With the JSE and S&P 500 at record high levels, and markets around the world having enjoyed a strong run, looking for value can be quite a challenge for investors. With stock prices so high, it’s hard to find companies that will outperform over time, delivering earnings in excess of what their price promises. Nevertheless, there’s always value somewhere, and according to RE:CM’s Piet Viljoen, today that value can be found in the resource sector, not just in South Africa but around the world. The S&P North American Natural Resources Sector Index, which tracks major US companies that operate in the energy and materials sectors, has been essentially flat since 2011, even as new natural gas resources have been tapped and major resources companies have cut back costs and streamlined operations. The JSE Resource 20 has been similarly lacklustre, struggling to find momentum as the platinum strikes and ongoing concerns about regulation and the electricity supply have weighed. Worldwide, resource stocks have also been slowed by ongoing concerns about global economic growth prospects – slow growth means low demand for resources. However, as Viljoen argues, prices are not really keeping up with earnings, and the sector may indeed offer value. – FD
ALEC HOGG: PPC Chief Ketso Gordhan has called for reforms in South Africa’s infrastructure procurement processes, while Absa is currently investigating micro-retailer Sura Pure Drinks after the company opened an account with that banking group. To get a more in-depth view of how the market is trading today though, we’re joined by Piet Viljoen from Regarding Capital Management. Piet, it’s good to have you on the program, as always. Will we will be seeing you at Berkshire-Hathaway this year, or are you giving it a miss again?
PIET VILJOEN: No, unfortunately not. I have other arrangements, which I need to attend to. Clients are unfortunately, at this point, much more important than Berkshire-Hathaway. I would have loved to have been there, though.
ALEC HOGG: Well, it’s quite interesting that you say that, because the World Economic Forum in Nigeria is being held exactly on the same day as South Africans go to vote, so I guess not too many people are going from this country to that one either. It is, however, interesting looking at the markets today Piet, and that Rand strengthening up. Your view on the Rand’s fair value: is it approaching it or is it moving away from it now?
PIET VILJOEN: Well yes, it’s approaching it from the wrong side, the weak side, so we think the Rand is probably worth – I don’t know – around R10.00 to the Dollar, roughly, so it’s there or thereabouts in terms of purchasing power parity. I think there are some other factors at play here, which could probably keep the Rand on the weaker side of fair value for longer, because there’s no rule that says it has to go to fair value at any particular point in time.
ALEC HOGG: As far as the individual stocks are concerned, Times Media in the media industry has had a good run-up…30 percent in the past year. It jumped today – five percent – small volumes, though. Is it one that you managed to get into when it was offering great value?
PIET VILJOEN: No, that’s not stock that we own at this point in time.
ALEC HOGG: Do you have any views on it, Piet?
PIET VILJOEN: I think Andrew Bonamour and the guys will probably do a good job of managing it…better than previous management (if I could be so bold as to say that). However, it is probably not the part of the economy where we think sustainable value can be created over time, the way we see things at this point in time. I think it’s gone from a situation where it was probably slightly too cheap, to a situation where it’s now discounting quite a lot of good news. Maybe that happens. Maybe Andrew and his team make that happen and if they do, then that’s in the price. If they don’t, the share price could do nothing or go down. Those are not the types of odds we like putting into our portfolios.
GUGULETHU MFUPHI: Piet, where are you seeing pockets of value?
PIET VILJOEN: Well, I hate sounding like a stuck record, but I was on your show about a month ago. At that time, and previously, we continued to think the resource sector – specific areas in the resource sector – was where the value is, where there is tremendous, almost a once-in-a-generation type of opportunity to buy assets at deeply discounted prices. Not only in South Africa…this is a global situation. We think that’s probably the most interesting sector. We think the unsecured credit sector in South Africa is starting to show some value and broadly speaking, those are the two pockets, which we see at this point in time.
ALEC HOGG: Well, then you’d be interested in seeing the movement on the markets today. Talking about unsecured credit, Capitec had a good move this morning and on the other side, Aquarius Platinum has come under a lot of pressure. Are both of those consistent with your view?
PIET VILJOEN: Well, Aquarius Platinum has announced quite a large rights issue, so it’s no surprise that the shares are down on the day. However, platinum shares over the past year are up anywhere from 50 to 70 percent, so they’ve done really well. It’s no surprise that Aquarius wants to raise capital at these prices. The share price is up substantially, off the lows it reached at the time of the major strikes last year. Basically, what they want to do is extinguish the debt and strengthen the balance sheet by replacing the debt with equity so they can go into the labour negotiations/wage negotiations with a strong balance sheet, because it looks as though those negotiations could be quite protracted.
ALEC HOGG: And Capitec?
PIET VILJOEN: Well, Capitec we think, is a wonderful business. It’s trading in our view, probably slightly cheaper at this point in time, so we have a position in the stock and we think it is the best breed in the industry, which is where most of the accounts are quite cheap.
GUGULETHU MFUPHI: You haven’t said anything about any industrial stocks and the one that comes to mind is Naspers. The share price has been pulling back for quite a number of weeks now. Is that one that you’re eyeing, Piet?
PIET VILJOEN: No, we struggled to get to grips with the valuations of Naspers. We think it’s a wonderful business. We think they’ve done fantastic things there over time, but one should never confuse a wonderful business with a wonderful investment opportunity. Those two things are sometimes very different things. Many people regard the platinum business as ‘not so wonderful’ at this point in time, but we think it’s a wonderful investment opportunity and the converse I think might be true with something like Naspers.
ALEC HOGG: How are you reading Netcare? I see that stock again came onto the radar today with a decline. They’ve been subject to investigations in the U.K. around competition issues.
PIET VILJOEN: Yes, it looks as though they’re picking up headwinds in the U.K. Our view on the whole hospital sector is that it’s a great business to be in. They basically run little localised monopolies, which gives them a barrier to competition and as a result, they earn quite high returns on capital. Two competitors, Medi-clinic and Life, have taken different strategies. Medi-clinic has also gone into Europe, whereas Life has mainly focused on South Africa and Africa. Netcare has gone to the U.K. and I think it’s picking up some regulatory trouble there. Things might not be as ‘plain sailing’ as they thought it would be. They also did it with quite a bit of debt and I think that might be a problem, so it’s not a stock, which we own at this point in time.
GUGULETHU MFUPHI: Piet, there’s also a small hospital group, a day hospital group called Advanced Healthcare. They’re also looking to list on our local exchange, the AltX, in the upcoming months. Will you be looking at that one, too?
PIET VILJOEN: I think we are busy looking at that one, but I have no opinion at this point in time.
ALEC HOGG: We’ll have to wait for it to list on the market and then you can tell us whether it’s gone cheap or expensive, but at least… You remember the old Presmed. Is it the same guy behind it Carl Grillenberger?
PIET VILJOEN: That’s right, yes, the same person and our analyst is now looking at the stock but as I said, I can’t give you an opinion on that because we don’t have one.
ALEC HOGG: That was Piet Viljoen from Regarding Capital Management. I love that. If you go to what Warren Buffett believes Piet, he has the three folders. The one is ‘yes’ – very small, the one is ‘no’ – also, very small, the other one is ‘don’t know’, and that’s the one he answers most often. If you don’t know…
PIET VILJOEN: I think it was Charlie Munger who said ‘the dawning of wisdom is when you realise that you know nothing’ so we try to be wise about things
