Investing in education: SA value-style investor on ADvTECH, Curro and more.
Value-style investors are known for picking up stock market gems when the investment herd is unsettled and looking away. It is worth listening to what they say, if you are on the hunt for stock market bargains.
Wilhelm Hertzog of Regarding Capital Management, a value-oriented asset management company, shares his views on whether a range of stocks in the news right now are good value. He speaks to Alec Hogg, on the CNBC Power Lunch, about education groups ADvTECH and Curro, noting that the latter looks like a good business, but seems a bit pricey. He is more interested in ADvTECH right now, but doesn't think it is a "great bargain" either.
Also on the radar in this interview are retailer JD Group and money-lender African Bank Investments Limited (ABIL). Wilhelm weighs in, too, on platinum industry strikes. – JC
Investing in education: SA value-style investor on ADvTECH, Curro and more.
ALEC HOGG: In company news today, education group ADvTECH reported a 12 percent increase in full-year headline earnings per share while Telemasters recorded a first half net profit after tax of just over two million Rand. There's also a lot going on in the gold market. Let's get a more in-depth view of all of this with Wilhelm Hertzog from Regarding Capital Management. Wilhelm, I know it's probably not the kind of stock you look at (Telemasters), given that it's only a 25 million Rand market cap. However, from a broader perspective, the AltX does have some gems. Do you guys ever look there or are the listings just too small?
WILHELM HERTZOG: Certainly, there are some great gems and there are some great businesses, which, I guess, make their way from AltX and become big, large, and investable businesses. By and large, most of those businesses are small and difficult to invest in for an institutional asset management business, which obviously makes it a good hunting ground for the individual investor. If the large institutional investors can't realistically invest in a market like that then there may well be some good inefficiencies and good opportunity to dig some gems out of there at good prices. By all means, we keep an eye on some of those companies but as you said, they are often too small. We really need to invest about 100 or 150 million Rands into business before it's a meaningful investment for our clients. RECM is a small investment manager by South African standards, so it really is difficult to deploy money into that market.
ALEC HOGG: So, good opportunities then for private investors as you say, doing on a smaller scale what you guys do generally, because you like to go where there's value. If we have a look at the global scenario, we've been talking a lot about Ukraine lately, and the Russian stock market. Are you trawling around there?
WILHELM HERTZOG: Absolutely. Look, environments like that – what we see in Russia and Ukraine – that's fertile breeding ground for great value to emerge. Now obviously, there are massive risks and one thinks back to Europe two years ago when there was grave concern about the sustainability of the Euro, and there was much speculation that Greece may leave their Euro area – the common currency. That was the type of environment, which bred massive opportunity. We allocated significant capital into those markets at the time, and our clients did very well from that. Russia and the situation there…it's obviously very different, but also very similar in many respects. I guess when bad news makes the headlines and when people are panicking and running scared, that's often when you find great opportunity. Obviously, you can't just go in blindly and buy everything in sight. You need to do your homework, get your head around the risks, and establish what the probability-weighted payoff is, of allocating capital to those markets. Certainly, it's the type of environment and the type of market, which interests us and which we are spending some time on.
ALEC HOGG: On the local front… If you were to take a parallel with the Russian market and the way it's been knocked back, it would probably be retail shares that have been under the cosh now, for some months. Are you seeing value emerging there?
WILHELM HERTZOG: We would say so, yes. We aren't heavily invested in retail, specifically not in the food retail I guess, or on the upper end of the credit retail spectrum, but in the credit furniture retail market there has been some dire news of late, so our clients are invested in JD Group, and I guess things have been even more difficult than we expected. We allocated capital to JD Group, fully expecting a very difficult cycle. Maybe things have even been a bit worse than we expected, but yes, we do think there's long-term value there especially in the case of JD Group with a strong shareholder like Steinhoff backing it. We think there's a great long-term prospect for the company. These are experienced operators, they stand behind the companies they back, and they have the expertise and the management depth to pull a subsidiary through a difficult time. Yes, we are therefore finding value in that sector.
ALEC HOGG: If you were to look at something that's even more bombed-out than retail – and I guess JD is also exposed to this – it would be unsecured lending: more specifically, with ABIL. Is that offering value to you?
WILHELM HERTZOG: Yes, it is offering value. Our clients do have a small investment in ABIL's equity, but our clients have a larger exposure to ABIL's credit, which is obviously a bit of a safer proposition. We're quite comfortable with the mix of exposure, which our clients have to ABIL i.e. a small exposure to the equity and a more substantial exposure to the credit. I think that if you look at the numbers and the price being offered in the market for ABIL, it is clearly too low. The question and the issue one has to get one's mind around, is 'can a highly-geared business like ABIL keep funding itself through this very difficult cycle', because that's what typically leads to the demise of the lending business. It's not so much solvency; it's the ability to keep accessing credit markets and to keep rolling over funding. I think the run on the bank Saambou, and closure of the credit market to the institutional credit markets in a financial crisis, many pre-eminent financial institutions globally. That's the type of thing, which one has to monitor carefully – it's certainly something, which we are carefully monitoring.
ALEC HOGG: The watchful eye of the country is on the now eight week long strike in the platinum sector. I guess, as someone who looks for value, maybe this is throwing up opportunities.
WILHELM HERTZOG: Absolutely, and our clients have been invested in the platinum sector – heavily invested in the platinum sector, I should add – for some time now. Obviously, it hasn't been pretty and it hasn't been easy, but as you say this is the type of environment where value emerges and where good prices are typically on offer. I think this strike is almost… Our sense, when we speak to the management teams of the big platinum mines currently, is that we've rather reached a Rubicon. Management teams are saying 'so far and no further'. The companies can't afford the demands being put on the table by AMCU, specifically. They're willing to slug it out, to see it through, to sit through a long strike, which is obviously difficult for everyone concerned, and to do what is in the best interests of everyone in the long-term, which is to have a vibrant and sustainable platinum mining sector. At the wage demands currently on the table by the likes of AMCU, the sector is not sustainable. It's as simple as that. In the interests of everyone's long-term benefit, I think management teams have started to say 'look, so far and no further'. They've drawn a line in the sand and they're not willing to step over it.
ALEC HOGG: Wilhelm, we're going to be talking to Frank Thompson of ADvTECH in a little while. That stock's in the same area as Curro. I'm sure that Curro, given your investment style, would probably be right off the radar – it is such a highly rated share and very much a growth stock – but would ADvTECH be one that you'd look at?
WILHELM HERTZOG: Absolutely. It is one we'd look at and we have looked at it in the past. I haven't really allocated meaningful capital to the stock in the past, but we do like the business. We think it's a good business, soundly managed, not as exciting as Curro at the moment obviously, but it's quite interesting how people are rating Curro in relation to ADvTECH. Whereas the established, profitable, and solid businesses is being rated fairly modestly, the business, which is really in almost a start-up phase and having lots of capital thrown at the business, is being rated very highly. If the long-term future for Curro looks something like it does for ADvTECH, I guess one can expect a meaningful de-rating in the Curro share over time. We like Curro. We buy the business model. We think it's a great strategy they're following. We obviously back the PSG guys. Our clients have been invested in PSG in the past. We think Jannie Mouton and the guys there do a fantastic job of allocating capital. It's simply a matter of 'what is the right price to pay for an asset', and no matter which way we torture the numbers, we just can't come to the conclusion that the current Curro share price offers good value. Even if everything goes right in the long term, we think fair value for the share price is well below where the price is currently, but we do keep an eye on both of those.
ALEC HOGG: So you like the model, but Curro is overrated in your opinion. ADvTECH would be the one you'd be doing your homework on.
WILHELM HERTZOG: Probably, yes…not that we would say ADvTECH is a great bargain at these prices necessarily, but certainly, much more realistically priced in the market.