This is an unusual interview for a few reasons. Firstly, independent investment analyst Mark Ingham and I get pretty specific about the JSE-listed shares we like. For another, Mark turns from interviewee to interviewer – quizzing me about the eight stocks in the Biznews SA Champions portfolio. It makes for a robust and fascinating discussion (hope you agree) with both of us unpacking not only the stock selection process, but why our portfolios have been structured the way they have been. Both portfolios are targeted at retail investors participating in the revolutionary Easy Equities approach to investing – where fractional share ownership allows parcels to be bought for as little as R100 a time. I’ll be revisiting my portfolio every month with a webcast for Biznews Premium subscribers. – Alec Hogg
This special podcast is brought to you by Easy Equities; Independent Analyst Mark Ingham is on the line from Johannesburg. Well Mark, maybe we should talk a little bit about Easy for a while because they’re revolutionising investment with the ability to invest as little as R50 or even R100 at a time or a month. They really have taken this industry, this online trade sharing, or the share investment industry and turned it on its head. Mark Barnes started things off and I know you’ve been quite close to the guys over the years. Do you think this is a model that A, is sustainable and B, will travel?
Yes Alec, I’ve advised them for a while now and it’s great to work with the team and I’m independent of course, but I think I try and help the guys do what they do and they do it very well. What Purple has done through Easy Equities is introduce fractionalised share ownership into South Africa. What it means simply is that anybody regardless of income or wealth can participate and this is true empowerment where anybody can earn a piece of Naspers, for instance, not that many people can afford say R2,000 per share to buy Naspers, but through fractional share ownership, you are in a position to do just that. You can own a tenth of Naspers and in time you would build that up until such time as you’ve earned a single share and the rate of uptake is extremely encouraging and I think they’ve certainly started a march on the competition.
Last I saw they had over 30,000 small investors who were in there and I think that was quite a few months ago, so the numbers are growing and rightly so, they deserve to.
Yes, I think so and I think what’s quite interesting in the context of our discussion today, is baskets and bundles. You asked a question, well how do they work. For some people it’s nice not to have to make every single decision. Maybe you can count on an expert to help you do that. When you look at a basket for instance, it’s not managed, it’s preselected shares. You can remove and exclude shares from the chosen basket. There’s a modest fee, there’s no share rebalancing, and it’s a very good concept. Bundles are fairly similar, only in the sense that it differs from being managed, its preselected shares, you can’t remove or add shares, but you can exclude.
There is also a small fee. There’s something in it for both types of investors when you choose to go this route and it’s extremely simple to use, very easy to execute on the website. A basket is shares which are assigned weightings, they’re preselected by a well-known person, such as Mr Alec Hogg and it’s very affordable, so you know exactly what you’re in for, there’s no hidden charges, you know exactly what shares you’re being exposed to. On the site, I in fact, have one. I have a Pink Drive Blush basket, and that’s all in favour of the Pink Drive and there are a number of shares that I’ve included in that Pink Drive and it’s weighted accordingly.
I’m just having a look at that, because it’s very easy to get into and again, to understand this, with the baskets, in other words, your Pink Drive and you’ve got two of them and we can talk about both, with that it’s very clearly delineated on the stock that you can add or remove from the portfolio. So for instance, Pick ‘n Pay stores, if I think it’s overvalued, but I like your other shares I can just click on that and that 9.5 percent waiting would then presumably be allocated to the others?
Yes, that’s correct. You are able to click very simply. You may also be in a situation where you could be compromised by being exposed by a certain stock. For instance, if you were the CEO of Pick ‘n Pay and you wanted to buy that Pink Drive basket, you may be advised to not actually be exposed to your own share directly because there could be potential trade around that in close periods, so you would probably want to take that out and also because maybe if your children were exposed to it or your wife or any other family members, from a governance point of view, you would choose to exclude that. Equally, as you correctly say, if you wanted to not be exposed to MTN, for argument’s sake for whatever reason, you would be in a position to remove that. It can be fairly simply done and on the execution of that everything rebalances accordingly.
So you have a Blush and a Bright, what’s the difference between those two baskets of yours?
They’re fairly similar. The Bright basket includes the same shares and I think whichever one you actually choose, you’re pretty much buying the same risk weighting associated with that. The risk profile is one for growth and that suggests of course, that one would have to be taking a slightly longer view than just the short-term ups and downs of the market, so it’s a basket of defensive, growth and yield characteristics covering a range of different industries.
What happens if, for instance, Sibanye (which I have a very negative view on, I think they’re massively overpaying for Stillwater in the US), if you were to agree with that, clearly you don’t because you have it in your portfolio, but if you were to come to a similar conclusion, could you then drop it out of your basket or is this in there for an indefinite period?
I think nothing in life is cast in stone and the saying would go here, so we would have a relook from time to time at the risk characteristics and if a change was necessary for whatever reason, a change could be made but I think the intention when one kicks off with these types of things, firstly is to take a view through the cycle, secondly also there are some stops here where the companies like Bidvest, for example are very big promoters of the Pink Drive. Therefore, that also was a factor in the decision that I came to with respect, specifically to Pink Drive to recognise certain companies that see the need for this and are prepared to back it.
You have Purple Group in there. I would have loved to have added them to my portfolio as well, but it’s a different structure. It does however, maybe raise issues of conflict of interest. Are you comfortable even though Easy Equities is part of Purple, that you have that Purple Group in your portfolio?
Yes, and I can do that because I am independent. If I feel it’s worth it and I see value in the stock and there are other sorts of considerations too, I have no qualms about putting that in and so it isn’t coloured necessarily by the fact that Purple have ownership of this concept. It’s in because of the merits of the company.
Yes, I’m hoping they go international and I can squeak them into mine as well and similarly with Capitec, when they go international, they will then qualify for what I have, which is called a bundle rather than a basket.
Indeed and that’s the managed preselected shares where you can’t remove or add shares and so I think it’s quite interesting, I think we’d all be very interested to get a sense from you as to your choice. You’ve got nine stocks here Alec, a nice eclectic mix, so I think there’s a proudly South African angle to your picks and it would be great to get a sense from you as to your thinking behind this. The growth rating is aggressive and I also see that almost all of these companies have an existing presence outside of South Africa and in many cases a growing presence out of South Africa.
When we started off looking at it, talking to the people from Easy, the idea was to actually run two portfolios, a Warren Buffett Deep Value Portfolio, and then an SA Champions portfolio. The difference between the two, the Buffett Portfolio was to find those stocks that were trading hugely under their intrinsic value as I calculated them and then the other one, SA Champions was to say South African companies that are being champions, not just in their own country, but all over the world, so those who are getting the benefit of trading internationally, the competitive edge etcetera. I decided to just stick with one for the moment and that was the SA Champions.
We might get back to the Deep Value Fund in time, but what I did find there and as we were going through the various components in that portfolio, is that a lot of the stocks that jumped out at us like South Ocean was an example, Esor was another one, which were at deep, deep discounts to intrinsic value, were very hard to acquire, a very, very thin market, so that of course then starts eliminating them and then you have to start looking for maybe not such Deep Value shares, so we went with SA Champions alone. These are JSE-listed companies (they have to be on the JSE), that have shown the ability to compete and grow globally. There are a couple of inverses that don’t go into the portfolio.
The one is, no resource stocks and I can explain that as well and secondly, no South African only stocks, so as much as I like Purple, for instance, or as much as I like Capitec, they can’t come into this portfolio because they don’t have a presence outside of the country, so that’s the line that comes through it. The universe is quite a lot bigger than you might expect. Woolworths I liked a lot, but it wasn’t quite offering good enough value, similar with Bidcorp. I have both of those stocks just, just above their intrinsic value at the moment and I like to get, if possible if you go with the long-term bet on these holdings, I like to buy them with that margin of safety, 15 percent. Of course, it doesn’t always work like that and we can go through the portfolio and I can explain why.
Aspen is another one I’m keeping an eye on and one I really liked, which in fact, would have qualified for the other one is NET1, but NET1 has challenges that maybe are reflected in a share price that is under half of its intrinsic value. It’s really, really cheap, but on the other hand, it looks like it’s going to be losing its big cash cow being the South African social welfare contract. At one point you could have almost taken a bet to say there aren’t alternatives, no one will be able to take over that particular part of them, but the more I looked at it, the more it concerned me that maybe they would lose it and indeed, that seems to be happening now with others coming to the party.
So what you want to do is, the reason that one would qualify, if they have a big operation in Korea, they’re growing quite strongly in Europe, a big base in London in fact, where the CEO is situated and they are also doing well on other parts of the African Continent, but by far the biggest chunk of their portfolio now comes from South Africa. So until we have clarity on the whole social welfare thing, it’s probably one of those that’s just a little bit high risk, but all of the other stocks in this portfolio in fact, are in my opinion pretty low risk options. It might be termed aggressive, I don’t’ think it’s that aggressive at all.
It’s interesting you’ve made the reference to intrinsic value. For the listeners, how would you deride intrinsic value and what sort of parameters would you take account of in coming to that figure?
I suppose it’s in the eye of the beholder. Many people calculate it differently. My way of calculating it is as close as to the way Warren Buffett does it and the way he would look at something is he would work out what is the cash that’ll be generated by this business from today to judgement day? Now we don’t know when judgement day is coming, but what he’s saying is if the company continues indefinitely, how much cash can you get back from it? My angle on that is to say South Africa is a turbulent geography.
I really want to get great value when I’m buying stocks that are based in the country, so I look only at it this way, I will take the cash flows at the moment and go forward for five years at a growth rate that I would put in there of the cash flows over that period, take those cash flows into account and then you get, in five years’ time to the cash flow at that time. In other words, if you were to buy the business today, you would buy it on future cash flows on a multiple of ten, twelve, whatever it is that you feel comfortable with. For me, I take the cash flows five years into the future, so it’s like I’m buying the business today, I’m bringing in the cash over the next five years, I get to year five and I sell it at that point in time at a reasonable multiple.
Usually with international companies you can do ten years, which of course makes a huge difference, but I try to be as conservative as possible to give me that margin of safety and by doing it that way, of course you add back the net cash that is in the business and you get to an intrinsic value and I think most people intrinsic values are, as I say, in the eye of the beholder. Sometimes they don’t really mean a whole lot because when you have an exponential company like Naspers, if you start working on an intrinsic value, you’ve got to give yourself a growth rate of 25 percent. When you compound that it starts looking very exciting, but you’re still going to battle to get to the current share price.
I get to a point where I look at those companies and I look at them very differently, so I would take a view on a Discovery, for instance and a Naspers, that these are exponential businesses because of the new markets they’re going into, because of their business models and because of the multiplier effect that I have to try and get my head around. I have an international portfolio, a global portfolio that’s really performed well. It’s been generating 30 percent a year now for two years. You know if you do it for one year, it’s lucky, at two years we’re onto something there and in that portfolio there are a couple. The best performers have been these exponential companies, in fact, Amazon.com and Google and they have given a really good lift.
The other members of the portfolio there would be turnaround situations and there you have IBM, who have done well, Berkshire Hathaway, who have done well, deep value, as they were at the time that they were purchased and I’ve tried to replicate that in this portfolio. I think if we can take a long-term view, it will be good to see a portfolio outperforming the market five to ten percent per annum (if you can get that you’re doing amazingly well) and generally speaking to limit the losses, so not to get anything that’s going to actually blow you out the water, because as you well know, Mark, if you buy something or you buy into something that actually goes bankrupt, or a company that declines in value and investing in shares, that’s always a risk, you can be completely wiping out all the good work that you’ve done in finding good ones.
Yes, very sound principles there, Alec and the methodologies you employ, I fully back and I think it would certainly give those who are exposed to your portfolio via Easy Equities a lot of comfort to know that, really great homework there. I think also, timing can be your friend. We’ve seen with Mediclinic, on a bit of a rollercoaster, I think. Some were a little unsure as to our nurse situation, but I think that’s certainly rectified. We’ve seen the share bounce back on the London Exchange. Similarly with Brait coming off the boil quite sharply last year and I think given the longer run orientation here and your confidence in the five-year cash position, buying in at these very much more competitive levels, places you are in a very good disposition over the next few years being sort of exposed to this basket.
It’s also a bet on a belief that the South African economy has been very poorly managed and as a consequence of that the Rand will remain a weak currency over time, so that’s, if you like the overarching bet, hence finding companies that are performing and have a big exposure internationally and it’s spot on. Mediclinic, I have an intrinsic value there, which is around the current level of the share price, R134, but what I believe will happen is once they get their hands on Al Noor, they will jack up those returns dramatically because they’ve done it in Switzerland, they’ve done it obviously in South Africa and there is a big opportunity there for a turnaround. So to me it’s a value situation, but it’s not immediately apparent. Brait, on the other hand to me is an exponential opportunity.
The investments that have been made are very interesting; the UK has some very smart guys. I had the privilege of meeting Andy Bond, who ran Christo Wiese’s operations here in the UK and then went to go and see, he’s now running the whole Steinhoff operations in the UK and he used to be the CEO of Tesco when it was still reputable. So you have a guy there, who was at the top of the tree, left, he’s still young, he’s in his, I think early fifties and highly respected and now he’s working for the Steinhoff guys and looking after Christo’s interests, if you like, in the UK, where Brait is very significantly invested and there you have a lovely value play on top of it with a net asset value according to them, in September and you know that Brait are conservative in their valuations of R105.
Now when Brait was R150, it was scary that they could get it any further, but at R78 it’s giving me my margin of safety, so I’m very happy with that one. Discovery to me is an incredible business. It’s a pioneer in the shared value model, which we’ve heard about from Michael Porter. It’s valuation now is also looking extremely interesting and I’ve seen from the team here in the UK with Neville Koopowitz and Herschel Mayers, what they’re doing in the market is quite extraordinary, so when you’re on the ground and you can see upfront the efforts and the success that they’re having, and the direction they’re going, it does give you a lot more comfort, ditto Investec.
You can’t fail to be impressed by Investec’s operations in the UK in particular and we know how good they are in South Africa and it’s almost like one of those sleeping giants, you know I remember Investec when they listed in the mid-1980’s. The share price did nothing for years and I can recall having conversations with Bernard Kantor, one of the co-founders, who was tearing his hair out, he said, “Look at the great work we’re doing, we’re making all this progress and yet our share price is doing nothing” and you get the feeling that that’s a similar thing with Investec here in London. They really are a bank that’s going places and yet, the valuation is being affected by the London investors saying we don’t like South Africa and the South African investors not really knowing what’s happening on the ground, so those are my four 15 percenters.
I’ve put 60 percent of the portfolio into those four stocks, which is a strategy that’s worked pretty well for me on that other portfolio, on the global portfolio that I spoke of. The other five, the balanced five were all share picks, Steinhoff on a pure value situation, it’s according to my estimates, very cheap at the moment, Wilson Bayly, similarly, if you work the intrinsic value of Wilson Bayly, it’s far north of the current share price. The Australian operation there is also kicking in really nicely and they’ve done some innovative things in South Africa. Naspers is an exponential play, anybody who hasn’t had Naspers in their portfolio has been very sad over the last ten years probably and just seeing the way things are going in China, you’ve got to have a stake in that.
Naspers is not really the company that people know, the whole valuation there is made up of TenCent and TenCent is now the tenth-highest market cap company in the world and it’s almost like my Amazon if you like, in this portfolio. MTN is a massive opportunity, a big, big turnaround play there. I’ve been a long-time admirer of Phuthuma Nhleko and I think he’s put together a very powerful team, bringing Rob Shuter back from running Vodacom Europe to running little MTN (well little in relative size), you’ve got a top player there and he’s immediately getting Ralph Mupita from Old Mutual, who I know are very sad to lose him and Steve Van Coller from Absa Capital, who were just as distraught when he departed and they’re putting other top guys around them that they bring in internationally.
It’s almost like, do you remember when Telkom put in their dream team and you saw the share price appreciate, I think there’s an MTN play there as well, a big turnaround and finally Blue Label, which is a little bit of a wild card for me, but I do like the work that Blue Label has been doing. I think they’ve bought Cell C for an absolute steal. They got it at a fraction of the investment that the Saudi’s have made over the years and those Levy brothers know what they’re doing. Now that’s the good news in South Africa, but internationally, they’re making extremely big strides in Mexico and in India, so that’s why it qualifies for my portfolio, that’s really the thinking.
Each one of them is a story, each one of them have been carefully analysed, each one of them either are good turnarounds, great value, or exponential businesses and every month I’ll be doing a webinar on this portfolio to update people who buy the bundle so that they aren’t just putting their money away and forgetting about it, they’re putting the money away and looking at, or getting updated on what’s happening to the portfolio and if need be and I’ve done this with the other portfolio, if the circumstances change, I will certainly not be afraid to drop one out. I did that with Novo Nordisk in fact, the insulin-based company in the global portfolio. It’s the only company I’ve dropped out and I hope I don’t’ have to drop any others, so although the investments are made forever, if circumstances change, I won’t be scared to do that.
What’s quite interesting about what you say Alec, is the people factor, management and I have learnt over many years as an analyst that people matter and if you get the right people in place, the income statement tends to take care of itself over time and I think that’s where the real value comes through too. People do make a difference, so as you correctly said with respect to MTN, a significant beefing up through the management structure there in the last number of months and I think turning what was potentially a crisis into an opportunity for a whole new look at MTN going forward, equally, I think virtually every company that you have mentioned. In fact, all of them have recognisable leadership, proven leadership. I was very intrigued by your inclusion of WBHO.
I cut my teeth in these type of stocks many years ago and I would concur, you know although construction doesn’t necessarily come to mind in a portfolio these days, this is one of those companies that has bucked the ups and downs of the building trade successfully diversified outside of SA and making a very good return on that. I think it’s very comforting for people buying into your bundle, that that people factor has been taken into account just as you’ve correctly taken into account the hard metrics from a valuation point of view.
Thanks for that Mark because Wilson Bayly and Blue Label were both constituents of that Deep Value Portfolio that I put together and they were just too good to miss, just too good to leave out and I’ve been beating their drums, as you’ve been doing on many stocks that have done so well for a long time. Both of those shares have risen really nicely, but they still remain in a value type territory, but with big opportunities as well. Selecting shares is an inexact science, we don’t know, we don’t sit inside the companies, we don’t know exactly what they’re busy doing, but over a period of years when you have the opportunity to observe, there are certain things that you pick up. Warren Buffett says that he would never do business with somebody who he couldn’t do a handshake deal with.
If he has to do business with someone who he can’t trust that much, he said he’d rather not do business with them and he also changes his mind from time to time, not often, but when he finds that what he was told can no longer be trusted, he doesn’t mind taking a loss on it and he did that with Tesco, you might recall. He took, I think it was a half a billion Dollar loss after buying the shares once all of the nonsense came out there, it wasn’t Andy Bond’s fault by the way, there were other issues that came to the fore there.
That’s what this is about, know the companies you’re investing in and I think it’s good advice for anybody investing anywhere, know what it is that you’re buying and just be patient. Believe that you’ve done your analysis and if something comes up which shows that your analysis is off beam, well then get out and don’t be scared to do that, but that would be the exception rather than the rule one hopes.
Certainly, and I think if circumstances change then it prompts one to rethink and I’ve done that over the years too. I think in just wrapping up, Alec and this has only recently gone live, I think it’s a very exciting new opportunity for Easy Equities’ investors to participate in your knowledge through this bundle, I think a well-chosen bundle. What you’re also doing, Alec, is you’re backing your conviction with the weightings that we earlier referred to, 15 percent in Brait and so forth. The alpha potential on this is seemingly quite good, particularly if your calls come through and Brait, I think particularly is one of those companies that’s got the capacity to make a good recovery over the next while.
Clearly your positioning now based in England, looking at things from a more global sort of perspective, I think that certainly will be of comfort to people you can look at a much bigger universe and you can also, when you’re looking at these particular companies, take out certain global learnings, I think. Amazon is a very good example, as you’ve pointed out, but taking these companies and seeing where there’s a common thread with what’s going down globally in the various marketplaces in which they actually operate and I think here we have good South African management taking products and services to the bigger world and doing it extremely well and this is a portfolio, which keeps you partially in South Africa, but which gives you a really great global growth orientation.
Yes, you can invest in Rands and the other point that I did mention just before we close off, was there are no resource stocks here and that’s deliberate. Resources are an investment in an inanimate object. When you’re investing in shares, my belief is, unless you really are a good trader that you should be investing in human potential and human ingenuity. All of these companies possess that X factor, that ingenuity amongst their management teams, whereas, as good as a company’s management might be in a resources sector, if the price of that commodity were to tank, they can’t help you and that’s one of the reasons why I don’t look at Sasol, for instance. I look at Sasol and I like Sasol and I think they have good managers, but actually they have no power whatsoever over their profitability.
That’s all to do with the Rand oil price and if you’re that good at predicting the Rand oil price, well go and play the Rand and go and play the oil price, but don’t stick your money into Sasol because you’re likely to find that your bet, unless you get it right on those other things is going to yield you less. Sasol is one that’s transforming and once the company’s got to the stage where, as they promise, that there would be a bigger contribution from the chemical side which could happen after they finish their Louisiana project, then from the Rand oil price, well then you relook at it, but for me, invest in human potential because that’s where you get the outsized returns, you invest in an inanimate object, you’re vulnerable to the winds of change amongst traders.
I think it was Keynes who said, “The markets can be irrational for longer than I can survive”, and you and I saw that in the NASDAQ in 2000. I actually had a pal who was a very, very successful money trader who was short NASDAQ all the way through, just before the whole thing, the bubble burst, he had to be closed out and that’s what happens. We just don’t know how long markets stay irrational for on the commodities side, but when you’re buying into a share or a slice of a good company with good management, that human ingenuity will pull you through.
Those are very wise words and I remember and talking about wise, a wise old owl said to me once (one of the traders on the JSE floor), “You don’t invest in gold shares, you trade gold shares”, which corroborates with what you’ve just said with these price takers and your comment about the human aspect, the fact that these are very get up and go businesses, that are innovative. Even in industries which are quite traditional, such as building and construction, the way Wilson Bayly Holmes approaches it and particularly with its depths of management and long-lived management, they think of different ways to do things in what is a very traditional industry. So on the whole I think Alec, well chosen, well thought through, well valued, and I think those who subscribe to that thinking and they should, would be well-advised to go onto the Easy Equities website, choose this bundle, and ride this upside with you as we go forward.
Mark Ingham, as always a pleasure talking to you and the interesting diversion from our usual discussion of individual stocks today by looking at the basket that you’ve put together and the bundle called the BizNews SA Champions Portfolio. They are there as Mark says on the easy platform and what I love about it is that it’s democratising share investment, R100, that’s all you need to come for the ride. This special podcast is brought to you by Easy Equities.