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Bowler Metcalf, Amazon, Alphabet and Google in focus

‘When I look at both Amazon and Alphabet coming out, there’s a lot of focus on the cloud business’: Mia Kruger – director, Kruger International.

SIMON BROWN: I’m chatting now with Mia Kruger: she is a director at a Kruger International. Mia, morning. I always appreciate your early morning time. The Bowler Metcalf update came out yesterday. It’s a stock I follow quite closely. I suspect, though, that in your world where you’re running a fund, liquidity becomes very important and a stock like Bowler Metcalf is perhaps just out of your universe – not because you don’t like it, but simply because it is too small.

MIA KRUGER: Good morning, Simon. Yes. Well, we run a very different sort of fund in terms of our fund construction and portfolio-management style, where we really favour the diversification aspect in terms of how many shares we have exposure to. We looked the other day, and I could share the numbers with you sometime. So we could actually go quite low in terms of if it comes to diversification. 

You mentioned Bowler Metcalf. It is a very interesting company because it’s very small, it’s been tightly held, it’s been family held, mostly by the Sass family. They have been running this business as a specialist company, not as a mass producer. And when you compare them and stack them up to things like Nampak and such, they do look much better and much more solid. I just looked at some numbers quickly this morning and I saw that at the end of last year they actually sat with about half their market cap in cash and in property. And they weren’t rewarded for that because they were trading at a price-to-book value under one. 

So yes, it does seem like the market is waking up to this great company and I think it’s its due time.

SIMON BROWN: And that’s one of the things that always attracted me to them – that they trade below book often. And that book is cash, it’s property. The book does sort of IP and other bits. 

Talking of IP and other bits, Amazon results. We’ve got earnings season in the UK. It’s been a perfect storm for them. I was reading a book by Professor Galloway on his expectations for business post the lockdowns. He makes the point that online shopping in the US had been growing at 1% a year for the last sort of two decades. It’s reached 16%. It grew almost 10% last year. That is 10 years’ growth in a year. And my sense is it’s probably locked-in growth. This has been a perfect storm for the likes of Amazon and it takes what was an attractive investment and just turns it into significantly more so.

MIA KRUGER: Absolutely. You’ve hit the nail on the head. When we consider how they positioned something. To add to your point there is the fact that, when I look at both Amazon and Alphabet coming out, there’s a lot of focus on the cloud business. We’ve seen that focus coming into the market with Microsoft reporting last week, and there’s a big focus this week, especially when you compare Amazon and Alphabet. The big reason for that is – and I’m sort of drifting off Amazon a bit here because we know it’s a great company and the prospects for it look really good.

But when you consider the Alphabet case, it is that they are going to cut out their cloud computing segment from now on as a standalone, reportable segment in their earnings; and that hasn’t been done yet. So there’s big market anticipation around that. 

We don’t think it’ll have the big impact that it had with Amazon. Amazon did that in 2015, and it actually turned out to be much more profitable at that stage, but they were the market leader with AWS [Amazon Web Services] at that time. They actually improved their margins from 12% to 24% just by showing people what was really going on below the hood. 

So when we consider what’s going to happen at Amazon, we don’t expect the increase in margin to be that significant, since Amazon is still very profitable in the rest of their business; the rest of their business sort of makes up 81% of their revenue. But we still think it’s a great way to go. And that’ll definitely contribute to how markets and how analysts take the results. 

Having said that, just getting back to the price movement the last year or so with two shares, when we look at Amazon, they actually had that big jump in there. When you consider what their price has done, their price has gone up 66% over the last year, but most of it had gone up until sort of the end of June last year. From July on it has been moving sideways. And it’s not been the same case where Google or Amazon has sort of recovered or performed pretty well going forward on a continual basis, not sort of moving sideways. 

So we could see some price movement if they come out. Another big thing that we are watching for is the Amazon Prime membership, whether people have actually increased using that or if they have had more subscribers to that after this last quarter. We know it’s been a sort of holiday season, people stuck at home and locked down, and it seems like they don’t have enough to watch with Netflix and with Disney Plus and all of that already. So it seems like people are just increasing their viewership and their membership to all these subscription services.

SIMON BROWN: We expect giant numbers. I’m curious, I didn’t know that Alphabet’s splitting out of the cloud. That is going to be fascinating. Mia Kruger, as always I appreciate the time. She’s a  director at Kruger International.

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I love this headline putting Amazon on the same page as Bowler Metcalfe!

Market cap: Amazon-USD 1,7 trillion ie ZAR 25 trillion
Market cap: Bowler Metcalfe- USD 55m ie ZAR 780

End of comments.

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