

5 4

Remgro 20

Transport 1.3 3 Imperial 2 Service 0.8 2 Bidvest 3

OTHER 2.3 5 4 Property 2.3 5 Lib-Int 4 Lib-Int 20 Other 0 0 ETF TOTAL 100 100

The Dow Jones, with its preponderance of OldEconomy stocks has strengthened to reflectthe slowly improving data from the USeconomy and, if it stays above 10000, would bein a position to mount an assault on thedowntrend above 11000. The $ continues toreign supreme over the yen and euro despitethe hefty trade deficit, a return to deficit of theUS Budget, and continued questions as toquality of corporate earnings. The latter, plusvaluations, are more of an issue with the widerand more TMT inclusive S&P 500 let alone thetech-heavy Nasdaq. Neither of these indicesare as close to challenging their downtrends asthe Dow, although there is scope for a rally onthe Nasdaq. While valuations, as discussedbelow, remain a problem, the underlyingconfidence in the US economy could drivemarkets higher sooner than anticipated whichin turn would move Resources stocks furtherahead. Unless law and order is suddenlyrestored in the Congo, Zimbabwe and Angola,the structural weaknesses in the Rand(tendency to BOP deficit, lack of steady FDI,exit bias of local investors and weak forexposition) seem likely to produce renewedweakness in H2. We may therefore increaseour Resource weighting sooner rather thanlater. In the meantime the table belowhighlights the relatively attractive valuations ofSA equities although they are diminishedsomewhat by the inflation differential which islikely to widen somewhat to around 7% in2002. Year 1(2/02-1/03) Year 2(2/03-1/04) Feps Fpe Feps Fpe % x % x S&P500 +29.3 20 <10 18.2 RESI +33.2 12.3 +16 10.6 FINI +17.7 12.3 +15.5 6.2 INDI +21.6 10.9 +22.4 8.9 The current S&P PE of 26x is based on hepsas against eps which would put it well over 40x.Nasdaq, on and estimated (i.e. includingadjustments) trailing PE of 87 x, still looks alittle bubbly. Whilst the Financial eps growthaverage of 16.6% over the next 2 years is wellbelow the others, we believe this isoverdiscounted in the 2 year average FPE of6.7x. Like SA, other emerging markets offerbetter value than Wall Street, and consequentlythey are likely to continue outperforming asthey have for the year to date. In this regard,we note that global emerging market investorsare significantly underweight SA as per thelatest weightings so the likes of Anglo, Sasoland Angloplat will continue to attract interestfrom this quarter.



COMPANY COMMENT

Harmony (11760c) – gaining momentum

Q2 FY/02 results report that underground gold production decreased, by 3.3% to 16 194kg, as tonnage decreased by 7.8% to 3 201kg. Although recovery grades at Elandskraal deteriorated, all other operations improved their respective grades, leaving the overall grade 4.7% higher at 5.12g/t. The decrease in volume came primarily from the Free State operations. New Hampton, reported as part of the offshore operations, has treated 4.8% (1 009kt) more, albeit at a 25.8% lower recovery grade at 1.38g/t. This resulted in a 22.0% reduction in gold output to 1 397kg. This operation needs a serious dose of the “Harmony Way”. Kalplats continued to improve its resource base, estimated at 3.4 m oz, to a depth of 150 metres. Work on the pre-feasibility is continuing, while infill drilling and metallurgical test work is being done. The new ore reserve statement is expected in three months’ time. Harmony made an all-cash offer for Hill 50 in Australia. The cash consideration of A$217m will be payable if more than 90% of shareholders accept the offer and an additional A5cps becomes payable. Hill 50 has many synergies with New Hampton as cost and infrastructure rationalisation could add significantly to Harmony’s offshore operations. Harmony’s growth by acquisitions is far from over and greenfields projects also become a reality, like Hill 50, Bendigo and Kalplats. We forecast gold output to improve as Freegold’s 50% (JV) will be added. We expect strong earnings increases to 320cps in the next quarter, with the gold price at R101,500/kg, which is 55.3% higher than this quarter’s at 206cps. Advice: Harmony’s track record on management’s ability to turn ailing South African operations around speaks for

itself. Management, in conjunction with ARM, acquired AngloGold’s Free State operations for R2.7bn before tax. This, together with the Hill 50 offer, will add significantly to its asset base and earnings potential. With strong expected cash flows and further expected corporate activity, we retain our BUY recommendation.

Western Areas (3460c) – cash brought forward

Q2 FY/01 results show that gold recoveries declared improved by 10.0% to 1 490kg as plant lock-up was released, while tonnage throughput dropped by 4.8% to 180kt. Gold production at the old Western Areas section dropped by 7.7% as both volume and recovery grade fell. However, gold production is expected to increase as the trackless expansion beds in. Overall recovery grade improved 15.9% to 8.3g/t, not sustainable as plant lock-up was released. Cash costs increased by 4.0% to R83.7m as the upfront trackless costs are included, while productivity improvements are only realised towards the end of FY/02. Unit cost decreased by 5.5% to R56 174/kg and 21.1% to $173/oz in dollar terms primarily from a weakening rand. Profit from gold increased by 264.1% to R42.6m due to the higher gold output and higher rand gold price. Despite an increase in sundry revenue, lower tax and negative deferred tax did not counter the negative impact of its derivative activities, which resulted in a R32.7m drop in headline profit to a loss of R15.8m (-15.0cps). Western Areas has implemented a derivative scheme, based on selling options, receiving premiums upfront (US$125m) to make a distribution to shareholders. JCI Gold borrowed R464.0m and underwrote the difference of R33m between the Durban Deep loan and equity as collateral to Western Areas. The total debt is estimated at R497m. JCI Gold, to settle its debt, would need a R500m dividend from its 43.1% holding in Western Areas. A 1160cps dividend will square the books, leaving Western Areas with R464m to complete the project and JCI debt free. FY 2/02 Q1 HEPS is expected to increase by 100% to 16.4cents. Advice: By selling options, enough cash was generated to pay the long-awaited dividend. US$104m was raised to the end of 2002, with an additional US$21m expected to be raised by the end of the March quarter. JCI, in need of cash, will benefit form a dividend forecast at 1 160cps, which will allow JCI Gold to cover its debt of approximately R497m owed to Western Areas. As the forecast dividend is partially discounted in the price, our recommendation remains HOLD.



Anglogold (52880c) – excellent cost control

In Q4/01 gold production decreased, by 3.6% to 53 471kg, as tonnage decreased by 6.0% to 22 530kt. However, recovery grades improved 2.2% to 2.37g/t. An outstanding feature of this reporting period was how well costs were contained over the last six months. Cash costs in nominal terms only increased by 4.6% to R2 791m despite the weakening of the rand. With most of the other regions performing as expected, the non-performance of the North American operations is alarming, despite the severe weather conditions. We expect to see an improvement from this region by the second quarter of this year. With AngloGold’s unsuccessful bid to acquire Normandy and the sale of its Free State gold fields assets, the company will lose its position as the world’s largest gold producer. However, by spending more than R3bn on capital and R575m on exploration during FY 2/02, organic and acquisitive growth will ensure its assets maintain their high yields. Production, with the sale of the Free State, will be 14% lower. A further reduction is expected for the March quarter, which has fewer production shifts and traditionally a slow startup in January after the year-end break. Costs are expected to remain flat for the first half of the year, after which we expect above-inflation increases. The higher gold prices in rand terms will impact positively on earnings. Headline earnings are expected to increase substantially with the higher rand gold price estimated at R101 500/kg for the March quarter, to 1 001.1cps, which is 28.3% higher than this quarter’s at 906.0cps. Advice: AngloGold is restructuring its asset base after an unsuccessful bid for Australian Normandy, and disposal of its high-cost Free State assets. The sale of the latter will change its South African risk profile as well as reduce cash costs. With the rest of the South African operations performing as expected, sustainability of cost control remains to be seen. Although the company is trading at a premium to our 5% real NPV model, it is cheap compared to its international peers and is a strong dividend payer. HOLD.

Goldfields (9850c) – fundamentals improving

Q2 FY/02 results showed that underground gold production increased, by 3.7% to 23 545kg, as tonnage increased 0.3% to 2 895kt. Further, recovery grades improved by 3.3% to 8.13g/t, mainly at Beatrix and St Helena operations. Cash unit cost decreased by 4.0% to R57 797/kg despite the higher tonnage throughput. With the weakening of the rand, all South African operations, except St Helena, recorded lower dollar unit cash costs than Tarkwa, which was the cheapest operator in the previous quarter. Gold output at Tarkwa decreased by 3.5% to 4 505kg while tonnage throughput decreased by 4.4% to 3 636kt. Cash cost in dollar terms jumped by 6.7% to $174/oz due to lower gold output. Gold Fields and Repadre Capital Corporation successfully concluded the acquisition of 90% in Abosso Goldfields Limited. Gold Fields has a 71.1% stake in Abosso and its Damang mine, which is also situated next to Tarkwa. Management will take advantage of synergies between Abosso and Tarkwa. The acquisition of WMC Resources Limited’s St Ives and Agnew gold mines was concluded in the beginning of December. The latest result only reflects December month’s output. The mine treated 698t, producing 2 117kg of gold at a cash cost of R60 274/kg (US$161/oz). When the production is annualised, it exceeds management’s forecast. Gold Fields, by investing US$13m, acquired a 51% stake in Arctic Platinum. A resource statement is expected at this quarter’s reporting. Earnings are expected to increase substantially, with the higher rand gold price estimated at R101 500/kg, to 207cps, which is 50% higher than this quarter’s at 138cps.

Advice: Gold Fields, as an unhedged company, benefits from the current high gold prices, despite a higher expected tax bill. Management’s track record on cost control will see costs lower during the coming quarter even at the higher forecast gold output. The company’s strategy to acquire shallow low-cost operations outside South Africa is gaining



momentum and will benefit shareholders in the longer term. The potential of the Arctic platinum project is not reflected in the share price. HOLD.

Banks – small fry cooked but not burnt

The rating agency Fitch had to eat humble pie by reversing its downratings following the irate response by the banks concerned as well as emergency talks with the Registrar of Banks. Below we comment on the small banks concerned. Clearly contagion, if any, does not apply to the bigger banks, including BoE, as regards its minimal and very cautious exposure to microlending. In the comment on the small banks it should be noted that their debt:equity ratios were well below the equivalent for Saambou i.e. 17x which, in any event, resulted in a capital adequacy ratio of around 10x which met the requirements of the Banks Act. In similar vein to the other small banks, BRAIT CE Anthony Ball said that the company was extremely liquid and had sailed through previous crises. This tends to be borne out by the September interim balance sheet which showed a conservative Debt Equity ratio of 1.74 and current liabilities (deposits not recorded and could well have been lower) to equity of 1.57. We accordingly maintain our HOLD recommendation on the stock. ABIL has long been regarded as the leader in the industry and was indeed consolidating in late 2000 and H1 round about the time when Unifer went on its ill-fated lending spree. We have no reason to doubt its CE Leon Kirkiniss’s statement, quoted in the Business Day of 11/02/02, that it could repay all its liabilities and still have enough cash to meet its funding requirements since its book is self-funded and two of its competitors are no longer operating in the market. HOLD. The only reason AFRICAN MERCHANT BANK has been given a pedestrian rating with a PE of 4.8x, apart from being in a lowly rated sector, is its relatively humdrum growth in Heps over the past two years of 10 to 13% p.a. There has never been any question whatsoever as to its financial soundness and, in similar vein to the comment by Abil’s CEO in the Business Day of 11/02/02 its Director, Andrew Sprague, said it had a cash balance of R500 million enabling it to repay every deposit if it had to and still have surplus liquidity. This is borne out by a Debt:equity ratio of 1.05 while deposits comprised only 81% of equity at the last count. The company has a share buy back programme in place which will enhance its earnings and prospects. Accordingly we maintain our ADD call on the stock. As with the other members of the sextet of small banks in the Fitch rating volte face, CORPCAP boasts impregnable looking ratios such as a debt:equity ratio of 2.66x with deposits a mere 81% of equity. The company’s main thrust has been private equity but it is in the process of building its annuity income base. Our main gripe has been the generous bonuses paid to directors but this is part of its business model which includes attracting top quality executives and rewarding them on a performance related basis. We have been intending to visit the company, having already received a presentation by management, in order to discuss these and other issues. In the meantime, we maintain a HOLD recommendation.



Banks – big ‘uns, bloodied but unbeaten

Unifer, Saambou, interest rate hikes, rand dampened consumer lending and GDP growth together with increased bad debt fears – you name it, SA banks have had it all thrown at them. Their growth rates have declined to 20% or lower from the heady era of 20 to 30% p.a. not so long ago. To add insult to injury, forecast Resources eps growth on a rolling 12 month basis (see table in Portfolio Strategy) is likely to be almost double that of the Financial Index. The margin narrows to a whisker in the ensuing 12 month period reflecting the relative lack of volatility of banks earnings as against the inherently roller coaster nature of commodities. Needless to say, banks are currently getting no marks for this right now! Why not?

Well for a start, from foreign investors’ perspective, Resources still appear to have legs on H2 U.S. recovery hopes and, while they may recognise the value in SA banks they feel no sense of urgency to invest while lower GDP growth, higher inflation and interest rates, Zimbabwe and a weak Rand remain issues. They may well find better value in other GEMs. Moreover, SA institutions, if anything, have been trying to move from overweight Financials to at least onweight Resources.

Although none of this may change in the short term, by the same token, none of this need deter the individual investor from making longer term purchases at attractive entry levels. This is borne out by the graphs here of sector earnings versus the ALSI as well as the PE Relative which is not only a low for the 10 year period shown but indeed for decades! In addition we show the index with prime and insolvencies which put paid to any fears of positive correlation in that area. Nedcor and Stanbic are good examples of value available in the sector.

NEDCOR

NEDCOR

INVESTEC

STANBIC



Woolies (395c) – rising inflation clouds outlook

FYS – 06 (Rm) 2001 A 2002 F 2003 F Turnover Textiles Food Distribution

5,955.0 3,259.0 2,566.0 130.0

7,000.0 3,654.0 3,129.0 217.0

7.910.0 3,980.0 3,690.0 240.0

Operating profit 188.0 228.0 260.0 Finance income 258.0 305.0 370.0 Pre-tax profit 446.0 533.0 630.0 Taxation 147.0 180.0 211.0 Profit after tax 299.0 353.0 419.0 Country Road -19.0 8.0 10.0 Attributable income

280.0 361.0 429.0

No of shares (m) 900.0 905.0 905.0 EPS (c) % growth

31.5

39.9 26.7

47.4 18.8

DPS (c) % growth

15.0 17.0 13.3

20.5 20.5

Dividend cover (x) 2.1 2.3 2.3 Despite the impact of rising inflation on selling prices, Woolworths’ textile division is committed to compromise on neither quality nor margins as part of the ongoing rebuilding of its relationship with customers. Sales volumes are forecast to decline in the next year and no trading space expansion is planned in the foreseeable future. The food division’s growth is underpinned by a commitment to innovation, new product development and adherence to ultra-stringent quality standards. National brands’ share of turnover has peaked at 4.5%. Growing demand coupled with relatively small market share will drive further growth. Financial services’ growth will be accelerated both in the card division (which simultaneously benefits revenues in the stores) and in the fast-expanding loans division. Bad

debts remain well within acceptable levels, while loan criteria remain more stringent than the market as a whole. Country Road has been given its last lifeline. If current initiatives to restore profitability fail, management has indicated it will seriously consider disposal of the investment. Gearing remains low despite growing customer loans. Our concern relates to the “true” profitability and return on investment for this business after appropriate cost allocation, although the 31% sales contribution must be recognised in the equation. Perhaps management should consider introducing gearing in the business and returning cash to shareholders. In line with all apparel retailers, Woolworths is budgeting for lower volumes in the wake of rising inflation. While tax cuts will fill the unfunded gap between wage hikes and current inflation, the risk is that consumers will resist anticipated 15% price increases, placing pressure on retail margins. While earnings are protected by growing food and financial services revenues, overall growth reflects a declining trend and the risk profile has risen. Our 365cps valuation is based on a 5% discount relative to the FINI on a forward rolling one-year basis, which factors in the additional apparel risk offset by the stability of food and financial services activities. This is underpinned by our 376cps sum-of-parts value. Advice: We have lowered our forecasts and are anticipating a more difficult trading environment in H2 FY2002. HOLD

Shoprite (694c) – rising inflation turbocharges turnover & profits

With its domestic market largely saturated, Shoprite brand’s local operations plan to enhance earnings through improved store locations and space utilisation, product mix enhancements and cost management. Commencing FY2004, profits will rise strongly as unproductive leases



terminate. The brand’s dominance remains unchallenged with foot traffic continuing to grow. Opportunities to infiltrate the township market remain a key objective going forward. The Checkers/Checkers Hyper brands continue to disappoint, although the new marketing drive to entice competitor shoppers is about to commence. This initiative represents potentially the largest opportunity for profit enhancement in the South African region. The franchise division will only come into its own from FY2003 onwards and represents a potentially large growth avenue. But management will expand cautiously, given their perception that this market has become heavily overtraded and a fall out could occur fairly soon. The African division remains the group’s largest growth driver, with further penetration planned into Egypt and a greenfields operation soon to commence in Ghana. Profit volatility will rise, given the increasing exposure to currency fluctuations. Investors must also anticipate start-up costs as new country exposures are established. We expect 20% of FY2003’s operating profits to be derived from the African division (17% in FY2001). The integration of the House & Home and OK Furniture brands into a single entity is forecast to deliver substantially-improved returns over time from a very viable R1.2bn pa business unit. Shoprite’s target market is a major beneficiary of SA’s 2002 budget and will underpin its core customers’ ability to fund rising food inflation. FY – 30/06 (Rm) 2001 A 2002 F 2003 F Turnover Food – SA % growth Food – Africa Franchise Furniture

19,597 16,085 1,566 1,350 596

21,717 17,650 9.7 2,085 1,350 632

23,935 19,284 9.3 2,619 1,350 682

Operating profits Food – SA Operating margin % Food – Africa Franchise Furniture

406.7 241.2 1.50 70.0 50.0 45.5

544.0 313.0 1.77 130.0 50.0 51.0

647.0 412.0 2.14 130.0 50.0 55.0

Finance costs Pre-tax profits

+4.5 411.2

49.0 495.0

55.0 592.0

Taxation Tax rate (%)

99.7 24.2

134.0 27.0

166.0 28.0

Profit after tax 311.5 361.0 426.0 Minorities 3.2 6.0 7.0 Headline earnings 308.3 355.0 419.0 No of shares (m) 543.5 517.0 508.0 EPS (c) % growth

56.7 27.5

68.8 21.3

82.5 19.9

DPS (c) % growth

20.5 13.9

24.0 17.1

28.0 16.7

Dividend cover (x) 2.8 2.9 2.9

Advice: While the H1 R40m currency gain may not be repeated, current strong turnover growth arising from rising food inflation will underpin profit growth as will larger than normal “stock profits”. The African division’s growth will accelerate with an expanded presence in Egypt and Ghana. We believe a FINI PE relative of 1.1 is appropriate relative to the stock’s lower risk profile, giving a 9.5 FPE. Our one-year price target is lowered to 850cps due to changing market conditions, but the share remains a BUY.

SNIPPETS

Metorex (287c) – expect a spike Whilst the interim results for Metorex were poor (headline eps of 10.76c vs 40.45), earnings for the second half could improve significantly on the back of recovery in base metal prices, rand weakness, a higher gold price and higher antimony prices due to reduced Chinese production. Copper: Anglo American’s desertion of the Zambian copper belt does present opportunities to smaller players to acquire some of the more profitable operations on the Zambian copper belt. Chibuluma South (currently on care and maintenance) will become profitable once the copper price recovers. Gold: Metorex currently produces approximately 80kg of gold per month from its Cons Murch operation. Given the recent strength in the dollar gold price and concurrent weakness in the rand, revenues from gold production could increase significantly in the next six months. Antimony: Chinese production of antimony remains in a state of disarray due to interference from the central government. This situation has not been reflected in the price of antimony due to the drawdown of stockpiles in China and Europe. Management is of the opinion that stockpiles in both China and Europe must be close to depletion. It is therefore possible that the antimony price could spike on the back of a global recovery and insufficient supply. SPEC BUY.

Kumba (4950c) – kick down the line

Heps of 177c for H1 to 12/01 were in line with our expectations and we are tentatively forecasting 390c for the year to 6/02 given that volumes should be higher, $ prices of exports for the most part level or slightly better, and the Rand effect felt for the full H2. There are several pleasing aspects of the results including good cost control, on schedule implementation of expansion plans and satisfactory progress with acquisition of black empowerment partners which will facilitate obtaining



additional reserves as well as with such issues as the possible privatisation of the Orex railway. We expect next year’s Heps to be closer to the upper end of the consensus range of forecasts i.e. 646c. This would put it on a FPE of 7.3x at the current price of 4700c. We are however, reverting to our HOLD recommendation as we believe the company is unlikely to maintain its superb cost control into the second half. In terms of product sales, it is probably getting close to ceiling until expansion kicks in down the line.

Hiveld (1750c) – needs Sustegen Results for the year to 12/01 were every bit as rusty as expected. With turnover down 2%, heps of 25.9c and a div of 15c, the glory is not exactly palpable, moreover the taxman came to the rescue of its heps yet again (how embarrassing), and stocks must have been up with Net current assets up 15%. It’s quite possible though, that a general tidy up was conducted ahead of Acinerox’s takeover of Columbus, but certainly this does reflect tough times in the industry. Still, Middelburg was no great shakes under Barlow, nor has Columbus thrived as a JV, and its departure to other hands will be a relief. If you have to be in Steel, rather be in Iscor or Kumba. SWITCH.

Transhex (1540c) – conservative & impressive

Ahead of its March year-end, Transhex appears to be set for a better H2 after a disastrous H1 when it was hit by operational problems, higher costs and lower market prices for diamonds. The new CE, Calvyn Gardner (ex Highveld), is conservative and impressive. It seems Rembrandt is distancing itself from management, as it is non-core and Mvelaphanda holds an option over its holding, strengthening its black empowerment standing. Both government and Anglo stand behind the group, which will aid it to get further mining concessions. Consensus forecast eps is 192c for FY3/02 followed by 283c to 3/03. At the ruling price of 1480c the FPE is an undemanding 7.7x and then 5.2x and it is an ADD.

Chemserve (1525c) – let’s bow out together

Results for FY 12/01 were in line with our expectations of 180.7c heps, placing the stock on a PE of 8.5x. On a like for like basis, turnover would have been up 30%, but the R322 million (2/3rds cash, 1/3rd scrip) acquisition of an assortment of AECI businesses bounced turnover up by a nett 53%. Shares in issue rose by 7.9 million and exceptional charges rose through goodwill amortisation and restructuring charges relating to these businesses,

particularly AECI Coatings. With exports accounting for only 8% of turnover and imported cost components, Chemserve is largely dependent on local conditions for prosperity, even if there is an element of import parity applied in its pricing. While the management heps target of 210c for the next year is at 16% slightly below the 21% compound growth achieved in the last 9 years, it is in real terms on par, and so remains an ADD.

Nedcor (12300c) – expansion plus

There has been some concern about the free float issue, but our view is that this is already in the price since it remains in the MSCI Emerging Markets Free Index unlike Absa and Remgro. Old Mutual holds 54% of Nedcor which has a market cap of over R28 billion so while this may be negative for some larger investors this is not a major issue for others. Another concern was the possibility of additional tax in the Budget but, with banks paying more anyway, it was not necessary. Finally, while it is vitally important to distinguish clearly between organic growth and translations gains we see the former as satisfactory in the circumstances and regard the expansion offshore as a plus point given our view of the Rand. With Feps of 1860c and a Fpe of 8x on the current price of 12560c plus a FDY of 4.7% we recommend a BUY.

City Lodge (1100c) – SISA’s preetier seester!

In sound interims to 12/01, diluted heps were up 17% from 47.6cps to 55.8cps, for a rolling heps of 112c (PE of 9) and a div yield of 5.6%. Growth came from new hotels opened, which was timeous given the decline in occupancies by 2% to 72%. International arrivals were the main source of the decline, down from 8% to 5% of the revenue. Notably, the lower cost brands in the group held up best. These 2 factors pointed to weak results for Sisa which proved to be the case. Depreciation was also up courtesy of the new hotels and the level of refurbishment in the group. Given that two new hotels will come on stream in April, a rebound in tourism is expected, the World Summit and the Cricket World Cup next year, the group is confident that earnings growth will be maintained for the full year and is well positioned for next year. HOLD.

Cashbuild (410c) – cashing in on rebuilding

The interims to 12/01 seem to indicate a wrapping up of strategy in place since the “bath” of 06/00. With debtors down from R40 million in 1999 to R30 million now, it’s clear that the money is getting collected and, with creditors



and trade liabilities up from R167 million in 1999 to R311 million now and cash up from R17 million in 1999 to R116 million (500cps), it is plain that it is operating the business off somebody else’s balance sheet and keeping itself massively solvent. Interest bearing debt is negligible. The results show no growth in turnover but “The 5% reduction in cost of sales is as a result of a continued emphasis on stock management, rooting out shrinkage, obsolescence and unwarranted markdowns. Improved purchasing strategies, stocking a higher margin product mix, as well as matching product range to community needs have enhanced sales margins”. Then from PROSPECTS: “The company will continue to fund its expansion program from internal resources and intends opening up to 10 stores per annum in line with strict financial and operating criteria.” There you have it: get the model right, then roll it out! It is in the recommended income portfolio and is staying put. BUY.

Aspen (710c) – skiing along just fine

In interims to 12/01, Aspen showed heps from continuing operations up 42% for a rolling heps of 56.4cps and a PE of 12x. Moreover, this was with earnings fully taxed on a rate of 30% vs 27% previously. Possibly the only disappointment was in CoPharma in the UK with declining margins, but that is certainly not beyond remedy. Our FY/02 heps forecast remains 62c and for FY/03 is increased 3c to 79c, reflecting more legs in the growth phase of the business with Mybulin exceeding expectations and the manufacture of Merck products due to commence. These do not factor in the possibility of a government shift on HIV drugs, which Aspen can fully exploit immediately. Our original call was an ADD but, since the results exceed expectations and there is a free call option on provision to government of HIV drugs, we upgrade our recommendation to BUY.

CS Holding (69c) – Cee a Strong H2

The group’s interims to 12/01 showed a 21% increase to 6cps. This was achieved from revenue of R149 million (+60%). The increase was mainly on the back of a successful integration with Getronics. The EBITDA margins declined to 13% (16%) because of high startup costs. The group’s cash conversion rate increased to 72% (53%). The current ratio declined to 1.5:1 (2:1) because of the increased interest bearing debt as a result of acquisitions. Despite a lack of demand in the industry, we believe the group will have its usual stronger H2. We maintain our forecast of 20cps for FY 6/02, putting it on a Fpe of 4.4x. ADD.

Bidvest (4240c) – exploit significant opportunities

Bidvest’s treatment of translation gains, which by weighting the rate for the last month of the period (H1) forward for the remainder (H2) giving a translation rate of R15.60 instead of the more commonly used month-end average (R13.50), resulted in around 5% higher operating income growth (31%) than would otherwise have been the case. Nevertheless the 18% growth excluding all translation gains was creditable with better than expected SA growth backing up more sparkling results from PLC (27% of

operating income). Bidfreight’s revenue growth of 5.2% was lower than forecast but margins improved from 2.8 to 3.3% as management shed unprofitable business. Bidoffice showed healthy growth as Kolak benefited from the demise of Siltek. On our forecast heps of 434c, the stock is on a Fpe to 6/02 of 10.1x on the current price of 4390c. Management is looking to exploit significant opportunities resulting from the Rand slide. ADD.

Rebserve (720c) – Bullish Gold price spill over

The company posted good results given the tough trading conditions. With reference to our note in the Morning Meeting Notes of the 13/02/02, the Mining and Technical services division contributed 38% of earnings to the group's profits from operations. During the six months the company has exercised a share buyback of 1% of outstanding share capital, which supported the improvement on heps, which was 55c, 1c above our forecast. The securing of contracts in Facilities Management Services and Mining and Technical Services divisions are key drivers of organic growth. The Facility Management Services division in a JV with WS Atkins plc (UK services firm) has secured a R15bn contract with Telkom. This division has experienced start-up costs and will soon realise the cost efficiencies to enhance earnings. Despite the cost of closure of the Brown and Weirs stores cash flows from operations remain strong. The balance sheet shows a healthy cash balance of R611m (318cps). We anticipate that the margins on the Food Services and Support Services divisions will come under pressure due to tight trading conditions. We maintain our forecast for FY6/02 of 118c, with earnings growth of 18% (off the revised pro forma base of 100.6c as stated by management). ADD.

Enviroserve (135c) – remain strong

Interim results from the waste management company are reasonable. Heps are up 16% on the comparable period to 12.95c. The boost in eps was due to the share buy back during the previous year of 10% of the authorized 20%. The black empowerment partnership with Lungisa Consulting has helped secure 11 new contracts and will add more value going forward. Cashflows remain strong with a recent acquisition of Conquip, a plant hire company. We forecast earnings of 30cps for the FY 6/02 implying a Fpe of 5.1x. we recommend a HOLD but an ADD on any price weakness.



Comair (c) – flying through flocking flamingos

Un-audited interims to 12/01 seem to be a stout effort in a period which saw one of the world’s biggest airlines go bust in the wake of WTC911. Operating results were steady at R25 million, in no small part helped by growth in turnover of 15% and, in spite of increases of R3 million each in depreciation and interest, cash earnings were stronger at R37 million up from R20 million. The plane is pulling up from the dive, even if it feels like it is flying through a flock of flamingos. You missed the plane if you didn’t sell at 140c after 911. Now I’d buckle up and HOLD.

Tiger Wheel (c) – a special on new assets?

Interims to 12/01 came in well ahead of expectations with heps up 247% for rolling heps of 135.4cps (PE=10). The period incorporating the December shutdown is the most sensitive, but a substantial improvement is expected for the full year. Balance sheet basics improved with the current ratio stemming its slide of the last 5 years firming to 1.2 from 1.13 and debt/equity firmed to 0.48 from 0.57. This was in spite of an increase of R340m in working capital, partly funded by R60m debt increase and R220m increase in payables. Operating cash flow of 40cps is also a big improvement on last year. Translation gains of 317cps were booked as a change in Non-distributable reserves in the balance sheet. Between 70-80% of production is sold in hard currency. The bad news has been destocking by the auto-industry, fortunately offset by growing percentage of fitment at new car level. The troublesome Babelegi seems to be operating at capacity. With a new factory in the US due to come on stream at end-2003, that will be a relief. The US plant will add 10% to the capacity of 5m wheels per annum and will take hard currency earnings to between 80-90%. There are no further expansions currently planned. Our original forecast of 140c heps for 2002 is now upped to 180c at the least. The stock offers the opportunity to buy relatively new world class assets at NAV with a business tossed in. Technically, the stock looks strong, holding above its 260 day moving average.

US Stocks – evidence against the Accounting mounting

The following on the latest on US accounting standards from the South China Morning Post: Investors have been dumping shares in any companies with whiff of “creative accounting” about them. Shares in US oil firm Anadarko Petroleum tumbled after it admitted to mis-stating profits. The Fed told large US bank, PNC Financial Services, to restate its accounts and put assets held on an off-balance sheet vehicle back on to its own books. Warwick University professor Anthony Steele said: “There has always been a culture, certainly in Britain, of what’s called “creative compliance”. He said that it was easy for a firm to move debt on to the books of a subsidiary. If a company’s financial reporting periods were staggered, then debts could be shifted to and fro and not show up on the balance sheet in annual reports. “ It’s no big deal really. All I would have to do is write a cheque. I can play table tennis with the overdraft,” he said. London School of Economics professor Michael Bromwich said: “I think it’s a bit early to say what’s going to happen in [Britain], but in America it is very clear something gung-ho will be done.” His State of

the Union address George Bush called for “stricter accounting standards and disclosure” (our interpretation is covering his butt because it just may be very necessary). The equity boom of the 90’s was supported in part by surges in corporate earnings some of which may well prove to be mirages. There was a time when institutional fund managers could not afford to be cynical as they would be left behind in the performance stakes, but now reliability of earnings reports is under far greater scrutiny than ever before. With quality of earnings going down, heps and possibly share prices could pay the price. As Warren Buffet noted in Fortune recently: Heroic assumptions can do wonders for the bottom line”. Could the day be returning that the best test of earnings is the dividend cheque to follow?

De-jargonifying – Our secret language revealed

ALSI-All Share Index, CPS-Cents per share, CAGR – Compound Annual Growth Rate, DCF-Discounted cash flow, EBITDA-Earnings before interest, tax and depreciation, EPS-Earnings per share, EV-Embedded value, (F)-Forecast, FINI-Financial and Industrial Index, FY12/00-Financial year ending 31 December 2000, GEMs-Global Emerging Markets, GLDI-Gold Share Index, H1-First half, H(istoric)-Past published as opposed to forecast figures, IT-Information Technology, NAV-Net Asset Value, p:e 12x-Price to earnings ratio of 12 times, p:e relative-Ratio of the price earnings ratio of a company to the market average. In simplistic terms; a p:e relative of 2.0x indicates the share is “twice as good as the average” and 0.5, “half as good” PEG ratio-Price earnings ratio to growth rate, PV-Present value,Q1 or Q2-First or second quarter, ROE-Return on equity, ROEV-Return on embedded value, HEPS-Headline earnings per share, DY-Dividends yield, Mkt Caps-Market capitalisation i.e. price of share multiplied by number of shares issued, F1-one year forward.



POLITICAL AND IR – Government nails its colours to the mast

TREVOR MANUEL’s budget this year, his sixth, is politically remarkable.

At the end of 2001, per capita income in SA was about R22 000 per annum – roughly R1 800 per month. Because this is an average, a large number of people are earning less. In fact, most South Africans earn very little.

To look at it from a different perspective, if the average is R22 000 and we consider what many BoE clients are earning, it is easy to imagine how poor some South Africans must be!

While this is so, we have a budget in which the governing political party chooses not to spend the available R15 billion on social services for the poor, but rather on tax cuts. As the threshold for paying income tax is R23 000 (from 1 March it is R27 000), the full R15 billion in tax cuts goes towards South Africans earning more than that average of R22 000 per annum.

What is going on?

Others are also asking that question. In parliament, Manuel has had to defend himself against allegations that he should have given the money to the poor, rather than to the “rich” by way of tax cuts. In a more sophisticated approach, a Sunday newspaper attacked Manuel for spending R900 million on tax relief for people earning more than R300 000 per annum. The R900 million, argued the newspaper, should rather have gone towards poverty relief. Indeed, from a R22 000 molehill, an income of R300 000 must look like Mount Everest.

If any evidence is needed on the government’s commitment to an “open economy”, this is it. Cut taxes, reduce the deficit – it is now at 2,1% of GDP, down from 10% in 1994 – and stimulate growth via the private sector.

In a very forceful way, this confirms the pledge President Thabo Mbeki made in his address at the opening of parliament: the government remains committed to an open economy. His speech was the words; the budget was the action.

The contrast with our neighbours in Zimbabwe cannot be starker. In fact, in the week after the budget speech Pres Mbeki, writing in his weekly column on the ANC website, attacked leftwing critics of the budget. He referred to the “live-now-and-pay-later” policies of Zimbabwe and stated clearly that SA would not follow that route.

One cannot ask for a clearer rebuff of Zimbabwe and the left in SA, and at the same time for a stronger indication of his support for Manuel.

In fact, one of the issues continuing to amaze me is that the investment community lauds government for its fiscal and economic policies – but then fails to give credit to Pres Mbeki. They focus on his stance on HIV/Aids and on

Zimbabwe as if those were the only positions he had taken in public life.

Do people really think that a government can pursue the painful and difficult path of creating an open economy, and the leader of the governing party has nothing to do with it? That a minister of finance can give tax cuts to the richest section of a population, and the president is not providing the political space for it?

Likewise privatisation. Manuel provided R12 billion in receipts for this year (mainly Telkom’s IPO) and R5 billion a year for the next two years. Again, this is a done by a political party with a very broad base in society. And this is a society where opinion polls indicate that 76% of voters are opposed to any form of privatisation.

And yet, as a previous analysis published on BoE’s website and in this newsletter has shown, privatisation is moving ahead.

If the pace of privatisation is judged by the amount of cash flowing into the treasury, not much is happening. If it is judged by evidence of the emergence of a new social and economic order, a different picture emerges.

Last year literally thousands of South Africans benefited from the privatisation of state property and forestry interests.

Can you imagine how a community in the deep rural areas, now partners with Mondi in forests and a local saw mill, will react to attempts to damage those forest or efforts to organise a strike at the sawmill? Or how they will now lobby the provincial government to repair the local roads so that heavy trucks may move “their” logs and sawmill products? Or the influence of newly established black entrepreneurs who have bought government land for commercial purposes and now have to deal with local authorities to get that land developed?

In a way this kind of progress is more important than the once-off capital to be raised by the initial listing of Telkom.

It is not just the money flowing into the treasury. It is also the creation of a new economic and social order. And clearly, that order is increasingly taking on the characteristics of an open economy – not Africa-style socialism, be it the Mugabe variety or the Nyerere model.

In that sense, Thabo Mbeki already represents renaissance thinking and, more importantly, action.

With this budget, government has (again!) clearly nailed its colours to the mast. Will investors react and give it the benefit of the doubt? We shall have to wait and see.

� First published on 28 February 2002 by BoE Personal Stockbrokers

J.P. Landman

STRICTLY TECHNICAL

GEMS – neighbourhood watch We have been mentioning GEMs (global emerging markets) more frequently of late because of the profound effect portfolio flows have on prices. For example before the last revisions of the MSCI were announced Absa and Remgro could not make headway against the tide of stock that kept emerging and it later turned out that both were being dropped from the new free float based index. Index effects are always going to affect price movements, although it’s usually only short term. In the greater scheme of things, GEMs are small fry but that’s our classification. By the end of May when the revision is complete South Africa’s weighting will be 53% of EEMEA (Emerging Europe, Middle East and Africa), 15% of GEMs and a miniscule 0.5% of ACWI (All Countries World Index). GEMs overall are 3.75% of ACWI, minnows among whales but that is where a large proportion of the world’s basic materials come from. MSCI EMERGING MARKETS

The GEM index (shown above) indicates a potential double bottom and a possible change of longer term trend but that will take a time. In the short term it could trade between the support and resistance levels indicated. Not coincidentally for the reason mentioned, the CRB Index, which contains both soft and hard commodities is a similar picture. CRB INDEX

WHO’S WHO IN THE ZOO The big gorilla at 0.52% of the ACWI is South Korea, which has recently put on a spurt.

KOREA – the silverback

South Africa is 2nd to Korea at 0.47%. Stripped of the thrust from rand depreciation it is struggling with short term resistance. The trend remains weak but it could consolidate and try to push through resistance. In the top fifty GEM stocks are Anglogold, Angloplat, SA Brews, Anglo and Sasol. SOUTH AFRICA – runner up

Another heavy weight is Taiwan at 0.46%, with the power of China behind it and tracking the overall index. TAIWAN – an orang-utan

China at 0.26% of the index fell out of favour and there has recently been a bit of a scandal in the equity market but it is on support now. CHINA – has to be a panda

There is no space for the little darlings, Russia at 0.12% and Hungary at 0.4% but both are tipped to outperform in the GDP growth stakes and equities.


EDITORIAL Stephen Meintjes, Barbara Price-Hughes, Vernon Reddy, Likhapha Seliane, Warwick Lucas, Kate Gerber, Noreen Green and Dave Eliot. Research material is drawn from within the BoE Group and external sources available to BoE Personal Stockbrokers. Based on these and other inputs BoE Personal Stockbrokers makes its own recommendations to clients.

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This publication has been issued by BoE Personal Stockbrokers (Pty) Limited. It is confidential and issued for the information of clients only. It shall not be reproduced in whole or in part without our permission. The information contained herein has been obtained from sources which and persons whom we believe to be reliable but is not guaranteed for accuracy, completeness or otherwise. All opinions expressed and recommendations made are subject to change without notice. No information contained herein, no opinion expressed and no recommendation made constitutes a representation by us or a solicitation for the purchase of any of the securities mentioned herein and we have no responsibility whatsoever arising herefrom or in consequence hereof. The inventories of BoE Personal Stockbrokers (Pty) Ltd may from time to time include securities mentioned herein.

WIDE RANGE OF SERVICES WITH WHICH WE CAN ASSIST YOU Portfolio Management In addition to our deal execution and custodianship services (see below), BoE Personal Stockbrokers offer portfolio management on a discretionary or non-discretionary basis. Retirement Planning Retirement planning can involve critical decisions. The BoE Group has the necessary skills and expertise to advise and guide you in planning your financial affairs for security, flexibility, tax efficiency and inflation combating investment yields. Estate Planning BoE will ensure that your estate and your will are correctly structured to fulfil your wishes in practical, tax efficient and cost effective terms. Personal Trusts The main advantages of correctly structured trusts are in their ability to help preserve your wealth coupled with tax and estate duty benefits. Depending on your personal requirements, trusts can be operational during your lifetime or come into effect at death. They can include charitable, educational, family and minors trusts. Through the years BoE has built a reputation as a first-rate provider of trust services especially designed to meet our clients’ needs. Custodianship BoE Personal Stockbrokers has a long tradition of distinguished achievement in this area. Our modern system developments enable us to respond and capture corporate actions and offers punctiliously. On our clients’ behalf we have been doing this type of business daily for many years. For investors who enjoy the challenge of managing their own securities portfolio but wish to minimise the associated administrative burdens, our personal custody

service provides an attractive alternative. We will collect income on your behalf and provide a detailed income tax summary. Personal Tax Planning The professional staff within BoE are available for your strategic investment and estate planning needs. Internet Services BoE Personal Stockbrokers has been a pioneer in the development online share trading and investment services for many years. It’s internet services are regard as the most comprehensive in South Africa. We provide our clients with a wide range of investment tools, which are designed to assist in the management of their share trading affairs. For more information go to: www.boepersonal.com INTERNATIONAL TRUSTS BoE International Portfolio Services Limited (BoEIPS) is a company incorporated in the Isle of Man, part of BoE International Group of companies and ultimately owned by BoE Limited of South Africa. BoEIPS provides 'Inter-Link' an investment administration and management service BoEIPS is the holder of an Investment Business Licence issued under Section 3 of the Investment Business Act 1991 of the Isle of Man and as such is an Authorised Person to conduct Investment Business by the Isle of Man Government Financial Supervision Commission. BoEIPS has been approved by the Financial Services Board of South Africa to advertise, canvass or market for business in South Africa. For more information regarding the above services that we offer, please contact your portfolio manager, who will be able to assist you. All contact telephone numbers are printed on this page.

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