JOHANNESBURG — The Biznews SA Champions portfolio comprises of eight companies founded locally but making waves overseas. It’s built on the premise that the South African economy is currently badly managed, and the heads of these companies, entrepreneurs at heart, have found other avenues of income. Started in January this year, the portfolio has exposure in all corners of the globe. This month saw the Rand weaken which pushed the returns into positive territory, with gainers Naspers, Glencore and Discovery, dragged back by Brait, and its problem child New Look. It’s a fascinating hour long discussion with Alec Hogg, looking at the rationale behind each stock, and why we plan to hold each one forever. Until next month. – Stuart Lowman
The rationale for the Global Champion’s Portfolio is simply to back great entrepreneurs who have expanded out of South Africa’s shores and have managed to take their learnings from SA into the global arena and are being successful at it. Lots of people obviously, try to do this. Not everybody has been successful but what we’ve tried to do is we’ve tried to identify those companies that have moved outside of SA’s borders and are primarily driven by entrepreneurs. Our view is that you can’t in this age, in this very fast developing age, expect to just go through the motions – as many corporates do. Bureaucracy is in big trouble in the Fourth Industrial Revolution, so we need to have an entrepreneur. We need to have somebody who actually understands, who sees the future, and is able to guide the organisation in that direction.
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The second thing is we do believe that the South African economy, at the present time, is being very poorly managed. This was emphasised again by the latest statistics that have come out. SA at the moment, is the worst performing economy on Earth, seriously. We’ve had two successive quarters of negative growth or contracting GDP, and that means that now we’ve even gone past the other bad economies around the world. If you take it from last year the South African economy performed 4th worst in the world, this is of 43 countries that The Economist assesses and we were the 4th worst and the only ones behind us were Saudi Arabia, who are very oil dependant and going through serious problems – their economy contracted last year. Venezuela, which is a disaster, you should not even have that on the list. And the other one was Brazil, and you might have seen the news on BizNews that President Lula, the icon from Brazil. The man who was fated by leftists all over the world has had criminal charges laid and, successfully so, he’s going to jail. Well, isn’t that something to think about?
Anyway, our view is that we think the South African economy is being poorly managed and as a consequence, what we need to do is to follow these entrepreneurs into the global arena. So that where the hard currency is being generated it can then offset the difficulties that one has by being over exposed to a South African economy. That’s the rationale for the portfolio and it is clearly going to be very dependent on the way the Rand performs.
In the last month our portfolio has improved, largely on the basis of this graph, which shows you what’s happened to the SA Rand. It has depreciated by just about 3.5% in the past month. It had a big pull back in the last 24 hours otherwise that depreciation would have been even more. But the decline in the Rand, from R12.77 a month ago, (when we did our last webinar) until R13.22 today. It’s largely the result of the Finance Minister Malusi Gigaba, appearing in London at a Standard Bank Global Investment Seminar, where he went down like a lead balloon. The feedback that we have from there was that this is a man who was completely out of his depth and the global investors have reacted accordingly.
Interesting to see though that there is somebody who thinks that the Rand is now offering value again, it got to just above R13.50 against the US Dollar, as you can see here and we’ve seen a very strong appreciation in the Rand in the last few days. That might also be related to the troubles that the Trump administration is having in the US, but anyway it’s very difficult to play currencies in the short term. I do however, like to urge you to remember that the longer-term basis of this portfolio is for a weakening Rand because of poor economic management. When that changes we’re obviously going to be changing our view as well.
The investment here was of R100,000 on the 23rd January, and we’ve made a few changes (as you can see there), significant changes given that this is a portfolio that we intend to be holding indefinitely. Remember you can buy into this portfolio for as little as R250, on EasyEquities, (it’s really that simple). It’s called the BizNews SA Champions Portfolio. You register with EasyEquities and they’ve made it extremely simple. We’ve partnered with them because they are incredibly disruptive in the space that they’re working in and very cheap to invest in. They’ve realised and they got onboard early on – the fact that investments grow only as much as their fees allow them to. If you have high fees and if you’re trading continuously in a portfolio your growth, in a longer-term, it is going to be affected.
So, it’s unusual for us to have made 2 changes but we certainly did. The reason for this, just to recap very briefly. Blue Label – we sold them at R17.08, we were very concerned with the contagion effect of the scandal around Net1. Then we switched that money into Naspers, we expanded our holding of Naspers, even where we are now, (on Naspers) there’s an argument to say that we are very light given that Naspers makes up 25% of the SWIX Index of the JSE and 20% of the All Share Index of the JSE. The SWIX Index is the one that only looks at the South African Shareholder Register. In other words, it takes out those distortions of BHP and a company like BAT, where most of their shareholdings are outside of SA. So, it’s almost like if you were to take SA Inc, Naspers would be 25%. Of course, Naspers’ South African slice of its business is fractional now. Most of its business is coming offshore and we’ll talk about that in a little while. How well did that switch do? Well, so far so good, it’s only been a few months but Blue Label has gone down, the share price there has gone down to R15, so it’s down about R2 and the Naspers’ share price is up R10 from that position, so we’re not trading but it just makes me feel that we did do the right thing.
Secondly, on the 1st June, we sold Wilson Bayley. Again, at this point in time that switch has worked out pretty well. Glencore share price is up R7 since that time and Wilson Bayley share price is down about R1, so both of those changes to the portfolio worked out and there it is. There’s the SA Champions’ Portfolio. As you can see on Naspers we started with 16% of the portfolio, which is underweight relative to the way the JSE or its share in the JSE, that’s how extraordinary this business has been. From R100 thousand starting point we’re now at R101,900, so we’re a little bit in front, after paying all the fees, etcetera. You can see there we’ve got an even split, 4 winners and 4 losers. The biggest loser at the moment, is Brait, I’ll give you some reasons on why I think that that’s temporary.
The winners…Really nice returns there from Glencore, which we only recently added to the portfolio. It seems like other people are picking up on the whole electric car story there. Discovery – 14% gain, getting about it quietly and then Naspers, after coming back, is starting to recover again. The others, I wouldn’t worry, 5%, 6%, 10% either way, MediClinic has been bouncing all over the place and that’s a bit of a swing factor in our portfolio. Then MTN and Steinhoff – I have full confidence in those management teams, so no question about moving anything at the moment. As we stand right now, it’s not surprising, since we began this portfolio the Rand has appreciated and, as a consequence, we’re an offshore-based portfolio, so it’s not surprising to see that we’re under-performing the JSE All-share Index. I don’t think that or I obviously, hope that that’s not going to be something that lasts for very long.
Just to remind you, if you have any questions Stuart will stop me and pass it on.
Alec, I’ve got a comment which might be a good lead-in for the conversation. It’s from Andrew Wright, and he says Naspers is valued today at $88bn. Its 33% stake in Tencent is worth about $110bn, so that places a negative value of around $30bn on the rest of Naspers’ business. I think it’s just a comment more than a question on MTN, MultiChoice, LLX and Flipkart.
Yes, and in one way you can justify it on the fact that if you are an investment holding company your ‘see-through’ value is rarely the same as the value of the stock that you have. There’s usually a discount on an investment holding, unless you have a huge reputation, like Jannie Mouton at PSG. From time-to-time PSG actually trades at a premium to its ‘see-through’ value. But I think that’s all wrong – I think they’ve got that very badly wrong and I would like to give you the example of what happened in the past 2 months here with a German company called Delivery Hero. Delivery Hero was started in Germany in 2011. The intention there was to use the internet, (almost like Uber has used it with cars) to use the internet to become the online delivery service globally. A little bit like Mister Delivery in SA, where they would drop off those brochures and then you’d find different restaurants in your area. You’d phone them and some guy would arrive.
Well, this is taking that all online but not just in SA, it’s all over the world. Naspers likes this area very much. It is invested heavily in it in South America and recently did a big deal in India. In May, this year it was approached by Delivery Hero. Now, by this stage Delivery Hero was already the biggest in the world in this field, in the field of online fast-food purchasing and deliveries. It really is like an Uber, so it’s got the restaurants on the one side and the people who do the deliveries on the other side and it makes its money out of commissions essentially, from both of those parties bringing the two together.
Delivery Hero has been a really hot stock. It’s had investors from Silicon Valley for some time and in 2015, it raised $110m, from 2 Silicon Valley investors at a market cap price of $3.1bn. When Naspers did the deal on the 12th May, that is only 2 months ago. It was brought in and invested $421m into Delivery Hero, and it was brought in at a share price, which is closest to half the level that the stock is trading at now. It listed on the 30th June, and it’s essentially doubled its money, not quite but it’s very close to that. Now, what is this telling you? It’s telling you that Delivery Hero wanted Naspers in as a shareholder to give it credibility. When you get to that position you really are ‘home Jerome.’
There was no intention or no need for Delivery Hero to talk to Naspers. In fact, they didn’t have to talk to anybody. Their IPO was on the 30th June, they came to the German market offering pre-listing shares, a lot of them – they were raising a billion Euros, offering pre-listing at prices of between €22.50 and €25.50 per share. The offer was so heavily oversubscribed that they were able to sell the shares at €25.50, in other words, at absolutely the maximum price range that they put in. Naspers came in a month before they did this road show at a price of €16.25, now that kind of puts that into perspective. When you get to that situation in the world or global environment. When you’re the ‘go-to’ investors for a tech firm, you do get these kinds of opportunities coming to you. Not to say that Bob van Dijk, (who’s in the picture there on the right-hand side), hasn’t had a lot to do with this as well, but these guys are savvy.
We had a lot of good fortune when the brilliance of Koos Bekker was ‘let’s go and throw mud on the wall.’ Him and Antonie Roux did that in the late 90’s – in their early 40’s and they got half of Tencent for $34m and that of course is worth many times that today and as Andrew said earlier, the value of Tencent is already 120% of the Naspers’ share price but your story here has to be is Naspers a ‘one-trick pony’ – in other words is it just Tencent or has it got the ability to pick other winners? Well, Delivery Hero already shows you that it’s picked a very big winner there. It’s busy doing the same kind of thing in India. It bought into a company in India that is the equivalent there of eBay. In fact, the company has just bought eBay India, that’s called Flipkart. What I like about Flipkart is that it has also just done a fund-raising issue, where it went out to market to raise money from various investors and the fund-raising issue was led by Tencent, Naspers’ partner or associate in China. Flipkart brought in $1.4b. Tencent was leading the funding of it and other names who did the funding were eBay and Microsoft. That’s the kind of league that Naspers is operating in.
It put $71m itself into Flipkart. It now has a 16% share of the Indian e-commerce operation and if you have a look at the way e-commerce is taking over in various markets. You’ve got to believe, with the support of Tencent, eBay, and Microsoft that Flipkart, which is, by the way valued at just under $12b that Flipkart is going to be a big winner, given the Indian population and Naspers sits on 16% of it. So, it’s not a ‘one-trick’ pony, that would be my view. You might even make the argument that when finally, people or investors realise this that Naspers’ valuation, which already is conservatively put in the books because as you can see Flipkart, of which its value is and Naspers owns $1.8b worth of Flipkart. That’s not even in the valuation. All people are looking at is just Tencent.
So, you’ve got Flipkart, you’ve got the Delivery Hero story that I spoke about a moment ago. You’ve got Mail.ru, which is a huge business in Russia. You’ve got OLX, which is the Latin American business and that excludes even the SA operations and we know how strongly and generative Multi-Choice is. Naspers is a SA champion and, if anything, I’d be happy to expand or increase the slug that we have in this company, in this portfolio. It’s going to do so anyway, as the share price continues to rise. There you can see Naspers market capitalisation, R1.13trn, the first trillion Rand company born in SA and what the politicians in SA should be doing is asking Naspers ‘how did you do it’ and ‘how do we leverage your intellect and your skills into the global market?’ Instead of worrying about a tiny percentage of Naspers, which is still exposed to SA, so that’s the story. This is a real global champion and you can see the share price in the last month or the last week or so, has actually picked up quite nicely. I think the story is getting through that this is a very good partner to have, if you happen to be in the tech space.
The Naspers results came out, it really is a little bit ridiculous to read those results and then start getting all excited about it. I think there were some reports that analysts were disappointed that the profits were R40m rather than R40.2m or R40.6m or something ridiculous like that. That’s not what Naspers is about. Naspers is an investment company that is investing and taking big bets in tech companies. Now, are they able to get other businesses like Tencent? Well, so far Delivery Hero is certainly suggesting it and so is Flipkart in China. Quite apart from OLX, which is doing well, and Main.ru – I really love this stock. Absolutely love it and if you own the shares hold onto them. If you have a pension in SA thank your lucky stars that Naspers is an SA company because all pensioners in the country have benefited from the growth in this company’s fortune and remember it’s done it offshore. It hasn’t done it in the country. No South Africans have lost out through the interventions of Naspers. In fact, they’re only big winners as a consequence – I love this stock.
There’s Delivery Hero, which listed on the 30th June. It’s only been going for 5 days, or a bit more than 5 days but it’s now $28, pre-listing it was at $25.50, and this is the kind of graph that you can expect to continue to grow. Naspers’ shareholding there in Delivery Hero. These numbers now just start getting ridiculous don’t they, when you bring them back to SA Rand terms but it’s investment there has gone from an initial investment of $421m to now be worth, at the current share price, $736m. It’s made a profit on the investment in 2 months – scary. Okay, but that’s what happens when you hit a winner in the global markets.
Alec, I’ve got a message from Deon saying he’s still muted. Deon, just a quick one. Please note the questions need to be written into the question bar on the right-hand toolbar. If you put it in there, it will come through to me and I’ll get Alec to answer. There’s no audio for the listeners to come through to us unfortunately.
Thanks Stu, if were to do that it would be like the Tower of Babel, with everybody getting in at some point in time. It is a two-way engagement but not audio. The engagement is you can type in your questions.
Moving onto MediClinic now, there’s an interesting story. MediClinic saw the writing on the wall in SA quite some time ago I think, as far as the future for the hospital companies are concerned. I’m going to be talking to Mark Ingham next week, he’s done a lot of research into the National Health Insurance Initiative and if it is to be pushed through, well it’s going to mean a lot more taxes but let’s leave that on one side. The impact that would have on private hospitals in SA would be significant, you can’t underestimate that. Mark has done the research and he’ll be giving us some insights into it.
Given the obsession to go this route, the State driving route by the ANC Government in SA, Mediclinic took a decision a while back to globalise and now that globalisation has really wretched it up. They have a big business now in Switzerland and a significant, well it’s just as big a business in fact, perhaps even bigger, in the UAE. They are however, attacking the UK market with vigour and they’re listed on the London Stock Exchange, were they’re a member of the FTSE 100, so it gives you an idea that this is a significant company. The rumour doing the rounds at the moment, is that Mediclinic is going to be making a bid for Spire Healthcare, which is a significant player in the UK market.
The UK market is very different to SA. In the UK, they do have National Health but living here, I can tell you that National Health is not for people who worry about their time. You can get Health Insurance or National Health for free, that’s easy enough. But the problem is you’ll probably spend a whole day in the waiting room because there are no appointments. You arrive on a particular day and you take your turn at the time that you are allocated or when you get to the front of the queue – that means pretty long waits. If you’re an entrepreneur, where time is valuable and more and more for people time is becoming valuable, (time is money) then what you’ve saved, by having free National Health is easily offset by your insurance that you would pay or go into a private hospital.
That’s one of the big bull points for Discovery who’ve got a substantial, private health insurance business here in the UK called Vitality. It’s also a big plus for a company like Netcare. I’m going to be looking more carefully at Netcare now because having seen the way that National Health is coming under increasing pressure. You can’t keep funding something that’s mushrooming out of control indefinitely, that’s on the one hand, and on the other hand for a MediClinic now attacking the market with Spire, which they already own 29.9% of. There is talk in the marketplace that they will be looking to acquire more of it.
There’s the MediClinic share price. Since its listing on the London Stock Exchange it hasn’t done well. It’s a bit like Brait actually. It’s been effected, to a large degree by Brexit by the uncertainties in the UK and, as you can see, it’s been bumping along there. That’s fine, the shares tell you one story but much more important with companies like this is what is the underlying fundamental – and the underlying fundamentals for MediClinic is very positive and they are ignoring ‘mister markets short-term assessment’ and there’s the Spire Healthcare Group, you can see that uptick in the share price in the last few days on the strength of the proposed takeover bid by MediClinic.
What I like about this graph is it shows you where Mediclinic are now, they’ve got their 29.9%, they’ve had a good look inside the company, they’ll know what they’ll be buying and they aren’t buying it at the top of the market. That would have been, as you can see, in around October 2016. Whatever they pay now it will be a significant discount to where the shares were at that time. It’s always better to be timing your entry and they seem to have done this pretty smartly. Stuart, anything on your side, any questions?
Sorry Alec still no questions coming through but we do encourage it, so please fire them away and I’ll give them to Alec.
Here’s a story that I could spend the whole day talking about. Christo Wiese, one of the great entrepreneurs in SA. He decided a few years back to take control of Brait. How he did that was he injected into Brait a big chunk of his shareholding in Pep. Pep is a company that was started by Renier van Rooyen but it really got kicked into gear when Christo Wiese went along and worked with him and of course, Pep is a huge global, multi-national. The interesting story here was when Wiese went into Brait and injected his Pep shares and took over effectively, the control of Brait. The questions were well, has he dumped his shares too cheaply,’ etcetera. In fact, is was completely the opposite. Brait then sold in 2015, quite a while ago, its share in Pepkor to Steinhoff in that big deal and it made a return of more than 69% a year. So, Wiese gave other shareholders a huge profit by injecting his Pep shares into that.
Pep is now no longer in the portfolio but Brait had this pile of money from the sale of the Pep shares and they’ve been eyeing a few investments in the UK and he sprang into action, Wiese, and his team at Brait and they made some substantial acquisitions into the UK, that was in 2015. The biggest of these was a company called New Look, which is a women’s fashion retailer, and the New Look business has really struggled in the past couple of years. Well, it’s been struggling but it was struggling at the time that they bought it and that was why they were able to buy a company with nearly a thousand outlets and a big slug of operations in China. More than a hundred outlets in China, so New Look is potentially, a very interesting and very exciting investment opportunity, if you just take the China perspective.
In the UK, post Brexit and the continued austerity, uncertainty with the recent election. Lots of things affecting the market in the UK at the moment, and affecting the ratings of companies. New Look, which was bought at a price that made it 45% of Brait’s portfolio in 2016, is now down to 15% of Brait’s portfolio and that big write-off in the valuation of New Look, you’re not writing off the money, you’ve bought the company but you’re writing-off the valuation in your own balance sheet, which is a conservative and a good thing to do. That write-off has actually, affected the Brait financial results and, as a consequence, it’s reduced the net asset value of the Brait share price. That’s a direct consequence of that, as you can see in the past year, the valuation has come down or the share price has come down from over R120 to below R60 at one point. At that time when it did that, when it dipped below R60 or in fact, as it was going towards that, Brait has been buying back its shares with gay abandon.
It bought back in the week to the end of the 22nd June, it bought back R85m worth of stock. More recently it’s bought some more and in fact, in the week before that it bought another R64m worth of stock. By my calculations it’s now heading towards R200m worth of shares that the company itself has been buying back at this range. The clincher for me is that often the popular press starts running headlines on companies at exactly the wrong time and Brait when they were sitting at R150 a share, the popular press were saying what a wonderful company it is. Of course, well predictively almost in the Financial Mail after the results from Brait. It said ‘Are Brait’s glory days gone,’ and that’s when the share price was at R60.
So, you have all of these signals that are coming to you. What they’ve done with New Look incidentally, is they have cut the loss from last year to this year. Of course, analysts will quickly point out that last year’s loss was that way because of the costs that were added to it through the Brait acquisition and that is true but the loss, at least is moving in the right direction. They’ve closed a lot of stores, they’ve given support to a new chief executive, they’re putting a lot of their attention onto China. The new chief executive incidentally, spent his lifetime working in China, so he’s been running retail in China. So, it’s not like a lot of companies who go into China, and don’t really know what they’re doing, as far as Brait is concerned, it is going in there with its eyes wide open because the CEO was a Chinese based executive for most of his career. So, you’re adding all of these things together and you’ve got a story here that I think is looking extremely exciting and wonderful potential.
Sadly, as often happens with value investors, like ourselves, we bought in early. We bought into the share at around R80 a share. It is now sitting at R63, as you can see there. So, it’s got a long way to go to get back to recovering our purchase price but what I would rather look at it and say, ‘here you’ve got a stock that is sitting at really bargain-basement levels – Wiese is no mug, he’s done the right deals.’ By the way, the other deals in the UK, Virgin Active, Iceland have been extremely successful. They’re continuing to move in the right direction. Then they’ve also got Premier, the old Premier Milling, you might remember, (a SA company they now own), which they’re considering, I think they’re considering listing it, but they’ve put a lot of money into Premier into building new milling plants. In SA, they’re doing really well there.
The problem child at the moment, is New Look and that is getting all the attention possible. It also has a huge investment into China and they’ve put Wiese and his son, Jacob, and three Brait executives are on the New Look board. So, if you were to take a team that could turn something around, particularly in retailing, which is where Wiese comes from. I would say that you can probably back them. That’s the Brait story.
A question on Mediclinic from Gail Stevenson. She said is it not still adversely affected by the UAE problems with government funding of private health care?
Yes, it’s an interesting question there, Gail. One has to take a longer-term view on these businesses. They have been sorting out that private health care issue in the UAE. It got to a stage where there was quite a lot of confrontation. From what I understand from the company, they bought the business in the UAE because it was massively under-performing. They could see that there were way that they could apply just the normal way they operate in other parts of the world to that business and improve it in that way. So, they went in there not on a regulatory play but more on a play of what is the underlying business? Can we fix it? Can we add value to it, and they’re certainly are of the impression that the Al Noor business is fixable and that whatever regulatory issues there might be with the government, and they do seem to be more positive, by the way (in recent times). But whatever regulatory issues they have that they will be able to overcome that. We have to trust the management on the regulatory side, but where we’re really backing management is on the investing in the business itself and can they make it more efficient? I think the SA business shows that they certainly can and in deed, they’ve proved that in Switzerland too and they’ll be very keen to prove the point again in Spire, in the UK. It’s a really good management team. They know their oats. They are of the private hospital companies in SA. They’re the one that you’d be wanted to be invested in, if it were just a SA business, you’d back them to be able to overcome the challenges better than the competitors. I guess, on this one, there will always be regulatory issues but I think they went into that with their eyes wide open. They paid the price, the appropriate price and quite happy to have done so. I’m happy to still give them, certainly at this point, the benefit of the doubt.
Moving onto Discovery, shall we? Discovery have got their heads down. They’re building a new bank or putting things together on a new bank. I love this company as well. To see what’s going on here in the UK with Vitality. As a South African you’re getting enormously proud when you see Vitality advertising everywhere. They’ve got a little Dachshund dog called Stanley, who is all over the television sets and when you go down the Underground stations you’ll see Stanley looking out at you and giving you some quirky advice of his. The market share that they’ve managed to grow and achieve in the area that we forget to note on Discovery and that’s life insurance.
Discovery is very strong on life insurance. They’ve done extremely well in SA and Herschel Mayers, who runs the South African operation. He spends roughly, half his life here as well running the UK life operation. That’s doing extremely well at Vitality. Where they have been finding the going a little more difficult is in healthcare insurance but as more and more pressure comes to bear on the National Health System in the UK. Companies like Vitality are going to enjoy a lot more support and overcome that kind of resistance, so it’s a long-term investment in the UK, Adrian Gore has done that. He knows what he’s talking about. Remember they’ve brought in a disruptive strategy. You’re hearing more and more about it not that Discovery are the one company that is trying to help people or incentivise people to become healthier. These are real thinkers, these are not doers, they hire people who are prepared to stop and think before they do things, and then they execute very well as well. It’s a rare combination.
I would be a little concerned for the High Street banks in SA, when Discovery does bring its new bank into the play because you can be sure they’re going to do something disruptive and interesting. It’s a company that you literally, just got to have their shares. Put them in your bottom drawer, a bit like Naspers. They’re doing extremely well, globally. Anybody who’s tried to do business, for instance in China, would know that the fact that they’ve got this long-standing relationship now with Penang. They have a similar thing in India, they have a similar thing in Singapore. In Europe, as well with all the big names there. If you know how difficult it is to break into these big organisations. You have realise that there’s a lot of value in Discovery that isn’t being reflected in the share price, at the moment.
There’s the share price now, it’s not done a whole lot in the last 3 months but it has picked up a little bit recently and it’s showing us a nice return. We were very fortunate to have acquired the shares in the portfolio in January 2017, as you can see. It was ahead of, not a huge re-rating but a happy re-rating from that low-point.
Let’s move onto Investec and there’s an interesting picture. In the last month Stephen Koseff, who’s your most unlikely doctorate candidate, was awarded an honorary doctorate by [??? 0:36:27.3] at Wits University. I say unlikely because he’s not the academic type. He’s incredibly clever but Stephen is a ‘salt of the earth – feet on the ground pragmatist’ and he is somebody who has played a very big role in SA in helping to get the unemployment or the Youth Employment Scheme off the ground. They’re intending, together with Cyril Ramaphosa, they’ve worked on this, Investec – Adrian Gore from Discovery is also involved there and other business leaders. I think Stephen Saad is there too, from Aspen. They’ve put together a scheme, where they will be employing around 300 thousand or committing to employ around 300 thousand young people who, otherwise wouldn’t have exposure to the business world, per annum for the next three years.
It’s a wonderful initiative. Unfortunately, a lot of the business partnership with Government ground to a halt when Pravin Gordhan was fired. It does however look like things are changing in the country and that businesses, like Investec and others, and the minds that we have, like Stephen Koseff, will become more involved in helping to address those issues. It’s a wonderful company this. I was the cricket at Lord’s watching, unfortunately SA lose. The day I was there they did quite well but at the cricket at Lord’s it’s Investec sponsored and it does give you a sense of pride when you see this home-grown SA company, dominating the home of cricket or a huge event at the home of cricket. They’ve done the same thing at the Derby, which is the greatest horse race in the world, (The Epsom Derby), so it shows you that Investec really are cracking on in the UK. They’ve got a wonderful brand here and they do have enormous support.
It’s interesting in Investec, if you want to invest or if you want to become a client of theirs you need investable assets or cash to give them, of £150 thousand and that’s where they’re pitching themselves. At the really, top-end of the private client market. They’re clearly a sizeable asset management business but in the last month Investec has also been one of the first institutions in the UK, to move into robo-advising options. This is really interesting in that if you have been following what’s going on in the financial services businesses around the world. Robo-advisers are were technology assists you in making your investments. It actually cuts out the traditional financial advisor and Investec is moving into that field now in the UK at a relatively high level though. If you were to, you can get robo-advisor services from a company like Nutmeg for £500. Whereas Investec wants you to have £10 thousand invested, but that’s not huge in a UK perspective. But if you put your £10 thousand in the robots will allocate, and you answer a whole lot of questions, so they know your profile. The robots will then allocate your money across 300 active share portfolios and they will charge you a 0.65% fee for it.
It feels a lot like what was happening when Vanguard took on active managers 30 years ago, and John Bogle’s main fund now, the S&P 500, charges a fee of 1/20th of 1%, 0.05% as a fee. Well, the robo-advisor from Investec at 0.65% is extremely aggressive and very attractive. Nutmeg, by the way, charge 0.75% for a similar service, so it just gives you an idea of where Investec is going and I like companies like this. I love companies, I love to invest in companies where you’re leveraging the human ingenuity and that’s really what business is all about. It’s if you can find, as an investor, you want to go into a company – Warren Buffett always said in the past that you wanted to find businesses that even the village idiot could run because one day the village idiot would run it. In this more modern world you almost have to do the opposite. You have to go into those companies, where there are no village idiots. In fact, the village idiot wouldn’t even get into having an interview with them, where you get really smart people who understand business. Who understands that you have to put the consumer first. Investec is very good at this, and the best company in the world right now is Amazon, and they do exactly that.
Jeff Bezos, since he founded the company in the 90’s, has put the consumer right at the pinnacle of everything that they do. They’re in the business of serving the consumer and Investec certainly, on the private banking side, is in a very similar situation as well – bringing in new ideas, new opportunities, and doing a pretty good job. I know it – I’m a client of theirs and I’m very happy with the service that I get from them. So, that’s the big move, they call it Click and Invest, the new service that they’ve introduced into the UK. You can expect that robo-advisor service to be coming into SA in due course. That’s what good companies do.
A question from Beau, it’s on Brait. He says when do you foresee the share price to start climbing again and do you think it will ever get back to the heydays of R160 plus?
I’m of the view that when you invest in equities you should be trying to buy the shares at the lowest possible price you can and holding them forever. That’s my view on Brait, is that right now it’s one of the lowest possible prices entry points that you’re likely to see and if Christo Wiese were to pass away suddenly I would have to reassess obviously, because that man is a genius. What he’s done is quite extraordinary. You are taking a bet on Wiese, in the longer term. You’re taking a bet on his ability to identify, accumulate and harvest from great assets, and to buy them at the right price. New Look, for all intents and purposes, is now not looking like it was bought at the right price. They might have waited a little longer, certainly Virgin Active and Iceland have suggested they have been bought at the right price, and I venture to add that Premier in SA, which is about 25% of their portfolio – it was also bought at the right price. They’ve got another few, bubbling under but at the moment what they’re doing is they’re going to fix New Look and then you’ll see again this entrepreneurial, this kind of opportunistic deal-making coming to the fore, as far as Brait is concerned.
So, will it get back to the old? Of course, it will get there. It depends on what you’re timeframe is. If your timeframe is 25 years or forever then it will be there but what we try to do is we try to find companies that are offering excellent value. That you don’t have to worry about the ethics of the people who are dealing with it. You don’t have to worry that they’re going to cheat you or that they’re going to go and do stupid deals. The entrepreneur, the one who’s got his own skin in the game, tends to pay a lot more attention to the long-term opportunities of the business than a professional manager, who might be wanting to cash his share options in, when he retires in say, five years’ time. So, there’s a very different approach that we would take to companies that we would have in the portfolio, and I’m very happy to have Brait in the portfolio, and I think particularly at these prices. I was happy at R80, so as Piet Viljoen always used to say is he can’t understand people who invest in share, or retail investors, when the share price goes down they panic and sell. And when the share price goes up they want to buy more of it. He said it’s like buying a hamburger for R20, and if they’re on special at R10, say ‘no, I’d rather buy them when they get to R30.’
So, it’s part of the whole psychology and if you read Dan Ariely, and behavioural economists like that. You’ll see that it is, it’s in our nature. That’s why we operate like that and you have to overcome that and become more rational. Here’s a rational guy, (on the screen), Markus Jooste, really a rational guy. I remember meeting with him in London a couple of months ago and Markus was saying… I asked him, you’ve got such huge business now, with the acquisition Mattress Firm in the US, and the massive that they have in Europe and SA is becoming increasingly less relevant or less important to this company. I said, “What do you do? What’s your job?” He said, “My job is people. My job is all about identifying great people and if I find the great people, who’ve got their own businesses and their businesses will be happy to be within the Steinhoff fold, then I would like to go and do a deal with that company. If somebody is prepared to offer them more or does a better deal for those people, I still wish them well and hope that they are happy in their new home.” That’s very much what he’s about.
You might recall that Jooste is the man when Steve Booysen departed from Absa, Jooste picked him up to work on his audit committee, Booysen being a chief executive of Absa, he’s very highly rated. The time I was there he was a young man still and he’d been tipped for great things, he’s very bright. I think he’s a doctor or a doctor in something. Anyway, that’s an example. Sean Summers, when Sean Summers was ejected by Pick ‘n Pay, who knocked on his door, Markus Jooste? Now, Sean is helping out with the Mattress Firm acquisition in the US, he biggest bedding company in the US, and he’s done the same thing in the past few days.
He’s picked up a guy called Stuart Makin. Stuart is very highly rated. He was brought into a company in Australia called Target in 2013. Target had been going through a succession of CEOs. He didn’t even last three years in that job, and he left there after there was yet another scandal, they seemed to be embedded with scandals at Target. This time the scandal had something to do with inflating of financial numbers and paying, it’s quite a complicated thing but he resigned. So, did the financial director of the company. He took the blame, Stuart Makin, but the industry press said it clearly wasn’t his fault but he’s an honourable guy obviously, so he took the blame for it. Interestingly enough, they also mentioned that the financial director was supposed to have a job at another company and that offer was rescinded. So, it does, reading between the lines, you can see that Makin might have been a victim of something that happened that he wasn’t paying as close attention to as he might have. Maybe he trusted someone too much. Anyway, he’s been picked up now by the Steinhoff Group and he’s been employed as the new chief executive of the bedding operations in the UK. I just mentioned that story because it’s a great story to tell you how this business works. It’s all about people. You put the right people, in the right places and magic happens and that’s what this man, Marcus Jooste, believes in.
The share price of Steinhoff is still being digested or the international investors are still digesting the deal that the company did with Mattress Firm in the US. I think it’s the biggest deal ever, by a SA company outside of the borders. The biggest deal inside the borders incidentally, was the Steinhoff acquisition of Pepkor, so it gives you an understanding of what a sizeable operation is become.
And the Steinhoff share price is bumping along at the moment, and has been doing so the whole year. It however, is still in our opinion, offering excellent value. It’s expanded now, outside of SA’s shores. It did the same thing for many years, going back when Steinhoff was not performing well in SA, or the share price wasn’t. Then all of a sudden it was discovered, if you like, and I rocketed ahead. My view would be something similar is in prospect for Steinhoff into the future. A great company and, once again its strategy, although it is vertically integrated, which really helps. It grows the trees, it makes the furniture, sells the furniture through its doors. Also, add an overlay to that is it makes acquisitions of people, and if those people are in businesses that they would love to keep going, a bit like the Warren Buffett approach in fact, then more is the better. So, that’s a Steinhoff, long-term bet, and it is one that even if it continues to bump along in Euro terms because it’s listed on the Frankfurt Stock Exchange because its primary listing. For Rand declining this is one that will appreciate anyway.
A question a little off topic from Darren Berry. He wants to know, I think we actually spoke about this at the last webinar. Your investment advice or thoughts on things like Bitcoin or other online currencies and how one would go about it?
Bitcoin is like a commodity. You are buying an inanimate object, it’s a very exciting inanimate object, in that regard. But there is no human ingenuity that can leverage that to your benefit. If, for instance, the Winklevoss brother, who are trying to put together an ETF on Bitcoin. If they had a company that was listed on the stock market and their strategy was to list a Bitcoin ETF – a different story, then you’re buying that management company. It’s a bit like buying into a property portfolio or into a property management business. Would you be buying Growthpoint shares as you’re just getting a whole bunch of huge properties now, and the ability of the managers. To influence that probably is relatively small or would you go for something like Attack, where they have more of a property development – where the entrepreneurship of the managers is more active. Or one of my favourites, Safari, a similar thing – small business, doing entrepreneurial deals. I would tend towards the Safaris’ or the Attaqs rather than the growth points because you’re having an investment there, in human ingenuity.
Bitcoin is an inanimate object in the same way you’d say ‘well should I buy Bitcoin because if it goes up, I will be able to sell it to a greater fool. In the same way, as if the gold price goes up, I’ll be able to sell that to a greater fool. So, there’s a very distinct difference in your approach to it. If you’ve done your analysis on Bitcoin and you’ve seen the way that you think that supply and demand for that inanimate object is going to go and grow and Bitcoin will rise. Well, sure take your changes but remember you are really betting against the rest of the world. In that case, in the same way as if you were to buy gold today. Do you analysis on the goal price or analysis on the platinum price and you either buy or you don’t. I think that’s just too complicated. There are too many moving parts. Much better for me is to find a business that’s in a very good area, with really good management, so I’d buy into their ingenuity.
Let’s move onto Glencore. Here you might say, what you’ve just spoken about with inanimate objects. What he heavens are you doing in a mining and minerals company? Well, Glencore is the one company that you have to say is all about human ingenuity. Those of you who have been following the premium section for a while and following my writings on this subject, will notice that Glasenberg, at the annual general meeting positioned Glencore and I buy it is a play on electric vehicles. Now, in the last month we’ve seen some dramatic developments in this field. We’ve seen Volvo say that they’re going to stop making internal combustion engines by the year 2018. That’s next year, end of next year and they’re going to stop the internal combustion engines, and all of the cars that they produce thereafter will be electric or they will be hybrids, primarily electric.
What do electric engines need, they need batteries? What do batteries need, they need cobalt more than anything else? Certainly, the batteries that are dominating the world and are likely to dominate in the near future, with these lithium, iron batteries they are full of cobalt. How much cobalt is there, well not enough to supply the demand for batteries. And who is the biggest global supplier of cobalt? There you have it, Glencore. Not just cobalt but they have the same position in copper. The same position in nickel, and the same position in manganese. So, what he’s done, Mr Glasenberg, (the Johannesburger), who in fact represented SA in walking. It’s not the walking I do but the athletic type. He was the best in the country at one stage.
Glasenberg has repositioned Glencore to benefit from their move, the mega trend, from internal combustion engines to electric vehicles, and that is happening. You can just have a look at the share price of Tesla, with another South African connection and another, with of course, Elon Musk. Then you overlay another South African connection there because one of his biggest shareholders, who’s recently bought in, is Tencent, which is owned partly by Naspers. Isn’t that interesting? So, you’ve got a South African play at work on the move of the megatrend from internal combustion cars to electric cars, and that’s Glencore. Glencore has gone up really nicely in the last little while as you can see, almost as though the Volvo announcement got people reassessing who are going to get the real benefits from the move towards electric vehicles and it has to be, as in every gold rush, the one who supplies the picks and shovels. Those who are out there making the electric vehicles have got a far more difficult task than those who’re supplying products into them and Glencore’s the one who supplies products into it. In Australia, they’re in the process of rechecking their portfolio. Glencore is also very opportunistic.
Rio Tinto: a mining major, which has been a little less well-managed (to put it mildly) than Glencore has been is in the process of selling its Australian coal-mining assets. Glencore is very keen to pick those up. It’s also bidding for a US grain-trading company called Bunge. It’s just signed a cobalt deal – this is an interesting one – with a Chinese company. It’s a four-year deal at 20,000 tons of cobalt per year and this Chinese company supplies Volkswagen VW. Essentially, what’s happening is companies like Volkswagen need the battery supply to be guaranteed because there’s such demand now for those products with the swing to electric cars. It doesn’t help if you’re re-jigging your whole plant to make electric cars and you can’t get the batteries for them. This Chinese company has now got the supply – 20,000 tons per year for the next four years – of cobalt, from Glencore.
We’ve been talking about joining the dots elsewhere but do you see how you join the dots in this electric vehicle area? Glencore is one of our star performers by the way, so it was nice that we twigged onto the whole story of electric cars it seems, before most.
Okay. Well, we’re nearly at the end now and here’s MTN. It hasn’t been that active of a period for this company. We’re still expecting Rob Shuter (the man on the left-hand side) is going to deliver the magic. He is a very experienced and highly-rated executive. The real driving force behind this company is Phuthuma Nhleko who is one of the great entrepreneurs of Africa. It’s funny that he hasn’t been afforded the respect that he deserves but in time, I think people will realise that he did take a loss-making business and a business that was very much #2 to Vodacom and through some entrepreneurial brilliance, has turned it into a business with 350-million customers. Those customers, with which MTN has a very close relationship, are certainly an opportunity for taking advantage of all the new technologies that are coming in. People are looking at MTN in a linear way.
When I say ‘people’…some investors are looking at it in a linear way, considering it as ‘what is the ARPU (average revenue per user)’ without understanding the real potential as Tencent has shown us, is when you start putting in the other things into your cellphone. i.e. contracts or players. Once you’ve got the phone in your hand…once you’ve got the purchasers with this device in their hands, there are many opportunities where you can leverage that and there’s no doubt that under the new regime at MTN, this is an area that they’re going to be exploring.
Just on MTN, Aresta wants to know what about the political risk in Nigeria? Have you taken that into account?
Yes. MTN’s one of those companies where the share price is reflecting that political risk considerably. If you were to consider the 350-million users that it has and you were to then put it into a Tencent perspective (Tencent has 900-million users) and you then take the market cape of Tencent and the market cap of MTN, you’re talking about different universes. There is the political issue of dealing in an emerging market, which is always going to be a flag for investors but on the other hand, we’ve seen that in Nigeria, the reason why MTN got into trouble there was not because of any bad politics. It got into trouble because of incompetence. It did not do what it was supposed to do in registering. In a South African sense, what they did wrong there was they just never RICA’d people and if you’re not going to RICA people…
If you’re not going to do that in a country like Nigeria where they are very rightly, unhappy about lax security (especially on cell phones and where you’ve had hundreds of your schoolchildren being kidnapped by Boko Haram) … If you’re not going to pay attention to those kinds of things, you are going to be punished and that’s exactly what happened here. Nigeria is a very interesting country and I by no means, believe that I’m an expert. I’m not an expert in their politics but what you can see… It was interesting to see the reports coming out ahead of the G20 where Nigeria was talking about fighting corruption. There was a wonderful statement from the Finance Minister of Nigeria saying how the G20 needs to help emerging markets to stop this illicit flow of funds – something that Thabo Mbeki waved a flag about many years ago and is continuing to happen.
Where the illicit flows are mostly to the detriment of emerging market countries and of course, the people in those countries. It’s just like how the corruption in South Africa doesn’t really affect the middle class but it really, really hurts the poor because there’s less money to go around and give them an equal opportunity to improve themselves. That’s the tragedy of corruption. MTN and the Nigerian government: is there political risk? Of course, there is. There’s political risk in any country but MTN’s a huge part in Nigeria. It’s a huge player in Nigeria and you can be sure that they have made absolutely certain that they’ve sorted out any of the concerns/issues, given that they’ve had such a huge fine, which they’ve had to pay. They’ll be dotting their I’s and crossing their T’s and they’ll be communicating on a humbler basis with the Nigerian regulators in future. Of that, you can be certain.
Well, just to close off with, let’s have a look at our portfolio and see where we are. You can see the numbers. It’s just a repeat of this. I’m very happy with the way we’re structured. Of course, it would have been nice to have bought into Breit now rather than when we did but on the other hand, we bought into Naspers, Discovery, and Glencore at very good prices compared with where they are at the moment. If you were to have R100k today to allocate or start with a portfolio, I really could not advise that you switch your money into anything different than what we have here. I did have an email from someone in the week saying they’ve read what I had to say on my research on Breit and they’d really like to put all their money into Breit and my feeling on that was ‘no’. You have a few eggs. You put it in a basket and you watch it carefully.
We have eight eggs here. Eight eggs are great. One egg becomes very, very risky. With the EasyEquities portfolio option (or with their bundle, as they call it), it’s so easy. You literally just give R250 and they allocate that R250 in the same proportion on the portfolio, as we have. Then you know that last month, we were -1.7% return. This month, we’re +1.3%. That means if you happen to have bought in the last month, you would have made about three or four percent (and remember, these are after costs). That’s what you would have got in cheaper than we started off, in January. That’s really the idea here, of this portfolio – it’s to give you eight really nice eggs. We’ve got a slightly bigger bet in five of them than the other three. Steinhoff, Glencore, and MTN are slightly smaller. They’re about half of the percentage of the others but that was a function of the time that we bought in and what we thought was offering the best value.
Glencore was a switch from Wilson Bayly, which was 8% of the portfolio. That kind of encapsulates the whole thing. We’re trying to help you to have an investment that we’ll keep looking back at with you. We’ll keep reassessing it every month and we’ll keep updating you on the news. If some of this news disturbs you…if you think for instance, that Visa and Co are not going to get New Look right in the UK then at least, you can make an informed decision on buying or selling your rate shares. The worst thing in the world when it comes to equities is to just go ahead and buy companies on the name or on a tip from somebody. I hope that helps. Thank you again for being with us.
