Ranmore founder Sean Peche specialises in finding cheap shares, often among the neglected small and medium-sized listed companies. He pays little attention to the âbig newsâ like the surprise 50 basis point rate cut from the US Fed, preferring to focus on areas where he can see opportunities to buy low and sell high. Freshly returned to his UK base from BNIC#1, Peche identifies the star of that show (Mteto Nyati) and uses the advantage of fresh eyes to compare annual results just released by Discovery and Remgro. He spoke to BizNews editor Alec Hogg.
Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.
Watch here
Listen here
Edited transcript of the interview ___STEADY_PAYWALL___
00:08
Alec Hogg
Sean Peche is the founder and chief investment officer at Ranmore Funds. He was at the business conference last Thursday, gave us a wonderful presentation, which will be published in the course of next week. We’d love to get his impressions and also some insights on the interest rate cuts and some South African companies that have just released financial results.
00:38
Alec Hogg:
Well, there we go, Sean, quite a mouthful. Letâs start with getting home, back to the UK, having a look at your homeland. It is your homeland, as I always say, thereâs no such thing as an ex-South African. Unfortunately, wherever you are, youâll be given away by your accent. What did you take from the conference last week?
01:06
Sean Peche:
Yeah, Alec, it was tough to come back, Iâve got to be honest. One week in beautiful South Africa is definitely not enough. And only a day or so in Hermanus. I thank you and thank you for the opportunity to be there. And, you know, Septemberâs a beautiful time, Pro-Tierâs up and Bloom, itâs stunning. So, different beauty at different times.
Now, in terms of the BizNews Investment Conference, I mean, I thoroughly enjoyed it. And I must tell you a story which I didnât get to. The night before I was staying at our place in T.V. on his cliff, and the night before I had drinks with friends. And one of the, and we were talking about Eskom and one of the ladies, Gail, good friend of ours, she, she said, âOh, I must tell you, I worked with Mteto Nyati. The guyâs brilliant.â I said, âWhat makes him so special?â She said, âHeâs a great leader and heâs so collaborative and he will bring people on site.â Iâm like, âWow, itâs amazing.â I hadnât even looked at the agenda. I was so busy and so rushed to get there. I couldnât believe it. I look at the agenda the next morning and there he is, speaker number two. So I had to go up to him and mention Gailâs name.
So it was really enlightening for me to see him speak and to hear about the wonderful stuff that heâs done. And I thought for me, he was the winner. Okay, he was up against some tough competition. But I thought Mteto Nyati was very, I thought it was a great speech. And I just think, you know, he has done remarkably well. And I think the other thing is, so often when everybody is on one side of the seesaw, everyoneâs negative, âOh, this load shedding is going to go on forever,â etc. Boom. You know, all of a sudden, like thereâs no load shedding. So it just shows you oneâs got to be careful about getting too fixated, too negative, too positive, etc. So congratulations to him and his team.
And the other thing which is interesting is that youâll recall that one part in his speech, he talked about AI, joining the dots with individuals saying, âWell, hang on, this person does this job, but theyâre driving a Maserati and live in a five million rand house in wherever,â you know, and those dots donât line up, those points donât line up and they use AI. Now, if a big corporation like Eskom is finding benefits from AI, it just shows you, and itâs a point Iâve made before, is donât just think that the only beneficiaries of AI are Nvidia, itâs the other companies too. So, for me, that was just fabulous and I was ready to like to see, and you know.
That just makes such a difference to the small companies out there that can keep the lights on, the restaurants, the shops that are able to carry on charging people with their handheld terminals, etc. So it makes a big difference and itâs great and well done. So yeah, that was my key takeaway.
03:31
Alec Hogg:
You mentioned the small companies. Another takeaway from the conference was the appeal of small and medium-sized South African listed companies at levels that hadnât existed for many years, if not decades. What was your take on that? Did you go back home and start looking at annual reports to see whether he was pointing you towards something interesting, given that youâve got the whole world to choose from?
04:01
Sean Peche:
Yeah. I mean, look, we have a South African small-cap company, AACI, in the portfolio at the moment. And I mean that whole theme, if you think about it, like where has the money been going the last 10 years? Itâs been largely in passives. Thatâs largely the large companies. And who have people been taking, you know, when people move their money from active managers to passive funds, well, the active managers have to pay for that redemption, so they have to raise funds somehow. And so quite often the small caps get discarded. So itâs a global phenomenon. And that was why, you know, and when you look at the number of the variables including the valuations, especially the valuations really, and the growth prospects. We are positioned in mid-caps and smaller companies rather than the large companies because they just offer better value.
And I mean the other thing is if growth is hard to come by, well one of the ways in which the big companies can grow is to gobble up the little companies, you know, and to make bids for them at huge premiums. And so you have that optionality in the smaller companies that youâre not going to have. No oneâs going to take over Amazon or Microsoft or Nvidia, but you know, somebody, somebody could take over some of the companies Pete mentioned. And Iâm not going to, you know, people are going to watch his presentation to hear the name. So I totally agree. And I totally, and I think itâs a global phenomenon as well. And of course, you know, South Africa is not the only cheap market in the world. Hong Kong is pretty cheap. And thatâs why weâve got, in fact, we have about as much, if not slightly more, in Hong Kong than we have in America. Some people might go, âYouâve got to be kidding me.â Iâm going, âWell, thatâs where the value is.â Thatâs the market thatâs been ignored. They go, âBut Iâm in China. What about the growth?â You go, âWell, itâs hardly like the US economic data is all roses.â Thatâs why the Federal Reserve is lowering rates a little bit. Theyâre worried about the unemployment. I think theyâre on the money pit side.
06:18
Alec Hogg:
The Federal Reserve lowering rates, we heard last night that Jay Powell, the Fed Chairman, is cutting interest rates there by 50 basis points or half a percent rather than what many thought would be only a 25 basis point cut. Were you surprised?
06:48
Sean Peche:
To be honest, I didnât pay any attention to that. I didnât have a forecast. You know, no one in our team, we didnât poll our team and say, âHow much do we think the Fedâs going to lower rates?â because we just donât worry about that kind of stuff.
What is interesting is I read an article this morning that of the 113 economists who were surveyed by Bloomberg, only nine of them expected a cut of this magnitude. Now you never really know because itâs also not just about the numbers, what did they say and what they said is that theyâve got a dual mandate, theyâve got to achieve maximum employment and inflation around 2%. So theyâre obviously a little bit happier with inflation coming, falling largely because of the base effect. But unemployment has been ticking up and so theyâve got to manage it. And I guess to go 50 basis points, if itâs, you know, they donât want to be too late. They were too late last time. So letâs err on the side, maybe err on the side of caution and do that.
The one point I havenât really seen a lot of people comment on this morning is that what they did say is the committee will continue reducing its holdings of treasury securities. Now thatâs quantitative tightening that I touched on in my presentation. And I hope my presentation wasnât too complicated for, you know, so maybe, well, maybe that means I have to watch it a couple of times, which is not a bad thing. But you know, one has to recognise that the era of quantitative easing and low interest rates is really over because I mean, youâre down to 4.75 to 5%. Thatâs not the nought.
That was the environment which many of these companies flourished in. So, yeah, I mean, I know the other thing, Alec, and I think weâve just got to be mindful of this and I guess it never appears at the time, but if you look back, we donât have a lot of data points on this. Okay. But the Fedâs rate cuts happened before the last two recessions. And actually, if you go back and that was in 2000 and 2019, obviously COVID, you know, exacerbated that thing. So letâs take that.
So the problem is we donât have a lot of data points, but if you go back to, you know, 1974, typically when the Fed starts lowering rates, it means lower economic growth. Okay, thatâs what theyâre seeing and thatâs why theyâre lowering rates. Okay, so we just got to be quite on the ball. If that flows through to companiesâ earnings, thatâs going to be a factor. But thatâs what history tells us. History also tells us that the best time to be buying shares is when interest rates start falling.
09:15
Alec Hogg:
There is a direct correlation between the two. Now thatâs markets generally. Clearly itâs not really your game because youâre looking for the jewels in any kind of market condition. But if you are a person who owns a lot of exchange traded funds and in other words just buying the market generally, is this a good time to be upping the ante?
09:44
Sean Peche:
Well, you know, I think, you know, the problem with looking back, and we never really one of those people who say, âPresidential years markets do wellâ or that kind of thing is because every time thereâs different situations. So yes, itâs, you know, maybe it has been a good time, but it depends on what the valuation is. So in 2000, when they started lowering interest rates in 2000, you know, valuations were pretty much where they are now. And over the next year, markets fell in a heap. In 2019, prices were lower, but also fell in a heap, but thatâs because of COVID. So each time itâs different. And thatâs why we donât really pay too much.
Weâll be aware of it. We know that the Fedâs lowered rates and all that, and weâll say, âOkay, well, what does that do?â Thatâs not good for companies that have got a lot of cash, because what does that mean? It means that theyâre going to earn less interest income on those businesses. And so, and it is good if those rates, that lower rate gets passed on to the underlying companies. It is good for those companies who are indebted, but youâve got to be careful about making sweeping statements because it depends if a companyâs got a lot of debt.
Maybe they fixed the rate. You know, maybe theyâve got so, so that that rate is locked in. You know, itâs only helpful if itâs variable. You know, it might help the housing market. And I see the home stock, home building stocks, you know, hit a new high. So oneâs got to be careful about making sweeping statements. Thatâs the second-level thinking I like, youâve got to look a bit deeper, you know, and I mean, what was interesting yesterday is that the market.
11:11
Alec Hogg:
The market initially took the news positively but then closed on the lows. Many people were saying that wasn’t a good sign. However, you wake up the next morning, and Asia is up, Europe is up nearly 2%. Thatâs good. Also, it has an impact on currencies. The Euro is strong, the pound is strong; theyâre all close to yearly highs. The rand is strong, and the Brazilian real is too. For those with money in the US, it’s worth noting that the US dollar is not the best currency right now because other currencies are appreciating.
11:41
Sean Peche:
Yes, indeed. There are lots of moving parts, which is why we focus on bottom-up individual companies rather than trying to predict numerous variables. Some say “sell in May and go away,” but that strategy can lead to losses if applied indiscriminately. It’s similar to horse racing advice, such as not betting on a horse making its second run after a rest, though many horses have won under such conditions. With so many variables in play, itâs crucial to look at individual companies rather than relying on broad strategies.
Speaking of moving parts, South Africa had two well-known companies report their financial results today. While itâs not my primary focus, letâs briefly consider Remgro, often touted as a cornerstone of a South African portfolio, and Discovery, known for its success internationally, including in the UK.
I havenât reviewed these companies in 20 years, so bear with me. I had only an hour this morning to quickly assess them. Being from South Africa and Canada, I approach this without bias, as if Iâve just discovered these businesses.
13:05
Remgro is deeply tied to the South African economy, with significant holdings in MediClinic, OutSurance, Air Products, and others. However, EPS hasnât grown; in fact, it fell to R10.18, down from R11 in 2013. Over the last 10 years, total return, including price and reinvested dividends, has been around 12%, but for investors, itâs been a poor performer, with returns of just 44% in 10 years.
The stock was previously at a premium to book value but is now at a discount. The market has wised up. Remgro was once seen as a business with inherent value, but it hasnât delivered as expected. They claim an intrinsic value per share of R251, yet earnings remain at R10, translating to a 4% return, which is quite poor.
A large portion of the intrinsic value is tied to their telecoms business, which is currently losing money. Why would one pay a high price for a loss-making business, unless itâs seen as a one-off issue? Conglomerates often face fluctuating performance across their subsidiaries, leading to discounted valuations. Management needs to unlock value, which has been disappointing.
Looking at the management team, who have been in place for 14 years, and the CFO for nine, the stock has a 1.6% dividend yield and trades at 11 times earnings with low ROE. Based on this, I wouldnât be buying it.
16:22
Alec Hogg:
Thatâs a very insightful analysis. Often in South Africa, Remgro is bought simply for its reputation. Now, what about Discovery?
16:45
Sean Peche:
Discovery, under Adrian Gore, shows a different picture. Operating income is up 17%, headline earnings up 15%, NAV up 16%, and embedded value is up 12%. Their Ping An Health Insurance JV is contributing significantly, up 85%, which is impressive. Discoveryâs growth prospects with Ping An and new business up 18% make it a strong performer.
Discoveryâs total return has been 61% over the last 10 years, compared to Remgroâs negligible return. Even in dollar terms, Discovery is up 3%. It’s trading at 12 times forward earnings, a similar valuation to Remgro, but Discovery clearly offers more growth potential.
18:12
Alec Hogg:
Given their similar ratings, if you were to choose, youâd go long on Discovery and short on Remgro, expecting the market to adjust the valuations accordingly?
18:42
Sean Peche:
Shorting involves risks, such as potential positive news from Remgro that could impact the stock unexpectedly. If forced to choose, I would definitely prefer Discovery.
19:12
Alec Hogg:
Discoveryâs insurance business is already separately listed, so they donât have that option, but they have other unlisted stocks in their portfolio.
19:40
Sean Peche:
As for the US interest rates, what happens next is worth watching. Over the last 20 days, the equal-weighted S&P 500 has outperformed the market-cap-weighted S&P 500 by 2%. This suggests that smaller companies outside the major tech stocks are gaining traction. If lower rates help earnings grow and reduce funding costs, valuations should rise.
Itâs not just about the US; central bank actions globally could also influence economic growth. While many investors have focused on the US, itâs worth considering opportunities elsewhere. Itâs similar to rugby; while everyone watches the backline, sometimes the eighth man on the blindside scores.
21:01
Alec Hogg:
Sean Peche from Ranmore Funds, thank you for your insights. Iâm Alec Hogg from BizNews.com.
Read also:
