The Biznews SA Champions portfolio was launched as a ‘bundle’ offering on the EasyEquities platform in January. The foundations of the portfolio is JSE-listed companies looking to conquer the global market. The intention is in line with Warren Buffett’s philosophy of holding each share “forever”. The Biznews team hosted the first webinar recently, in which the thinking behind the portfolio’s structure and individual share picks (eight of them) were shared. We understand the the world spins at different paces for individuals, and some interested parties were unable to attend. Therefore the full webinar with slides has been transcribed below, with full audio available. – Stuart Lowman
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The whole idea of the Biznews SA Champions portfolio is to try and have a look at South Africa as it stands at the moment and then to find the best way for a long-term investment, remembering that the kind of investor that one should be is to follow a buy for the long-term and hold if you can at all possible. I want to just sketch a little bit of background to get some perspective of where we’re coming from. So, there’s India in 2012 and I did steal some of these slides from an Allan Gray presentation they had recently. I’m sure that they would want the information and the knowledge to be shared as widely as possible, but that gives you an indication of what the NASA satellite showed India to be like in 2012 and that is India in 2017.
Just go back, look there. Look at satellite picture on the right-hand side, India 2012, India 2017 and in five years you can see an enormous increase in the amount of light being emitted by India into the atmosphere and that’s a reflection of growth. Then we have a look at South Africa in 2012 and South Africa in 2017. Now I’d ask you to have a look at this very carefully. Go down to the pictures for Kwazulu Natal and particularly Durban and you can see it going down on the South Coast because that reflects it best. When you look, that’s 2012, and that’s the 2017 figure and it should be quite easy for you to see what I’m trying to get across here. I’m just going to repeat this once more, just to get it into our heads. There’s India to start with in 2012. In five years’ time, that’s what happened to India. South Africa in 2012, South Africa in 2017.
Now this gives you a pretty good reflection of what’s going on in the two countries in relative terms. These are satellite pictures taken at exactly the same time, just five years apart and they do show you the one country is moving forward and growing economically, the other country, well, not so much. Then we reflect back into South Africa itself and there is a reason why those lights are dimming. Electricity distribution by Eskom. It is a figure that Allan Gray has put together in its presentation and you can see from 2012, I suppose where we had our picture that the distribution of electricity, which is aligned obviously with the amount that’s being used in the country is down and down quite significantly.
If you have a country that is growing, as you can see South Africa was between 2001 and certainly 2006 and thereafter to about 2008 before the global financial crisis hit, you can see that electricity demand increases, but the minute things turn around, when the economy declines, then you have the opposite occurring. In South Africa there’s a possibility that part of this is done through the savings of electricity after the high prices that Eskom has been charging, but all round, if you’re using less electricity, it is a reflection that your economy is growing less. One of the reasons why we started the global portfolio which has now been going for nearly three years was of a concern of the mismanagement of the South African economy. On the one side, we’ve just seen the consequences of this.
Here we can see from a government perspective, again using Allan Gray’s research graph, you can see the real growth in GDP. In other words, how the economy is growing is in that red line and you can see what’s happened here, from that point in about 2012 to where we are now is a significant decline in economic growth. These are percentage figures, so in the mid naughties, we were hitting almost an 8% growth rate. Against this, the budget deficits, so in other words, what the government is spending has been growing. Budget deficits are the differences between the growth, rather the income that the country gets, and the expenditure, the money it spends, therefore, the difference between taxes that come in and money that’s spent outside of it. This is the next graph that I wanted to show you because it does give you a very good indication as well, of what’s happening with government finances.
Again, an increase or a surge up until democracy in 1994, just after democracy came in, we were at around 50%, that’s government’s debt to GDP ratio and then excellent management of the economy all the way down until the global financial crisis and for the coinciding of the Zuma administration in 2009, we have seen just one-way traffic and that has been the expansion of government debt and it’s now at the highest level ever, higher even than in the worst days of Apartheid.
That’s the background that you have to deal with if you are an investor in South Africa and clearly, if you’re an investor in South Africa you also have to have the market in perspective and this is an excellent graph. It shows the total world market and then emerging markets here in yellow and South Africa as part of the emerging markets.
So, what you’re saying here is that those little red dots reflect the country that we’ve just explained or given some perspective to, bad economic management, debt rushing out of control, or certainly at the highest level ever, government debt, low economic growth, decline in the amount of electricity used. This is not a recipe for profit growth and for corporates flourishing. As a consequence of that, we have to see it in perspective and what the smart guys have been doing is they’ve been looking outside of the country. During all of this time, however and particularly recently, you can see that the Rand has appreciated very strongly. In 2016 it was trading at worse than R16.00 to the US Dollar, it’s now trading at around R12.50, as you can see from that graph.
Alec, sorry to interrupt, the graphs aren’t updating, so we’re stuck in the deficit versus growth graph.
Ah, okay, thank you for that. I’ll go back a little, the deficit versus growth, this graph here. That was the number that I was talking about a moment ago. Let’s dwell on that one a little longer. You can see from that one that the government debt to GDP is now at a worse level than it was when the Apartheid regime ended in 1994 and indeed, when the debt to GDP peaks shortly thereafter. The excellent management that Trevor Manuel and before him Derek Keys, had over the country’s finances where they were repaying debt, has been reversed since the Zuma administration came in and since then it’s been one-way traffic. That’s a very scary graph if you’re an economist or indeed a citizen because what it’s telling you is that you are borrowing to fund operating expenditure.
Think of it as a family who are spending more than they are earning and the only way they can keep going is by bringing on more debt.
Moving onto the next graph and there we can see this was the graph I was talking about a little earlier. It also came in that presentation of Allan Gray. You can see the whole world, then you see emerging markets and then you see South Africa being a very small part of it. During this period, however, particularly recently, there’s the Rand from over R16.00 to around R12.50 against the US Dollar, which means it’s appreciated dramatically.
Why, what has been pooled there by emerging market currencies, and if you look at this, this is a graph since the beginning of the year, the blue is the Brazilian Real and the black is the South African Rand and they’ve been, despite the issues that have been going on in South Africa, the two of them have been pretty close together over this most recent period and it is just to reflect that when the desk jockeys in a place like London or New York decide to buy emerging markets they don’t really care about the fundamentals and that’s the primary reason for the Rand’s strength over this period.
Okay, so what do we have? We have an economy that’s in trouble, we have a currency which has gone against the trend, in fact has been appreciating.
Therefore, the citizens of the country are actually getting richer because the currency is appreciating, but when you look ahead, it is a time that you have to be somewhat concerned. Our rationale is focus on South Africa’s global champions; both the entrepreneurs who are able to make it work in the global environment and the companies that have shown they are good enough at competing in other parts of the world. It’s a very distinct trend that the SA Champions Portfolio has. It’s JSE listed companies, so it’s to give South Africa investors an opportunity to buy into this idea and it’s also very heavily focused towards entrepreneurs.
Entrepreneurs in these cases are people who have a lot of their own money in the business, so they would be watching more carefully perhaps than a professional manager who maybe has a couple of years to go until retirement and all he’s really interested in is maximising his share options. These entrepreneurs are owners of the business, they are looking to achieve the greatest return on the investment that they can in that company and these are the people that we want to be co-owners with. First of all, before we go into the individual portfolios, you have to understand that the portfolio is positioned offshore as much as possible. So we’re buying into JSE listed companies, but those that are entrepreneur driven and have a lot of their activities overseas and what that means is that they are positioned to benefit from Rand weakness, not Rand strength.
As you can see, when we launched this portfolio on the 23rd of January, the Rand was at R13.48 against the US Dollar, it’s now R12.77, so that is in an appreciation in the Rand of 5.3%. All other things being equal, our portfolio should be down by 5.3% as a result of this, given the way that we’ve structured the portfolio in being an offshore portfolio. Also, what we’ve done since the 23rd of January and this is most unusual. We invested that original R100,000 but two out of the eight stock, we sold the Blue Label shares at R17.08. That was on the 4th of May and this is not a play-play portfolio, it is in Easy Equities, it’s the bundle in Easy Equities, which is available to buy. I’ve put my own money into it.
You can buy in chunks, I think R250 or R500 a time, there’s more than 200 investors who are in the portfolio at the moment and there’s a responsibility when you have people’s money to not just sit on it and to sit on the portfolio when you see issues that are happening that could affect the value thereof. Now Blue Label is very closely associated with Net1. I think Net1 has quite a lot of prospects going into the future, but given the eruptions that have been going on there with the management, with the founder now having been eased out (eased, I suppose is a very polite term), Serge Belamant has left.
Why am I concerned about Blue Label? Because a transaction had been structured between Blue Label and Net1. Net1 is very cash rich and was going to be putting R2bn into Blue Label and a further R2bn into Cell C, which both of these companies, Blue Label and Net1 are requiring control of. It concerned me in early May that Blue Label was associated with all the noise around Net1. As a consequence and also, because its international operations are going to become less important in the future once it acquires the effective controlling stake in Cell C, the self-run operator in South Africa, our decision was to sell out there and to reallocate that to Naspers. We’ve gotten even more excited about Naspers since we bought the first 8% of it in January.
The reason for that is the growth, and growth of Tencent. I’ve done a lot more work on Tencent, which in fact, if you just took Naspers’ ownership of Tencent, the shares that it owns in it, if you were to sell it today, you would get 120% of the current Naspers share price. What’s happening here is Naspers’ shares in Tencent are being discounted in the Naspers share price, so you’re actually getting about 20% of the Tencent shares for free by buying Naspers, plus you get all of the other Naspers assets and there are some quite significant ones there. South Africans know all about Multichoice. So that was the decision, let’s make Naspers our biggest holding in the portfolio, let’s sell the Blue Label shares. So far, the decision has worked out okay. Blue Label’s down a couple of Rand and Naspers is up, so on both of those instances it’s worked out.
What we did on the 1st of June is we also sold out of another stock that was originally in the portfolio, that’s Wilson Bayley. We took a bit of a knock there, just over R10 a share, but we sold the entire holding because Wilson Bayley, although it does have an international arm which is doing well in Australia, it’s also heavily exposed towards South Africa with its construction operation and with the way that the South African economy is going, I felt it wasn’t correctly positioned in this portfolio for the moment. It’s a cheap share, but it’s probably going to be cheap in terms of its net asset value for quite some time. The other reason why was I really like Glencore. Now those who’ve been following my writing over the years would say, “But commodity share, what are you doing?”
Listening carefully to the webcast of the Glencore Annual General Meeting made me change my mind on this business. Well, first of all, I do know and I’m sure you’re aware that there is a South African element here. Not only is it listed on the Johannesburg Stock Exchange, but the CEO Ivan Glasenberg is from Johannesburg. So there’s that element, but the second thing is that he has positioned his company for the massive move that we are seeing from internal combustion engines to electric cars. Glencore has a very heavy focus on the materials that go into electric cars, specifically cobalt and copper and as a consequence of that, it has a very different structure in its portfolio of assets to companies that are better known as resource companies.
I like the company’s management; I love the fact that Glasenberg is the biggest individual shareholder in the company. So we’re talking about an entrepreneur as well, but most of all if we were able to invest in Elon Musk’s Tesla, which we’ve had in the Global Portfolio, it’s done amazingly well for us there, if it were listed on the Johannesburg Stock Exchange, then we would certainly do so. Well, this is another way of riding on the electric care wave. Those are the changes that we’ve made to the portfolio since January and that’s what the portfolio looks like today. It’s unlikely that we’re going to be making many more changes in the near future, never say “Never”, but from here onwards, the changes would only come if there were a structural or fundamental alteration in the business itself.
I’m very happy with the way that the business is currently structured and to give you an understanding of how this tends to work, on the Global Portfolio that we’ve been running for more than two and a half years, in all of that period there have been only two changes and both of those were due to fundamental issues that arose. The one was in Novo Nordisk, a company out of Denmark, which had been fudging the books to put it pretty plainly. The other one was Barclays PLC; where there was an event to do with whistleblowers, the Chief Executive’s action, and the way that board reacted to it, which I really don’t like at all, because it gives you a reflection of what’s going on inside that company. It’s not the kind of business that you want to be invested in long-term.
If an event like that were to happen to any of these eight stocks, obviously we would reassess, but for the moment, I’m very happy with where we are and every month we will be updating the progress of these companies to make sure that they are still on track. As you can see there, the shares that have performed, the portfolio’s only been going for four months, so it’s way too early to start making any assessments on it. Also given the fact that the Rand has appreciated by 5%, the companies that have performed and have pulled us against the trend in many respects, against that stronger Rand trend, are Naspers and Discovery.
The stocks that have been under pressure are Brait and I’ll dwell a little on that in a moment and MTN and the rest of them have kind of bumped along, although Mediclinic has been extremely volatile and if you were to have a look at Mediclinic just a few weeks ago, it would have made a big difference to this portfolio. Overall, the JSE’s all share Index has gained 4.1% since the portfolio was launched. We are only up 1.3%. I say only, that is after costs and I’m delighted actually, given that it is structured for a stronger Rand, so the Rand has been strong and our portfolio has nevertheless managed to withstand a lot of those issues. Stu, I wonder if there are any questions at this point?
No Alec, nothing at the moment, but we do encourage people to please put your questions on the right-hand toolbar. We’ll get to them as soon as they come through.
Let’s start off here with Naspers. Incidentally, the picture that I showed you was of Bob van Dijk, he’s the Chief Executive of Naspers. Many people will look at Naspers and come from the perspective of this is Koos Bekker’s company. Well, Koos is still involved, he’s the Chairman, and Bob van Dijk is the man that he selected, he handpicked to run the business. I’m very impressed with Bob. I took this picture of him in the member’s lounge at the World Economic Forum.
We had a lovely interview and in fact, if you go and listen to that on BizNews you’ll see why I’m impressed with this gentleman and very happy to have him as the custodian of our funds. To expect that Naspers can do another Tencent or find another Tencent is a little well, I would say over-optimistic, but just to fill you in briefly; Tencent has almost 900-million customers. These customers use an app called WeChat. That would be their default, so these 900-million people in China have WeChat on their phones, so they can swap and get Android phones or Apple phones or whatever phone they like and they still however will be playing and using the WeChat app.
That is a huge advantage that Tencent has over companies in the Western world where the operating system and the apps that are used on the phones are very different. I follow very closely, what is going on internationally in the move away from desktop computers to mobiles. Mobile is getting an increasing share of that market being an online publisher as we are at BizNews, this is very important for us to understand where the market is going in the field that we operate in and Tencent has an absolute stranglehold there, certainly in the Chinese market and something that is very hard to shift away from.
Naspers is the biggest single shareholder in Tencent, over 30% of Tencent is owned by Naspers, and you can almost discount everything else in the portfolio. Well, you can. You can take away everything else in the portfolio and I like Tencent so much that I’ve included it in our global investment portfolio. So, you can see why Naspers is an obvious biggest shareholding that we have here.
Moving onto Mediclinic, the company is run by professional managers. In fact, it’s the only one that you cannot associate with an entrepreneur, but it is a business that has lots of potential. It moved outside of South Africa some time ago. It has bigger assets in Switzerland and the UAE, and the UAE asset has been the one that has caused concern for investors. As you can see though, earlier, rather about a month ago in early May, the company had a presentation for investment analysts, which they loved.
The financial results were very good, it showed that the concerns that many had about what was going on in the UAE are now quite a bit easier to absorb and as a consequence of that just to look at this, it’s quite interesting if you have a look over there, at the share price that Mediclinic was at and this is in London remember. The London stock price was over 1100 pence and it came all the way down to this level here, which is around 700p. Now it’s escalated still, it’s gone a fair amount since then. But we’re still talking about a share price now around about the 800p level and in South African Rands with the Rand being strong, it has had a deteriorating impact on the Rand, so we’re a little bit below in Rand terms where we bought into Mediclinic, but as you can see from this graph, it’s quite a turbulent representation, the share price bouncing up and down, Stuart, happy so far?
I was going to wait for the MTN discussion Alec, but Ronnie wants to know why keep MTN?
Yes, I think so. Ronnie, if you don’t mind, we’ll get onto that. It’s a very good question and it has been, as you know or as you saw right up front, the worst performer in our portfolio. You might also be asking the same question of Brait, why keep Brait?
This company is managed by Christo Wiese, but in Pound terms has halved since Brexit. Now that’s quite extraordinary. If you have a look at this, this is the share price of Brait on the Johannesburg Stock Exchange and it’s gone from pre-Brexit levels of R150 a share to round about R75 a share, so why are we holding onto this one? Well, they haven’t had a terribly good ride recently; they have a number of investments in the UK. In fact, the whole focus was into the UK, so Brait is a play on the UK.
If you talk to currency analysts, they will tell you that the British Pound, they have been saying so for some while now, is the cheapest currency in the world and in fact, the best long-term bet that you could think of. It’s being affected recently, as the Pound by obviously Brexit in June last year and now the election that was called by Theresa May. The polls for the British election are showing that the landslide that she was hoping for is unlikely to happen, but what you need to be aware of in this case is that those polls are done with a different audience in mind to those who actually go out and vote.
The polls are done across the spectrum of ages, but young people here in the UK tend not to vote, whereas the oldies go out in full force and the Labour Party presumably, because young people only remember Tony Blair and not what happens through Labour Party policies in years gone by are two to one in favour of the Labour Party. So put that into your calculations and if you are now talking to people who are unlikely to come out and vote, they’re going to skew those statistics in favour of the Labour Party. Another issue comes up here, is that the oldies are getting a fright by having a look at a 7% difference between Conservatives and Labour and they will perhaps be triggered into going out and voting more than they might otherwise have done. That is something to bear in mind.
Perhaps the polls are accurate. They haven’t been accurate for a long time. They were accurate in France, but they certainly outside of that had been pretty inaccurate recently as we know from Brexit and from Donald Trump and my gut is telling me that the market is overreacting negatively towards the polls that have come out, that Theresa May and the Conservatives are unlikely to have a bigger majority than the one that’s being projected and that could be the final bounce or the selloff followed by the bounce in the UK currency. So, would I be selling Brait now with all of that? Clearly not.
A lovely picture of Adrian Gore, the Chief Executive and founder of Discovery, another company that we have in the portfolio, which is doing very well internationally and that we are banking on the entrepreneur.
Adrian must have plenty of air miles. He spends a lot of time on the aeroplanes and he spends a lot of time also looking after his health to make sure that it does not affect his ability to focus, I guess. The UK operation has been a bit slower, but again, living here, you can see the potential for the private healthcare sector. When we first arrived we tried out the National Healthcare and it’s okay, but it’s no more than okay. If you want a little more than that, you would be prepared to go to private doctors and increasingly we are seeing the potential. As the national health in the UK comes under increasing pressure, the private sector will be taking an ever larger slice of that and that’s precisely where Adrian Gore and his company, the wholly owned company of Vitality (they trade under Vitality) is positioned.
They’ve also done terribly well in their life insurance space. Discovery life head, Herschel Mayers spends, I think half of his time in the UK and the other half in South Africa, so they’re expanding very rapidly in that field. Once Vitality starts really kicking into gear, you can expect that the UK operation will be a very strong profit contributor, but that’s only the start of the story. They’ve done partnerships all over the world with the biggest players in pretty much all of the major markets, United States, China, Southeast Asia, etcetera. So, I’m very happy to be invested with Discovery and they haven’t let us down have they? So far, it’s both Discovery and Naspers bucking the trend of the stronger Rand. There’s the share price, it’s come off a little bit in recent weeks, and that could be directly related to the weakness in the Rand.
In fact, I’m sure it is because the underlying health of this company could certainly not be in question, but because of the huge investment that they’ve made internationally, a stronger Rand is going to affect them but by the same token a weaker Rand, which is what we anticipate will give this company a really good boost.
Investec’s in a similar situation. There’s Stephen Koseff, who together with Bernard Kantor built the company from the start. I had the privilege of knowing these guys when there were only five of them working at the old Mooi Street offices.
As a young reporter for the Sunday Times at the time and those days the Sunday Times was based in the old office which is very close to where Absa’s head office is now and the Investec guys started in the old IGI Building, which if you drive down Mooi Street in Johannesburg, you’ll see is not in, and even then it wasn’t in a very fashionable part of town. But if you go into London today and you see number two Gresham Street, which is pretty close to Bank Station, you’ll know that they have moved up a long, long way in the world and as far as the UK operations are concerned, Investec is just getting stronger and stronger. I liked what I heard at the year end results. It appears though that I might be in a minority there. Share price of Investec since those results has actually come under pressure.
This is again though, in Rands, it’s the price that you’ll be buying on the Johannesburg Stock Exchange and that is also a reflection of the strength of the Rand affecting the price of, or the perceived value of Investec’s offshore assets. Its European assets or more particularly its UK operation is now a very sizeable part of this business and as a consequence, it is perceived as a Rand hedge. I often like to, whenever I invest in companies, I like to do what Phil Fisher, the man who wrote that brilliant book called Common Stocks and Uncommon Profit”, when Warren Buffett was described by Charlie Munger, his partner, he was said to be 85% Benjamin Graham and 15% Phil Fisher.
Well, Phil Fisher writes in that book about “scuttlebutt” and scuttlebutt is all about the informal things that you see in a company and try it with Investec, phone their call centre and you’ll hear a different calibre of person engaging with you that you’d get at most other companies, a similar thing with Discovery by the way, also similar just as an aside with UBS. I engaged with UBS a couple of weeks ago, the Swiss Bank and was unbelievably impressed by everybody that I met in their building, very interesting, but both Investec and Discovery have put a huge focus on the ability of their staff and people and at the end of the day when you’re investing in companies, that’s what you’re investing in. You’re leveraging the human potential of those companies. So, Investec is in our portfolio and very happy to be with it long-term.
Steinhoff and there’s one of the great entrepreneurs of South Africa, Markus Jooste, has become very much an international company now. The acquisition that it made of Mattress Firm in the United States was the biggest acquisition ever by a South African business offshore. It’s in the league of the kind of elephant that Warren Buffett would like to acquire. His biggest acquisition was only around $26bn and this one’s around R20bn, so it gives you an understanding of how big the bet has been by Steinhoff, and they also have a very strong business here in the UK as well as an even stronger one in Europe. Steinhoff does still have South African links but the percentage of the South African holding is now becoming far less.
They have recruited top South African retailers and top people from the country in the business. It’s almost like the next SABMiller and those of you who were lucky enough to invest in SABMiller when it started its global adventure in 1994 would know how well that has served until it was sadly acquired by 3G Capital or Anheuser-Busch InBev. This is a company on a similar growth path. Jooste and his partner, in fact, the biggest shareholder here is Christo Wiese, the South African entrepreneur, has said that they have Ikea in their sights. They’re already the second-biggest furniture retailer on earth and that’s where they’re heading, to be number one. So, it is a ride that we’re likely to see continue for quite some time.
This is the Euro price which is maybe a little, given that the Rand has strengthened, is a little more flattering, but as you can see since we bought in in January, it’s done very little, but that’s the usual trend that you, with value investing, you buy for the long-term and it takes a little while for the rest of the world to follow suit and then to squeeze your margin of safety and indeed, to push it above that, very happy with the Steinhoff investment.
Here’s the new one that we’ve only recently added. That’s the Johannesburger, Ivan Glasenberg, they call him, and there’s the head office of Glencore. It is something that I’ve kept away from for many years.
But as mentioned in the introduction, Glencore is now really a play on the massive swing from internal combustion in engines to electric cars and if you have a look at the comparison of the evaluations between Elon Musk’s Tesla and General Motors, it will give you an understanding of how big this megatrend is. Musk is going to produce about 100,000 cars this year, General Motors produces 10% of all cars on earth, 100,000 wouldn’t even register on the scale. Yet Musk’s company has a higher valuation, a higher market capitalisation than General Motors and that is because when people invest, you look into the future, your calculations are done on growth rates.
If you are contracting as General Motors has anticipated doing, then clearly the growth rate will be minimal, even negative whereas if you’re growing at the rapid clip, that Musk is intending to and that electric cars are growing at then you can see very clearly the way the trend is going. I liken it to newspapers and the internet. If you compare what happened to companies like Google on the one hand and the New York Times on the other hand, you can get an inkling of what’s going to be happening in the motor vehicle sector, so why Glencore? Well, Glencore, if you did like me, listen through to the whole webcast of their Annual General Meeting, you’d have been privileged to hear Glasenberg give a presentation on the way he’s positioned Glencore into the future and the positioning is very much focused on electric cars.
They’ve invested heavily in copper, being the biggest producer in the world as they have in cobalt and as they have in chrome, all three of which are products that are going to be used in huge amounts in the new electric cars. He did some calculations for us, which he shared with those who were either at the AGM in Switzerland or following on the webcast. You can see that the prospects for those three metals are very different to the prospects for others and I would hasten to add here that if you haven’t read the piece on platinum that I wrote this morning for the BizNews Premium subscribers for yourselves, then do it. You’ll see why platinum is in big trouble because 40% of the production of platinum goes into internal combustion engines.
In fact, it goes into exhaust pipes, what we call auto catalysts and if 40% of your market is to disappear, which is what’s going to happen to the internal combustion engines in the years to come, then you wouldn’t want to really be invested in companies that are heavily exposed to that. So, I know there are quite a few value investors, value asset managers who are quite excited about platinum’s prospects because it is cheaper than it has been for many years. I would take completely the opposite view until such time as platinum finds something to replace the demand from auto catalysts because that demand isn’t going to be there for a whole lot longer, Stuart.
Alec, while we’re on the commodity side of things, Robert de Vos wants to know if you have an opinion on Billiton, also big in copper.
BHP Billiton, Robert they’re also big in oil though and the problem with oil is that it’s now completely capped. Once fracking started coming through, it changed the oil play completely. What happens now and again, it’s a bet on human ingenuity, is that as soon as the oil price goes to a level that allows the frackers to become competitive again. Then new wells open up and there is so much shale gas available in the United States alone, let alone the rest of the world, that as human ingenuity starts improving the extraction methods, we can anticipate that the shale will be produced cheaper and cheaper and that will have a negative impact on oil.
I quite like Sasol, but my concern with Sasol is that they need to, first of all land the chemicals product, and thereafter to continuously reduce their exposure towards oil. But at the moment Sasol is an oil play, a South African Rand oil play admittedly, which gives you a bit of a Rand hedge, but I would be watching Sasol if it starts getting really cheap. But to go with an international company that is heavily exposed to oil is like going with an international company that is heavily exposed to platinum and I think you’re reading me here with BHP on the one hand and Anglo American on the other, so for me Glencore is just in a different league.
Thanks Alec, MTN’s next. Ronnie asks why do you hold onto it because in his mind, aren’t there management ethic issues and is that not a core issue when you hold a share forever?
Well, there’s the picture and that’s the reason why we’ve bought into MTN and are very excited about their prospects. Rob Shuter is a South African who went offshore and he was poached by Vodafone. He handled Vodafone Europe. He’s a member of their top team and somehow Phuthuma Nhleko from MTN, the Chairman decided or managed to get Rob Shuter back, but changes in the managerial situation at MTN have been traumatic. The team that’s been brought in are about the best money can buy. Apart from Rob Shuter, himself and I must admit to have been very surprised to see him go into MTN, but he must be excited by the potential of the company.
They’ve also managed to bring across Ralph Mupita, who’s one of the top guys at Old Mutual. Ralph I guess looks at Old Mutual and decided it didn’t have the prospects and remember he was running a very sizeable part of the portfolio and was set to be running the South African operations in future when it was separately listed, so that’s quite juicy, but he rather decided to throw his lot in with MTN, similarly Stephen Van Coller, who was the Chief Executive of Absa Capital and on the main executive committee of Absa or Barclays Africa. Stephen would know in quite intimate detail what’s likely to happen with Barclays Africa when it is a separate business already.
At the time that he resigned, he did see the sale starting by Barclays of its African asset and of course, we’ve almost seen the conclusion of that process just in the last week or so. Stephen is also one of those fast thinkers. I had a lot to do with him a couple of years ago when he brought (I think it was only last year) the entire faculty of Singularity University to South Africa to explain to clients and more particularly to his colleagues at Absa Capital what the world was going to look like in the Fourth Industrial Revolution.
Now Stephen himself had been exposed to these guys and if you Google Peter Diamandis, you’ll see he’s the head of that faculty and he came out with a lot of his colleagues, you’ll see that he’s really plugged in with the best and the smartest in the world. He engages regularly with Elon Musk, with the Google guys. In fact, they funded the start of Singularity University and Stephen Van Coller is very plugged into that world. So, here at MTN you have a guy who’s been brought back from Europe, who was on the fast track to being the number one in the number one cell phone company in the world. He’s come back to South Africa, you have the chap who would be running Old Mutual South Africa after the unbundling is concluded, you have a fellow who’s plugged into Singularity into the Fourth Industrial Revolution and he’s chosen to go to MTN to work on the plan that they have.
You also have this incredible entrepreneur in the name of Phuthuma Nhleko who has managed to steer the company through the very difficult waters that it had after the problems in Nigeria, which depending on how you look at it is probably a failure of the management at the time, and at the time he was the Non-executive Chairman. They have hundreds of millions of customers and in the new age, as we’re seeing from the winners in this new era, the Facebooks, the Googles, the Amazons, the Netflix’s. When you have the customer base all kinds of opportunities open up for you and of course, on top of that this customer base is all through mobile, which is the fastest growing area in the world, (the accessibility of people in mobile).
Now I think if you want to find a business that has all of the pieces in place and is really cheap, MTN’s the one and I’m in a way quite excited to see the share price falling because it means like when hamburgers go on sale, you can get two for the price of one if you go to the hamburger joint on say a Wednesday night when they have happy hour. There you can see exactly what we’re talking about. The MTN share price has fallen quite significantly and this is only in the last year, remember. This is long after it had discounted the problems in Nigeria. So, there is another, the Turkcell legal battle is hanging over the company.
I did speak to Sifiso Dabengwa at the time that this all blew up and he explained to me in quite a lot of detail, it was an off the record discussion so I can’t go into it too much, but he explained to me in quite a lot of detail what was motivating this whole court case and either he’s a very good liar or MTN is pretty confident that it has got its act together here. It even installed an internal investigation from a High Court judge from the UK.
That came through with the kind of conclusions that the management are very happy now to go to court with Turkcell even though it appears as though there will be lots of embarrassment or further reputational damage that could come through, but is the reputational damage sufficiently relevant in the current context where you have had a massive overhaul of the management team and you’ve brought in some of the best talent that is available? I don’t think so. I think that now is the time that you should be accumulating MTN shares, much like when Warren Buffett accumulated American Express shares in the 1960s. These opportunities don’t come along that often. This is a fat pitch for long-term investors and I’m very pleased to have this in our portfolio.
Thanks Alec, I see you touched on Turkcell there because Robert de Vos was actually asking about your thoughts on the case, but other than that, I have no more questions my side.
Good well, let’s go through the portfolio then just to close off with and show you where we are. Again, we have five stocks here with 15% roughly. Naspers is just slightly bigger at 16%, but that’s partly because we’re dealing in rounded numbers here with the number of shares owned and three that are 8% each. Naspers is, if one was more aggressive you’d be quite happy to have them separately in addition to having hem in the portfolio. It really is a wonderful play on an amazing company that’s based in China, which is where the world’s growth is coming from. Mediclinic, although it’s down by 3% since we acquired the stock in January, much of that is not due to the performance of the company, but through the strength of the Rand given that Mediclinic is now primarily an offshore-based business. It still has some good Rand businesses but primarily an offshore-based business.
Brait was hit quite hard by the results of its UK retailer New Look. That showed sales were down by 2.5%, but New Look has 872 stores at just one of the Brait assets, they also own Virgin Active in the UK. They have some fantastic UK assets and if you are thinking that the UK will come out of Brexit better than the markets are anticipating or some people are anticipating then this is a play on the UK and I’m certainly in that camp. Discovery, well, there you have 8.5% already since January who would be arguing against the entrepreneurial skills of Adrian Gore and those that he’s put around him.
Similarly Steinhoff, that’s bounced around a little bit, it’s slightly below where we bought in, Glencore has also come under pressure in the last few days, but remember this is a long-term bet on electric cars and then I’ve gone into enough detail on MTN to perhaps entice you at that 9% decline. Do remember that this is a long-term portfolio. This is a portfolio now and after the two changes that we’ve made in the last four months, it’s a portfolio now that I’m very happy that you can even encourage widows and orphans to put their money into. It’s one that you’ll invest, you’ll hold onto, as long as you’re prepared to hold for three years plus, I’m pretty confident that you’re doing to show some very good returns.
