There really are some lovely companies on the JSE – good, solid companies, with reliable earnings streams, diversified customer bases, and excellent growth prospects. To take a few examples, consider Naspers or Famous Brands (both discussed in this interview). With its major offshore component, its dominant position in domestic broadcasting, its stable of great entertainment brands, and its exciting China prospects, Naspers is one of the really global, sexy companies on the JSE. Foreign investors hold quite a lot of Naspers stock in a testament to the extent to which Naspers is an emerging markets media giant. On a smaller scale, Famous Brands is a very nice little company. It has some really great South African brands, most of which are unlikely to suffer too much in the face of a retrenchment in consumer spending, and it has the drive to keep growing and expanding, as evidenced by its recent acquisition of frozen yogurt group Wakaberry. – FD
ALEC HOGG: Famous Brands announced a 70 percent acquisition of the equity of the brand leader in the frozen yoghurt field – Wakaberry. It only started in 2011, that company, so good on the entrepreneurs there – while Metair Investments posted a full-year revenue increase, but a sharp decline in its profits. To get a more in-depth view of how the market is trading today, we’re joined by Matthew Warren of First Avenue. Just a little correction there, I saw on the one board, we showed Naspers down one-and-a-half percent…on the other one, down four percent. It’s actually down four percent at the moment, and lots of volatility there, Matthew.
MATTHEW WARREN: Yes, it tends to be a volatile share. When you look at Naspers, it’s a high growth story and it runs long into the future. When you value a company like this, it’s on a discounted cash flow basis. It’s not really so much on this year’s metrics when they’re growing their earnings at 30-plus percent per year. As people look out into the future, those opinions can vary quite a bit over a short period of time, but for a patient shareholder, you just have to look out, continue analysing the fundamentals and whether you believe in that future or not. What we see is a network effect – when we look at Naspers and Tencent, in particular.
ALEC HOGG: Just explain ‘network effect’. That’s analyst-speak for something very complicated.
MATTHEW WARREN: Well, it’s not too complicated. You can picture any platform where you’re bringing together buyers and sellers. In Tencent’s case, they’re bringing together providers, suppliers of video games, and the users – hundreds of millions of those users – and if they can skim just a little bit off those transactions, they can make a lot of money. The more users there are the more valuable they are to the suppliers and vice versa. That’s the network effect itself that we see, and because they have everybody on a communication platform and everybody on gaming platform, you can picture how they’re going to keep adding to that. They’re going to keep growing their customer base and they’re going to keep monetising it in different ways, over time.
GUGULETHU MFUPHI: No doubt, you’re still a firm believer in that stock.
MATTHEW WARREN: We’re owners in Naspers and we do like the competitive advantage they bring. It’s an extremely unique asset. Really, the competition was kept out in China and they were allowed to build something that’s almost more powerful than Facebook in that geographic area. It’s almost a combination of different companies. If you combined about three or four different U.S. companies with notes themselves, that’s what you’d find in Tencent.
ALEC HOGG: I think, just to kind of put it in perspective, at any one time you’ll have people on Tencent equivalent to the entire U.S. population, so it does tell you what an enormous business this Tencent has become. In a way, we don’t understand it, but thanks for explaining that part to us. Some good news for SABMiller and the share price has reacted.
MATTHEW WARREN: They’ve made a lot of money in South Africa for a long time and they’re very dominant in terms of market share. In many cases, they’re competing against themselves and a bit with imported brands but they have scale and local production, local distribution in a big way, and it’s hard for anybody to come in and match that. If you want to compete, you need to come in on-shore, have your own factory, and have your own distribution. To get to that scale is the hard part and they’re competitive. They’re not looking to make it easy for anybody. Here you have a court ruling that comes in their favour where they’re being on a competitive basis, rather than anything else.
GUGULETHU MFUPHI: You also focused rather closely on retailers and Famous Brands today announcing its deal with Wakaberry – a great entrepreneurial story, as Alec mentioned earlier on. What do you make of it?
MATTHEW WARREN: Well, you’ve seen them doing this a lot. Famous Brands have their core brands, they keep adding to it, and they seem to want to have the entrepreneur in the mix, which is interesting, to keep that partial ownership, keep that interest, and keep driving the individual brands forward. What Famous Brands bring to the table, is supply chain. They manufacture products, whether it’s chicken fillets or cheese now, they bring distribution so they can get it to where it needs to go when it needs to be there and just the scale that comes with that. Immediately, if you’re an entrepreneur and you plug into Famous Brands, you plug into a cheaper cost into your store. Whether you want to keep some of that yourself, or whether you want to pass some of that to the consumer – probably both – it makes you more competitive immediately.
GUGULETHU MFUPHI: Is this a new approach that retailers are taking? Just yesterday Alec, we spoke to Spur who acquired Braviz Foods if I’m not mistaken, the company that…
ALEC HOGG: The ribs people…
GUGULETHU MFUPHI: Yes, so perhaps it does seem as though getting into the supply chain industry is also a competitive advantage for food retailers.
MATTHEW WARREN: Spur is probably one of the biggest competitors. Famous Brands has quite a big presence at this point. It’s going to be hard for a stand-alone competitor to compete. Spur also has a large supply chain – maybe not the same skill – but they can help bring a smaller chain into the fold and get them closer to bridging that gap.
ALEC HOGG: So the model is that the entrepreneurs go overseas and see what’s hot there, as this couple did. They brought in frozen yoghurt from the United States before anybody else did in South Africa – 33 stores – sell 70 percent of it to Famous Brands, reduce your costs and make even more money.
MATTHEW WARREN: I think it was TCBY in the States back in the 1980’s or thereabouts where we first came across this. It did quite well and you’ve seen that come across in different formats; now you see it here and it’s working well.
ALEC HOGG: Metair, did you have a look at those numbers?
MATTHEW WARREN: I did get a chance to look at those. I think you see revenue growth but really, the pressure comes in from the strikes, so the strikes at the OEM level, and then you’re going to have the strikes at the supplier level. Any time these come along, you get very large disruptions, temporarily, in the business so whether you produce ahead or make up later, it ends up being lumpy financials in the meantime. They do, however have many good positions locally. One thing we didn’t like is you see some foreign competition coming into the battery space. We noticed a while back, Korean battery manufacturers coming into, I think it’s Tiger Wheel and Tyre, in terms of partnering for distribution, so nonetheless, more competition but they have a good spot here in the market.
GUGULETHU MFUPHI: Just on Metair, I also want to push that further and perhaps, and the strike action… I’m sure you speak to many people – your international client base. You’re from Canada. I’m sure you get calls from home where people ask you just how dire the situation is. Could we perhaps get your response?
MATTHEW WARREN: Chicago actually, but close enough – we’re awfully close there. I think people get concerned. If it’s a strike every year, it’s one or two weeks, it’s ironed out, and people come to an agreement on price or wages, I think that’s something investors can deal with. However, when you see the strikes getting longer and more disruptive… I have been speaking to some investors back home recently, in fact, and I think there are concerns around the Rand. There are concerns around some of the disruptions in labour, so I think that’s true, but at a cheaper Rand or at a cheaper share price, I think interest can also come back in. Everybody is trying to figure that out…at least, the folks I’ve been talking with.
ALEC HOGG: It’s a bit like Russia, isn’t it? There is a price, at which anyone will see it as a bargain.
MATTHEW WARREN: No, I think that’s true. Unless it’s a catastrophic risk you’re facing, at the right price a high quality company is worth buying.
