Inflationary pressures are ominous for growth stocks – Piet Viljoen

Counterpoint Value Fund manager Piet Viljoen delves into a host of corporate action taking place across the local bourse. The mining mergers and acquisitions mania has continued, with a twist, as Royal Bafokeng Platinum (RBK) turned down Impala Platinum’s proposed takeover to pursue a deal with competitor Northam Platinum. The Purple Group (owner of Easy Equities) also posted its financial results with the brokerage platform announcing impressive numbers. It remains one of the flagship growth companies on the JSE. Vodacom and Remgro have recently announced a partnership to grow high-flying fibre businesses Vumatel and Dark Fibre Africa. Viljoen unpacks the possible synergies this could create. Lastly, Ascendis Activist Investor Harry Smit’s appointment to the board is discussed to wrap up the conversation. – Justin Rowe-Roberts

On the effects of inflation on growth and value stocks:

The future is uncertain. This is not a forecast but the theory goes that growth stocks and specifically tech stocks are valued by discounting all their future cash flows by a discount rate – which is linked to the interest rate – and the lower the interest rate is, the higher the present value of those cash flows is. Value stocks are valued the same way. The difference is that with value stocks, the cash flows sit in the immediate future. Most value stocks don’t have a long runway of growth ahead of them. So, you are only discounting three, four or five years’ worth of cash flows; whereas, with stocks like Microsoft or Apple, you might be discounting 20, 30 or 40 years of cash flows. If you do that with a low interest rate, it gives you a big present value. If this interest rate were to increase, however, it brings down that present value quite dramatically. With a value company or a value stock, where the cash flows are right here in front of the next few years, any change in the interest rate you used to discount those shows make almost no difference to the present value of those cash flows. The theory goes that the value of growth stocks are highly linked to interest rates. The lower they are, the higher the value of growth stocks. As interest rates increase, all else being equal, the valuations in those stocks might decline. It’s too early to tell whether that’s going to work out in practice because interest rates have not really gone up despite US inflation at 6.2%. Ten-year yields in the US are still at 1.5% and short rates are hovering around zero. So, inflation’s gone up a lot. It looks like it’s not transitory but interest rates are still at the grassroots level.

On the corporate action in the mining sector: 

I believe what’s happening here is that there is a fight for resources. I think platinum companies see the need for the metal they produce increasing over the long term. Impala has a reasonably short life of mines, whereas RBP has just developed a couple of new mines that have a longer life and more reserves. They lie adjacent to Impala. In fact, Impala mines on RBP ground. They’re so close to each other. There are also issues with the smelters; there is capacity there, so there is a lot of synergy between Impala and RBP, whereas with Northam, there is no synergy. I guess they just want to use the cash they have on hand on the balance sheet because that’s been generating a lot of cash, like all the platinum companies over the past while. It seems they just want to stop Impala from getting hold of RBP and have taken out all of Royal Bafokeng Holdings 32% stake. That means they don’t have to make an offer to all the other shareholders, which leaves them out in the cold. It’s a very interesting situation developing there. I do think the signs are starting to happen. It’s still early days – it’s not there yet – but the signs [are that] the stock is up and with this corporate activity heating up in the platinum sector, that maybe valuations are starting to become a bit full. But as I said, I think it’s still early in the cycle. It’s not yet at the top of cycle.

On Purple Group’s financials: 

It’s a fantastic business. It has made investing in the stock market accessible for a lot of people. It’s made it easy. They’re trying to do the same with property, which I think is fantastic. What Charles Savage and his team have achieved there is fantastic. The problem I have as an investor is that at R2.50 a share, you’re paying for a lot of what they still are going to be doing. I think [this] will be good things over the next few years but you’re already paying for that. So, I don’t see value in the stock market price. It’s a highly valuable business. It’s a great business. I’m just not sure it’s a great investment at this point.

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