WEBINAR: Biznews SA Champions – Naspers, Glencore lead the way

LONDON — The Biznews SA Champions portfolio, which was launched in January this year, has a very specific mandate. We believe in South Africa's people. And its entrepreneurs. But we are also deeply sceptical of Zumanomics and its impact on South Africa's economy – and, over time, the Rand. So our approach with the SA Champions portfolio is to buy into JSE-listed companies which are investing heavily in the global arena. It is a long-term bet on great South African entrepreneurs – and against the mismanaged economy's "share price". We have eight carefully selected stocks in the portfolio. Here's the October update. – Alec Hogg.It's really a pleasure and a privilege to be with you again this month. It has been an interesting time for the portfolio and as you'll see in a while the performance is now starting to improve quite nicely. By the way you did see in the picture that I have the microphone that's after a request that the audio was not quite as good as should have been last time round so, we've made a few technical changes and now we have the mike ready for you..___STEADY_PAYWALL___.Okay, into the portfolio itself and let's have a look at how things are going but just before we start, just to remind you that it is a hedge against the Rand decline and the way we do this is we have a look at SA companies, in other words companies that are listed on the JSE (Johannesburg Stock Exchange), that's the first priority so, you can invest in these companies in Rands. Then we take a rule through them, try, and find the companies that we believe offer the very best value and they have to be companies that are primarily operating in the global environment. That is what gives them their Rand hedge element..There are a number of companies that we look at from time to time. For instance, Famous Brands is an example of a company that we did do quite a lot of work on and don't like because of the investment that they've made in the UK, a R2bn investment that has gone pretty sour. There was lots of talk on the ground here that Famous Brands had bought in at the wrong time. And the share price, although it's down significantly, doesn't fully reflect the problems that Famous Brands is picking up. What it did was just over a year ago it acquired Gourmet Burger for just over R2bn by borrowing a lot of money to make the investment. At that time Gourmet Burger, a 70-store chain, was generating about R170m in profit. It's now going to make a loss so, there's been a huge decline. On top of that the borrowings have skyrocketed for Famous Brands so, one bad deal can derail you if you're making a deal in an offshore location, and that's an example of that side..We have of course, got that experience in our portfolio as well with Brait and I can take you through a little bit more of that in time, but Brait made 4 big deals in various parts of the world, 3 of them in the UK and one of them was a real shocker and it's a company called New Look, a fashion retailer. Word on the street here, still is that New Look is teetering and is not going to be making any rebound any time soon. I've got a lot more faith in the entrepreneurial prowess of Christo Wiese and I'm hoping that that is justified into the future. We have quite a significant exposure to him, (Christo Wiese), in this portfolio, both through Steinhoff and through Brait as well..But that's the idea. The idea is to invest in SA companies that are listed on the JSE that operate offshore. One that has come onto my radar and I've looked at it and I've thought very deeply about it but I haven't quite built up the courage to make the investment yet, is Sibanye-Stillwater. When Sibanye announced the transaction for Stillwater I was very negative on it and that has been justified by the share price but now that Sibanye's share price is getting towards 4-year low levels and at R16 compared with R44, where it was just a little while ago, you have to start believing that it is now a Rand hedge that is worth looking at. I'm always cautious and very concerned about making investments into mining companies because you are there at the vagaries of commodity prices, and they could go anyway. But when you have a look at the way that the Stillwater deal is going to transform Sibanye there is an opportunity to consider that quite deeply. We do, of course, have a mining stock in our portfolio in Glencore but that's pretty much a very special situation..Moving onto the Rand/Dollar. I've taken this from the Financial Times of London and if you have a look at that over the last year. We launched this portfolio on the 23rd January and, as you can see at that time, the Rand was trading around $13.40. Today it's trading around $13.40 but my goodness has it been volatile in between, in that period towards the end of March you saw it get to almost $12.40, and then in double quick time get to $13.80. Now, if you're buying into international markets at the wrong time you can really hurt yourself when you invest in Rands, and it's a similar thing on the JSE, in these Rand hedge shares..Another one, by the way, that I'm looking at and have been looking at quite carefully is Phumelela, which has now got about a 70% gearing towards the Rand and the share price is not expensive at all. Phumelela makes 80% of its profit now outside of SA and essentially, what it does is it runs the SA horseracing business, which it then sells the picture of into the global markets and benefits from gaming or gambling that occurs on SA horseracing. So, it's a very interesting model and similar to the kind of models that we see lots of value in. You've got Rand costs, you've got hard currency revenues – those are the opportunities and Phumelela is, interestingly enough it's got Bernard Kantor from Investec and Markus Jooste from Steinhoff on its board so, those aren't mugs. They've also just done a really good deal in SA so, that's another one..So, if you ask me, 'what are we looking at?' We're looking, at the moment, at Sibanye and Phumelela as 2 potentials to add into the portfolio but of course, we'll have to adjust the holdings on some of the others to make that happen. The real focus though, long-term, is that we believe that the Rand will be weaker because we feel that the economic management, certainly under Zumanomics is not conducive to a stronger currency and that's the view that we sit at, at the moment. In the past year there's been times when we've looked really good, in other words when that view has been justified. There's been other times when the view has been completely unjustified, as you can see at the end of March, but on balance the Rand hasn't done a whole lot so, as a consequence our portfolio has not really performed significantly stronger than it would have, had the Rand been weaker..Just to give you an indication of the changes that we have made. After we began, on the 23rd January, with R100,000, it was invested in EasyEquities and you can go straight into this portfolio by buying, as I do, the bundle. You buy the BizNews SA Champions Portfolio bundle and you can put as little as R500 into it. We started with R100,000 in the portfolio, on the 23rd January, and after all costs, etc, we're now sitting on a figure which is R106,000 so, it's about a 5.5% improvement over that period. Don't get too excited because the JSE overall is up by nearly 9% so, we are lagging the all share index. But that, of course, the all share index doesn't take into account dealing costs and we have to..On this slide that's on the screen now shows you that we've made 2 adjustments. We sold those Blue Label shares at R17.08 and reinvested the money into Naspers. I'm delighted to have done that because now, at last, our Naspers shareholding is coming in line with the market and I've always felt that we should be overweight on Naspers. Then the second thing was that we sold the Wilson Bayley at R139 (call it), and bought into Glencore and that too has been a very fortunate decision to have done that. Let's move on. I see Stu has put up a link there..Yes, I've just dropped a link to which it will give the breakdown of the portfolio on the EasyEquities website and it's easy to move from there, if you want to invest..Brilliant so, just a little click on that link and it will take you in there and you can then actually have a very real as I do, by the way, all of my SA investments are tied up or invested in this portfolio. It's very easy to participate and you just know that you're participating alongside the asset manager or the portfolio manager, if you like, which is, of course yours truly..Moving on, to how the portfolio has been doing. It is very heavily reliant or dependent on some fantastic performers by Naspers, most recently Glencore, which we only bought as you saw, a few months ago and Discovery has done pretty well. Unfortunately, we've taken a hit with Brait and with Steinhoff..Now, Steinhoff in the past month fell quite sharply. There's a story to that, which we'll get into in a moment but in the past month, Naspers appreciated really well. In fact, let me just break it down. In the past month the portfolio is up about 1.5%, about R1,500 if you like, on the R100,000, and that came through an appreciation of Naspers, which went from R2.893 to R3,191 (it's a big jump). It's now 21% of the portfolio and I'm very happy with it at that level. In fact, I wouldn't start getting concerned until it went way over 35% of the portfolio so, it can still appreciate without any concerns there. The other big move was Glencore so, about R2,000 in the portfolio appreciated through Naspers. About R1,000 was added to it through Glencore's appreciation and as you can see, Glencore is now trading at R65.08 and it's come from R58.60, so those 2 have done pretty well in the past month..The losers, so R3,000 up, the R1,500 that went down were Brait, which lost us R500. Discovery lost us R500 and Steinhoff lost us R500 so, that's really if you look at it overall from the R100,000 portfolio. That's pretty much the way it's performed in the past month. I don't like judging too much on a one month performance and suggest also, that you be very cautious about doing that as well but be aware that the portfolio now, as it's structured – I'm very comfortable. Here's something that's quite important. It's almost like when you buy into unit trusts on a Rand cost averaging basis. How that works is that when the price is high you're buying less units for the same amount that you're putting in, and when the price is low of course you're getting more units. That's exactly what's happened in this bundle here is that our winners are now appreciating more rapidly and, as a consequence, when you have continuous losers as we've had with Brait, which started off at 15% of the portfolio – it's down to 10% now. So, it's impact of its slide is much smaller. Whereas an impact of a winner going higher, like Naspers and Discovery, is much greater. That puts to bed the theory that you should try and take profits..It's one of the worst strategies in investments. With investments you must ride your winners because when you get the winners, as we've had on our global portfolio with Amazon and Alphabet (Google), those winners tend to just get stronger and stronger. Whereas the losers, if you try and halve your cost of entry into them you don't always know. The world is an extremely complexed place and the first place to start is to realise that there's a whole lot that we don't know, that we don't know and if you can approach life from that perspective, especially approach your investments from that perspective and stick in it for the long-term. You go into an investment because you have a good understanding of what you think the story is. But when the story goes against you or when some complexities of which you were completely unaware start affecting you – having a portfolio like this is a very good hedge because as that unknown starts hurting you, as it's done in Steinhoff and Brait's case, that means you have a lesser exposure as the share prices continue to fall. I hope all of that makes sense. Does it make sense to you, Stu?.Yes, all good thanks, Alec. Unfortunately, there are no questions so I'm just trying to encourage the audience to drop anything into the Q&A sidebar and we'll get to it. There are no silly questions just silly answers..Okay I see there's just a few comments about the screen and they can hear, etc. That's good. We see here the number of questions that there but of course comments and questions are the same thing so please do. We don't want to get into a situation like we had last week where we ran out of time on the questions so please, just drop them in there..Moving onto the portfolio generally, and just as an overview there. It's developed from a position where we had 4 stocks at 15% each. Of those 15% we then added to Naspers and we took that to 16%, and the share price appreciation has taken it to 21%. As I've said, I'm happy to stay there. Discovery is a little bit higher. Investec, as you can see, is very close to the purchase price so, it's still at 15% of the portfolio and Mediclinic a little low down, and it's gone to 13% of the portfolio. Brait has been the big loser. It's gone from 15% down to 10%. Glencore another winner, it's gone from 8% to 10%. MTN is stable and then Steinhoff is down to 6%. So, if you're on a monthly basis it will allocate it to the portfolio weightings that we have now. I really like the way that things balance themselves out..Moving onto the all share index as you see it is outperforming us. At the top there, this is again from the Financial Times, the one-year change (12 months on 12 months) in the Rand we have seen an appreciation of the all share index by about 12% in the last year. Since the 23rd January it's gone from R53 thousand to, where it is at the moment, R57.5 thousand so, that's about just under 9% and that gives you an indication though that down to as low as R51 thousand in June the JSE has had quite a nice run in the last while. It was helped along by the volatility of the Rand..Here's our big one and it's the big one on the JSE as well. That's Bob van Dijk, the CEO of Naspers, who came under quite a lot of pressure from shareholders. I took this photograph when we had a chat at the World Economic Forum last year in the members lounge there, I didn't get into it, he had to issue an invitation but a very civilised and an incredibly smart guy. Bob van Dijk's share that he's looking after or his company that he's looking after, Naspers, it continues to perform really well. There's quite a lot of criticism around Naspers because the view is that because Naspers is trading at a significant discount to its shareholding in Tencent, the big Hong Kong listed company. The view is that Naspers or every now and then you get people coming up with an idea that Naspers should be selling its Tencent shareholding and deploying the cash or giving it back to shareholders, or whatever..The latest variation on that came from Mark Mobius, who is the Emerging Market manager with a pretty checkered track record, I'll have you know, of recent times but the media seems to have no concerns about that. He continues to get lots of air time and his most recent assertion was that Naspers should now be buying back its own shares to compress the discount between itself and Tencent. I guess, but if you are in a situation where you are developing and investing aggressively into other internet properties around the world you shouldn't really be exercising the kind of approach that highly conservative ex-growth companies, like IBM, Coca-Cola (well they're no really ex-growth but not exponential growth, which is what Naspers is looking for) the kind of thing they are doing but it is a view. It was quite ironic to me to actually have a look at Templeton Emerging Markets. The whole operation that Mark Mobius has got has $29bn in assets, which is quite impressive but it's an asset manager that is telling Naspers, which has got $102bn in market cap, and it's become pretty much an investment operation as well. It's telling Naspers what to do? I don't know..Koos Bekker fortunately, and the chairman of Naspers and the man who's driven it to the level that it has, he's been quite outspoken on this fact and with good reason. In 2012 we had similar clamouring where Naspers was suggested or proposed that Naspers sells its Tencent share and as Bekker pointed out at that time the Tencent's share price was HK$45. A month ago, by the way, it was HK$300 and now it's HK$350 so, if Naspers had listened to the worthies who manage portfolios and sold out its Tencent share in 2012, well you can imagine the criticism that there would be around the company today – that the share price has gone to HK$350. They know what they're doing. They're riding their winner. They have wonderful insights. Koos Bekker visits China often and engages a lot with Pony Ma, the CEO of Tencent. They've got a fantastic relationship and that is an ability from that relationship, between Naspers and Tencent, Naspers being the biggest shareholder there that they can inject and understand how the world is going, or this exponential world of technology and the internet is developing..We saw a good reflection of this and this is really in defence of Bob van Dijk, who as I mentioned earlier, some people are cross at the bonus that he received. Bob van Dijk is the man who's driven the investment into Delivery Hero, which is one of the biggest, if you like in SA we know Mr D, which started many years ago, where you would phone up and they would deliver to you from various takeaway outlets. What Delivery Hero does is far more fast liquor and it's all online and every market that it's entered into its managed to become number one or number two, and it's growing rapidly. It listed recently and Naspers, in the last month, bought another 13% of Delivery Hero. Its total investment in Delivery Hero is now just over €1bn. The market cap of Delivery Hero is $6.8bn. Translate that into Naspers' terms, they've invested about €1bn. The value of what they own is about €1.5bn – that's €500m that this investment has made for Naspers shareholders and if you work that into SA terms, its R8bn..Now, I don't know how you can start casting aspersions at a CEO, who has generated that kind of an investment for you. For me, Koos Bekker had the whole world to select from. He picked Bob van Dijk and his selection, as CEO, is doing a pretty fine job indeed. No doubt that there would be lots of people happy to take him into their fold, from Silicon Valley, if you were to have some insanity occurring where shareholders prevailed and not only got Naspers to sell their Tencent shares but to get rid of van Dijk as well. Sometimes businesses should just be left, especially successful businesses in my opinion, they should be left to continue on the path that's got them there. Anyway, that's a nice example of the value that Bob is adding to the company..While you're on Naspers, Alec. Yvonne wants to know, 'is it too late to invest in the company and what about investing directly in Tencent, which I know we hold in the Global Portfolio'.On both scores it's not too late. What we do in our view is we take a look at the company, we understand about it. We then look at what the potential would be in the long-term from the current share price levels. In all of those instances I'm very comfortable and very happy to be invested in both of those. As Stuart says, we do have Tencent a fairly belated in addition to our Global Portfolio, and that's really performed extremely well. Naspers, you're getting a huge discount on Tencent and particularly, if you're based in SA, then this is your route into Tencent so, it's not too late. You're getting a huge discount to the underlying value. Sometimes people just don't… The numbers are so big. Look at that, the market cap of Naspers – R1.4trn. It's about a third of the value of the GDP of SA..Now, when you look at that you've got to kind of rub your eyes and say, 'is it possible that there's a company, a primary listing on the JSE, which is worth about a third of the value of the entire economy in SA? That's what you're talking about here so, when you start unpacking the numbers it looks so big. It's a bit like Apple in the US, and you've got to just take off your blinkers and work out is it value for what it's achieving at the moment? Is it value for the revenue that's been generated and in Naspers' case, because you're getting a 20% plus discount on just the Tencent shares. Everything else, including Delivery Hero, which I've been talking about, and all the other investments – Mail.Ru, MultiChoice investments in Africa, all of that comes for free so, I think if you can get your head over the numbers..Warren Buffett, the world's greatest investor and certainly one of the great teachers about investments, he says that if you are going to invest in a company's shares imagine or knock a few noughts off and imagine you're buying the whole company and then look at the numbers in terms that you can absorb. If you do that with Naspers, you'll see it's offering excellent value so, certainly on that one. My view on Tencent is that it's in an incredibly sweet spot. It has 900 million people, that's three times as many people who live in USA. There are 900 million people in China who use Tencent as their operating system on their mobile phones. It's captured, if you like, (to us a SA term) that market and it can now sell things into the market and has been doing so hugely successfully with games and through that is where Tencent is. It actually started off by charging 10-cents for someone. Now, it's the equivalent really of SA's 10-cents because the HKD and the Rand are pretty similar in value so, imagine charging someone 10-cents for access to something. It's a micropayment. The micropayments have transformed that company. People don't mind paying 10-cents to participate in games or whatever it is, and that's where the business started. By charging tiny amounts but huge volumes. When you've got 900 million people in your ecosystem, my word. It's another Apple but of course it isn't. Apple, by the way, has got about a billion people in its ecosystem so, there's not that much difference between the two and both of them can make enormous amounts of money by just charging very small numbers. Sorry for the long answer there but yes, I do like both of them..Moving onto Discovery – there's been some negative press on Discovery. I won't say, 'negative press,' because they manage their press relations very well but some negative vibes around the company since the results were released. The results were very good particularly the UK operation, Vitality, which is making excellent inroads here. Living in the UK you can see how the NHS is creaking. You can see how British tax allocations are going to continue to put pressure on the service delivery of NH and as a consequence, more and more people who can afford it will be moving towards Vitality. So, they've come into the market at pretty much the right time. I'm not sure where the negative vibes come from in SA. It could be to do with National Health. It could also be perhaps an over evaluation of what Discovery will be doing in the banking market. They've spent a lot of time developing their own banking model and in the past month we have heard the news that Commonwealth Bank of Australia have entered the SA market and they will certainly be putting Discovery, and not just Discovery but all the banking companies in SA, under a lot of pressure..To give you an idea of the scale the Commonwealth Bank has a market cap, which is the equivalent of FirstRand, Standard Bank, Investec, Nedbank, Capitec, Absa, and then plus another R300bn on top of that. So, add them altogether (all the SA banks), put another R300bn on top of it and that's where you get to the value of Commonwealth Bank so, it's a big player and its identified SA. It's launched, it's got a banking license, a digital only bank – it's going to be a big competitor and maybe that's another reason for Discovery coming under a bit of pressure in the past month..Thanks Alec, just on the banking side of things. Pierre says, 'local banks appear cheap – what are your thoughts?'.They are, by historical standards but the competition is intensifying. As I was mentioning now with Commonwealth Bank, it is a concern that you have this huge player coming into SA and you've got Discovery in the wings and we know what they've done to the healthcare market in the country. Of course, you've got Capitec, who are continuing to grow at 17% – 18%, and growing market share so, banking is not an easy place to be right now. The ratings of the SA banks are reflecting this. On the upside, I guess, is that never forget that banks are in the business of borrowing from depositors and lending out to those who want to borrow from them. Most of the lending that they do is to corporates and when they can lend more they can make more money..They also get a big chunk of their earnings from corporate actions. When the companies themselves are active, when they're expanding, growing, merging, and doing those kinds of transactions then the traditional banks. You could say the 'big 5' in SA but who are the big 5 now? But the old, traditional banks in SA – FirstRand, Standard Bank, Absa, Nedbank, and Investec, they would benefit from an improvement in the economy. Or rather they are closely related to the way the economy performs and the SA economy has been under enormous pressure. Socio-political reasons are a huge part of it. When you have uncertainty then you do not get the investment in plant and equipment, and expansion of job creation. If you're not having investment then nobody is asking the banks for money to lend. If the banks aren't lending money they're not able to expand their profitability. On the other hand, if the economy is in trouble the banks find that the bad debts that they have to write-off start escalating as well..So, when you see an improvement in the SA economy that's the time when the SA banks will be rerated but not until then. The rating on Capitec, as I mentioned quite stridently after their financial results. I think it's a fantastic company and brilliantly run but the rating has just gone into the stratosphere. At that time, they were trading at a price to book value of 7.2 times. Now, if you take FirstRand, as on a price to book value of under 2 times. So, you're saying that Capitec is going to grow 3 times faster than FirstRand will indefinitely (until judgement day). In my opinion that is a bit of a stretch so, on the one hand FirstRand might be a little undervalued. It's a fantastic operation, as we know. One of the most innovative banks in the world but Capitec, on the other hand is probably overvalued relative to it..If you were to make a bet on banks I think that you probably going to be doing your work on the economy. What happens in December at the ANC Elective Conference is very important. It will give us an understanding of whether we'll continue with a confrontational approach between government and business in SA, and that would be the election of Nkosazana Zuma. If you were to have Cyril Ramaphosa elected as the president of the ANC and then presumably of the country, after 2019, and I say, 'presumably,' because lots can happen in that election too. But if that were to happen then the banks would certainly rally because there would be a perception that Ramaphosa, who is part of the establishment (if you like) he would be better positioned to get the economy going again. If you had the compromise candidate, Zweli Mkhize coming in – the banks would probably rally a little. Not as much as if Ramaphosa came in but that would be on the basis that he is a man of integrity, it appears. Certainly, all the work that I've done shows that he is..There's all kinds of talk going around at the moment, as happens in the political environment where virtually all of the candidates get badmouthed from one camp or another. You just need to be very cautious about what you believe but someone like Zweli Mkhize could be pretty good for SA, in the long-term but we have to see though, which way the cookie crumbles in December. I would say, do your homework on the banks. Find the one that appeals to you most and if you are confident that Nkosazana Zuma is not going to be elected, then you might well follow your gut and build yourself a little position in banks. They're so far down at the moment, and we're really talking about the big 4 banks, that there isn't really too far to fall from these levels anyway. So, your downside risk is capped. Whereas there is upside potential after the December Elective Conference..Thanks Alec. A question on Facebook, which is obviously not a local stock, but Terrence says, 'as an advertiser he sees the dominant role it plays and is going to play worldwide it's a fantastic buy.' We do hold it in the Global Portfolio as well..Yes, I'm a huge fan of Facebook and the reason why is because you do have this dominance. Let's just go back a little bit. In the media industry, in the past, you had very few routes to market and those routes to market meant that advertisers could pretty much pay what the newspapers and the radio stations and the television stations decided to charge. Now, there are infinite number of routes to market and the old traditional advertising model is completely broken. In its place has come a cut-price option, which is not only much cheaper but is also far better targeted..So, what Facebook can do is they can give an advertiser a target within an area, and we're looking at a beautiful picture here of Mediclinic's head office in CT. If you were, for instance, to take that little area or just take the City Bowl in CT because you have a service that you would like to deliver to them, in the City Bowl area. You can then target only people who live in the City Bowl area on Facebook so, it makes your target market much smaller and they will charge you a fraction of what you would have been paying through traditional advertising vehicles..The market doesn't always tell the truth but in cases like this it rarely lies, and that gives Facebook a massive advantage over other media companies in the areas that it operates in. Of course, when you look at Naspers it's an obvious question. What's going to happen to Naspers then? Well, Facebook doesn't operate in China so, Tencent which is Naspers' bull book, if you like, is shielded from that kind of operation until it gets its own social media site together, I guess, at some point. Facebook has a model which is only now starting to explore. I've heard internet experts say that if you were to take the internet's development in a context of say a year, we're probably only in the first couple of weeks. There's a long way for the internet to develop and Facebook has this incredibly strong position of over 2 billion people that it serves at the moment. Where it can now move, not just from advertising but moving into financial services, etc..Buffett says, you should buy a share that if the market is closed and you come back in 5 years' time, the stock markets that is, when the markets reopen you'd still be happy to be owning that share. With Facebook that's one of those very few shares that I can look at in this uncertain world and say, 'I'd be very happy to be owning it today.' I'm pretty confident that in 5 years' time the investment would have grown..We'll go onto Mediclinic – there's not really a lot to tell in this past month. It continues to bump around there. Mediclinic is listed, it's one of the FTSE top 100 companies there now, so it's affected by the Rand movement (as you can see there), it came under a little bit of pressure early in September and then bumped around a little bit more. This is a stock that I really do think is significantly under-priced. The reason why it has fallen is maybe there was a bit too much excitement in the time that it went ahead to list on the London stock market. When you're in fashion and you go out of fashion you tend to go a little bit further or lower than you should go to but on this one I'm very happy to have it in the portfolio. It's continuing edge up very slowly. In fact, it's almost identical to where it was a month ago and a good, strong, well-managed business..Here's the one that's been causing all of our problems, my goodness look at that. Here's the share price, thankfully we only bought it in January around the R80 mark. But those who had bought it a year ago would have paid double the price and it is a company that has been really hit hard by one purchase that it made. It bought a business in the UK called New Look. It's a fashion retailer. The decision to buy New Look now I something that Christo Wiese would love to undo as probably anybody would, if you'd bought something for over £700m and the value of that investment has now gone down to a fraction of that, at the most recent balance sheet. They acquired 89% of New Look in June 2015, and it actually just brought all kinds of new debt onto the balance sheet. It, of course, sucked up a lot of the cash that used to be in Brait at that point in time. It was, at around the same time that some of the other acquisitions were made. Virgin Active, which is going quite nicely. Iceland Foods, which Wiese already had a stake in that he bumped it up but New Look is the problem..In the last month we've seen or we've heard in the marketplace that New Look is now renegotiating its debt, or trying to, it's lost its CEO so, it's weighing heavily on the share price. In fact, there are quite a lot of short sellers of Brait even at these levels. But I remain optimistic, hopefully optimistic, and the reason I do is the insiders are really piling into this stock. The Brait management team are heavily leveraged towards the ownership of the shares. They've got about R2bn invested, which they've borrowed to make the investment and in the last month they bought another nearly R20m worth of shares at R56. So, as you can see, just where the share price is at the moment. That is a discount of 28% on the net asset value at the end of June..So, what are you getting from Brait? You're getting New Look, which has been written down to pretty much disaster or Armageddon prices that's the big problem. That's the reason why the share price has fallen so much. You've got a very good business in Iceland, which is a retail chain in the UK, which actually sells and is very popular because it sells iced products, so food that you can take from the store, put it into your deep freezer or defrost the meals, etc. It's very popular and a highly priced competitive. It's then got Virgin Active and the UK, like many other parts of the world, is becoming a lot healthier. The gyms in this country are booming and Virgin Active is very focussed in the area of the country, which is the most health conscious, which is London. That was £692m by the way, that they paid for Virgin Active in 2015. They value it at almost £1bn now so, that's a big part of the business..Then they've got in SA, Premier, the old Premier Milling, which is a R10bn – R12bn business. Just to get back to New Look itself – they paid £783m for it and that price has been written down to under £400m so, that's been the real hit for Brait. If the insiders are of the opinion that they can at least stabilise New Look, if not necessarily turn a magic wand on it and increase the value of it – that's one thing but they are certainly buying the shares at R56 and you rarely go wrong when you follow managers. Particularly managers who are in the business and who are risking their own money. Christo Wiese is a great entrepreneur. He's going to be borne out, I'm sure on this stock in the long-term..Of course, it is the ultimate Pound hedge and we also know that the Pound is at a point now where the appreciation in the currency is starting to work through. There's sanity prevailing within the UK on Brexit. Every day you would have some bit of news that would knock the Pound one way or the other but generally speaking, sanity tends to prevail in these situations and should it continue, the Pound will recover from its post-Brexit levels but it still hasn't recovered to those levels yet..Just on Brait, Beau wants to know, 'if you renegotiate the debt, is the price at R56 not still under pressure?'.That's a good question. It appears to me and certainly to the insiders as well, that the price is reflecting Armageddon for New Look. It's renegotiating debt now in anticipation of the debt it has to… It's got a few years so, it doesn't have to. There's no necessity to renegotiate debt or you go bankrupt – it's not in that position. Just looking at interest rates, they might be rising soon. Is there a way that they can secure themselves for even longer? That's the discussions that are going on there. It isn't a discussion of banks or missing the covariance and having to call it up. So, I think markets or investors are pretty skittish about this share, to come back to see the investors coming back into Brait in a big way is going to take a lot more than just a few months..Remember, they did get rid of their CEO at New Look a little while ago, I think it was last month. He'd been there for 5 years and was there through the transition from the old private equity partners to the new ones, which is Brait. It's in the price and I think if you're a bargain hunter now is the time to be adding Brait to your portfolio but I wouldn't go too big on it because I don't know what I don't know, and I think it must go for all of us – we don't know what we don't know about Brait. The insiders are suggesting to us that what is in there that we don't know is good news but the market is saying to us, 'it's still reserving judgement.' The best time to buy something is when it's cheap and there's no doubt that at the moment, Brait is cheap but don't put your whole portfolio in it. I think that's really my message on it..We're coming to the end of our discussion for the day and here's been our real, superstar performer, Glencore. Some localised news in the past month was that Glencore has now bought Chevron SA, it's invested $1bn. Chevron is the company that's got a refining plant, about 100 thousand barrels a day in CT, the Caltex service stations. There are 820 of them around the country so, it's now 75% owned by Glencore and 25% owned by the BEE partners. Interestingly enough the BEE partners objected to a deal that was done with the Chinese, China Petroleum, Sinopec. As a consequence of that that deal unravelled so, Chevron wants out of SA. It sold to the Chinese. The BEE partners weren't too keen and Glencore has come in and this is interesting for so many reasons but it's also supporting a thesis that seems to be coming out increasingly..There is a lot of rumour mongering and fear mongering in SA at the moment. It certainly supports certain political parties or political objectives. I heard the other day that if Nkosazana Zuma does not get appointed there'll be civil war in SA. Of course, anything is possible but that just seems really farfetched when you have a look at the sophistication of the country as a whole. But it's that kind of rumour mongering that is making SA assets incredibly cheap. For a Glencore and, especially with a Johannesburg born and bred CEO, Ivan Glasenberg, they can see the short term and it's more likely that the country will muddle through than go into some kind of Zimbabwe like decline. Even the great pessimists won't put more than a 20% chance of a Zimbabwe type ending to the SA political situation, and that's the bet that Glencore has made here..It's made a big investment. These guys are shrewd. They've got cash now to spend. They're busy doing a similar investment in zinc in South America, $500m that they're putting in there. It's interesting that Glencore, it was only a couple of years ago that it was over geared, in other words it had far too much debt. The share price was in the doldrums and it's now come back from that by being nimble and showing that even if you have a giant business like this one – if you do position yourself differently you can take advantage and this is the time. It wasn't the time to be buying mining assets in 2008/2007/2006 – that was the wrong time to be buying mining assets. That was just before the burst..Now, is the time to be buying mining assets but the competitors to Glencore in this field are all, themselves, are over geared as Glencore was but it has wiped that gearing out. It's now sitting there able to make good purchases and it's looking through the SA troubles, if you like, even for Glencore a $1bn investment is a big one so, Caltex service station is now owned by Glencore and its BEE partners and it's making a bet on the future which, as a South African, if you step away a little bit is not a bad thing at all..Finally, MTN, it's just bumped around in the past month. We are still very positive about the new management team. It's the kind of thing you expect from a new broom sweeping clean. MTN had to focus internally. It had to get its internal operations in order before it starts rushing out into exciting, and more fashionable activities that gets the investment community excited. We don't know when that's going to come. It could happen in the next month or it might take a year but at these levels, R126 a share, MTN is still offering excellent value..Steinhoff has been the big disappointment of the past month. I'm not worried about this at all. The reason for the share price decline was the listing of Steinhoff Retail Africa, or STAR as it's called. It seems the market isn't mad about that. Well, anyway, everyone has their own opinion. Roughly 20% of Steinhoff is tied up in STAR and STAR is a business that effectively is about 2/3rd the old Pep (Pep Africa) and Ackerman's and the other third will be the investment in Shoprite. Now, Steinhoff because of its relationship with Christo Wiese, is in a position to exercise an option where it has a controlling vote in Shoprite by about 20% of the economic interest, 23% to be precise..So, that's going to turn Steinhoff into the 15th biggest retailer in the world. It's complicated. People have been looking through it but I do like the way that Denko Capital, and there's a piece on BizNews today, if you'd like to go and read it the way that they unpack it. Their view is that, and they're big shareholders of Steinhoff. Their view is that this makes Steinhoff, the parent company, even more attractive than STAR and particularly after the recent decline in the share price. I'm happy that Denko Capital still likes it. I'm very happy that Markus Jooste has managed to get the group positioned in such a way that the international investors can start discovering it. Not just because it will be in the top 15 retailers in the world but because it is now 80% international and very clear lines between the African operations and the rest of the world operations..I also like Steinhoff on the basis that it has been contaminated with the anti-Amazon brush, in other words, Amazon is such a bulldozer that whenever it goes into a market the incumbents catch a cold very quickly, or catch pneumonia if you like, and their share prices fall but Steinhoff is positioned in those areas where it's not exposed to the Amazon effect. Primarily through big goods, mattresses, you don't sell too many mattresses on Amazon because they're big. Amazon specialises in digital distribution and in small products that's easy to distribute. Secondly, because it's very strong in the bottom end of the market where the margins are small, at Poundland for instance, where there's no margin in it for Amazon to sell and distribute it. So, that protects Steinhoff as well. I'm very happy with Steinhoff and if you haven't got it in your portfolio it certainly is one to be adding..Thanks Alec, 2 quick questions to end off with. Shirley wants to know, 'is Glencore a good buy at the moment?' And then Peter asks for your thoughts on Dischem..Peter, I haven't done any research on Dischem because it actually falls outside of the portfolio, unfortunately, given that this is just for SA Champions so, I can't help you with that one. Shirley, Glencore at these levels, you've got to start scratching your head because it's up by a third since we bought it. We bought it on the basis that it's repositioning itself into the electric car field and that's a story that hasn't even started yet but whether it's run too far in the short term is a possibility. It's almost like from where it was to where it is today. It's now putting in the premium for being focussed on electric cars..Remember, if you go back to the reason why we bought into it. At the annual general meeting Glasenberg focussed his whole presentation on how Glencore had been moved away from being a traditional commodities business into a business that was focussed on new age commodities and particularly on those commodities that were going to be using copper and nickel, that are going to be used in electric cars. So, we had a bit of an uplift there, from our perspective. The share price has been helped by an improvement in the commodity prices but it is getting to a point now that if you're looking for a commodity stock I'm wondering whether it isn't time to be investing in Sibanye-Stillwater because that's the way that markets go..You get this over-reaction, as there has been on electric cars. So, getting hammered are platinum and palladium stocks. Then they get dislocated so, the market goes too far in the one direction and too far up and too far down as well. If you're in the commodities field you've got to take note of this. Commodities generally are for trading. Glencore just looked too good to be true, at the price we bought in at, given it hadn't really moved then on its exposure to electric cars. Would I be putting more than 10% of my portfolio in it today? Probably not so, we have a 10% allocation and that's a healthy enough investment if you are wanting an exposure to electric cars. Unfortunately, Tesla is not listed on the JSE but if it were, I would rather be going for Tesla. But as it isn't, this is your route into that very exciting market but remember, you're taking a long-term bet on it..The long-term bet on electric cars is that within 20 – 25 years we are going to see the end of the internal combustion engine and it being replaced by the electric engines and Glencore is best… Cobalt is the other mineral that I didn't mention earlier. It is best positioned of all the resources companies to benefit from that. It's like they sell the pick and shovels of the mining boom, if you want to put it in a different way..Thanks Alec..So, Stu, that seems to be the end of our presentation today. It's been great chatting through the portfolio once again, this week. It's been an interesting month but it's always is an interesting month, as we know. I think that the watchword in all of this is just remembering why you invest in the SA Champions and it is a bet on the Rand or a bet on a weaker Rand. So, it's a hedge that you're taking against poor economic policies in SA, and you are enjoying that by investing in companies, SA or JSE listed companies, that can benefit from an appreciation of their assets in the global environment. There've been some ups and down but generally speaking, the portfolio is in front and it is a long-term portfolio. Even if it were significantly lower than our entry point I would still say to you, 'please look at this as a 3 – 5-year portfolio.' When we do make changes, they are for fundamental reason so, Wilson Bailey we fundamentally felt that they had run out of runway in SA, where a big part of their business is, or were running out of runway because of the economy in SA. Australia wasn't performing the way that we thought it would..A similar thing with Blue Label. They doubled up on their SA bets with the deal that they did with Cell-C and that doesn't really play to this portfolio, which is a global champions portfolio. We brought Blue Label in initially on its India and Mexico businesses so, from here, maybe there will be a lightening of some of the shareholdings but generally speaking, I'm very happy with the way the portfolio is structured. If you're going to get something to replace something in the portfolio or to add a new stock into the portfolio, it's got to be something that is very cheap and you have a very exciting outlook on a 5-year horizon..I hope you've enjoyed the presentation today. Thanks for all the questions and we'll be back again next month. Stu, we've decided we're going to do something different next month. We're going to move to an evening webinar rather than having it over lunch time to maybe go around about 19h30 and that does give people a little better time to be at home and it doesn't break into the work day. We will be polling BizNews Premium subscribers to get a better feel for that to make sure we're on the right track there but that's one of the enhancements that we are keen to make..Thanks Alec, yes, we'll see what the response is and what works best, 19h00 or 20h00.

WEBINAR: Biznews SA Champions – Naspers, Glencore lead the way

Related Stories

BN Portfolio Update: Unleashing Gemini; Tesla’s robot pivot; and avoiding classic investor pitfalls

BN Portfolio Update: Harnessing the AI revolution and navigating local headwinds

BN Portfolio Update: Navigating global market chaos - Strategies for long-term wealth building

BN Portfolio Update: Cashing in the chips - Why we are closing the Shyft portfolio after a 91% gain