LONDON — The Biznews SA Champions portfolio, which was launched in January this year, has a very specific mandate. We believe in South Africa’s people. And its entrepreneurs. But we are also deeply sceptical of Zumanomics and its impact on South Africa’s economy – and, over time, the Rand. So our approach with the SA Champions portfolio is to buy into JSE-listed companies which are investing heavily in the global arena. It is a long-term bet on great South African entrepreneurs – and against the mismanaged economy’s “share price”. We have eight carefully selected stocks in the portfolio. In the eight months since the launch, three have been firecrackers; one an awful disappointment; and the other four have marked time. For now anyway. Here’s the September update. – Alec Hogg
Welcome to this month’s edition of the BizNews Champions Portfolio webinar. I’m in London and Alec Hogg is my name and, of course as always, in Johannesburg is my colleague, our managing editor Stuart Lowman.
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Yes, thanks Alec. It’s good to be here again for another monthly update.
Stu just take us through the ‘putting up hand story’ to make sure that everybody can hear us.
Thanks Alec Darren says he can’t hear very well. I’m not sure if you want to lift the audio your side but It seems fine on my side.
Let’s see if that helps you a little bit more, Darren. I have a microphone next to me here, which should be picking everything up fine. But let’s just see if those hands have been raised.
Alec, I’ve got another one saying, ‘I can hear Stuart fine, I just can’t hear Alec very well.’ It’s from Kierna.
All right Kieran, I tell you what I’m going to do – once we move over to the presentation I’ll be talking… You see, if I do that now while I’m on your web screen it looks a bit strange, doesn’t it? But as soon as we move onto the presentation I’ll make sure that I bring that microphone a lot closer. That should make it a bit easier then. Anyway just to welcome and we do have this webinar every month. Stu, just give us an indication of how we work with the questions.
Thanks, Alec so, there’s a little question tab on the right-hand control panel. If you drop down that menu just slot them in there and I’ll pass them onto Alec as he goes through the discussion.
Great, and let’s just double check now that, as far as the technical is concerned, everything is working well. Are you seeing the big screen there, Stu?
No Alec it’s in PowerPoint mode and not full screen.
Okay, how’s that now?
Okay, there we go, 100%. Let’s rock ‘n roll.
I hope I haven’t messed it up now and just fiddled a little bit more. All good, is everybody happy?
Fabulous, well it’s another very interesting period that we’ve had here in the last month. Stuart, as far as the sound is concerned, is that any better?
Much better thanks Alec.
What I do is take you through a slide presentation and then we can stop at any time and Stuart will jump in to ask various questions. I see there are already 5 questions that are up there but please keep going because this time we’ll try and get through all of the questions.
The rationale for this portfolio is, as it is on the screen there – a ‘hedge against the Rand by investing in SA’s global champion companies, driven by its best entrepreneurs.’ So, what this means is on the one hand we’re trying to offset the decline in the value of the Rand. We believe the Rand will fall because of poor economic management of the SA economy. The way that we are wanting to hedge ourselves against that, in other words protect ourselves against that, is by investing in shares listed on the JSE, run by South Africans in the international arena.
So, a company like Capitec for instance, which I love is not in this portfolio for the simple reason that Capitec does not have an international, or not much of an international presence. These have got to be global champions. Discovery is in the portfolio and the major reason for that is that Discovery has got a substantial operation in the UK, and of course, elsewhere in the world. But its main business is still in SA. However, it’s expanding aggressively into the global community.
The main thing then given what the overall strategy is, it’s a Rand hedge and the Rand has not assisted us at all. As you can see when we launched the portfolio on the 23rd of January, the Rand was at R12.92 against the USD. Today it’s R12.93 against the USD so, the strategy of the portfolio is to hedge against a decline in the Rand. As it’s happened over this period, (9 months) that we’ve had this portfolio running – the Rand has, at this point, not done anything. It has not misbehaved at all so, as a consequence of that we’ve had no uplift from the value of the Rand declining.
It’s been volatile, as you can see there, in February. The Rand strengthened all the way to below R12.50 to the USD, and then shortly afterwards it got to nearly R14 against the USD. In the last month or so, as you can see pretty clearly there, it has been strengthening quite significantly, from R13.50 all the way to under R13. So, the past month has not been supportive of the portfolio as far as the Rand’s behaviour is concerned.
One last thing before we go into the indication of the individual stocks. What we did do, although we invested R100,000, in fact I put more than R100,000 into my EasyEquities account but you can put your R100 or more, (or multiples thereof), into EasyEquities. It’s called a ‘Bundle’ so you get exactly the same replica here. There have been 2 changes that we’ve made since the investment started on 23 January, both of those were for significant reasons.
The intention of this portfolio is every single stock that is bought is held indefinitely but in certain cases, where we see things happening that will affect the underlying business then we will make a change. We did this with Blue Label, we sold those shares at R17.08 on the 4th May, and switched it into Naspers. Now, there was a couple of reasons for this. Naspers accounts for 25% of the Index of the SA investments in the JSE listed shares – that’s how important it is now in that Index, or 20% if you just look at the overall Index and we only had 8% in Naspers as a start. It’s one of my favourite shares in the whole world. In fact, in our BizNews Global Portfolio we have Tencent, which is really the major reason why Naspers has done so well We have that in that portfolio so, when you restrict it just to the JSE obviously, you go big on Naspers. We only had 8% of the portfolio in Naspers so, that was an oversight, which we corrected on the 4th May.
The other reason why we sold out of Blue Label, we were concerned about the contamination effect of Net1, which was getting into all kinds of trouble over its Sassa contracts. Blue Label and Net1 were busy doing a deal. In fact, they are now partners in Cell C and that also was a huge investment by Blue Label, which focusses it more in SA, rather than its external operations in Mexico and India. We felt that on both scores, Blue Label becoming more SA focussed, and Naspers being underweight, it was a good idea to make that switch. The result has been quite good. Since that switch was made Naspers’ share price is up 17% and Blue Label’s share price is up 7% so it has benefitted the portfolio.
The second decision was one based on a view that Wilson Bayley was hitting some pretty tough winds in the SA market. It wasn’t doing great in its Australian business either so we decided to sell out of that and to switch it into Glencore, which has subsequently justified that decision, (we’ll talk more about Glencore later in the presentation). Glencore share price is up by 33% since the 1st of June. Whereas Wilson Bayley is up by 4% so we are in a situation where we can look back on those switches and say, ‘certainly at this stage that they were well justified.’
There’s the overall portfolio and it really is an interesting portfolio to look at. In the past month, it’s risen by R500, as you can see. Underperforming the JSE all share index at this stage. That is not surprising giving that we have a view that this is all being bought on a Rand hedge so underperforming the JSE all share index is really not surprising to see it, if the Rand isn’t performing the way that we think it will because clearly we’re heavily Rand hedged focussed, whereas the JSE is not anywhere near as much.
However, you’ve seen some very good performances by 3 of the stocks. Naspers, which continued this month, it and Glencore rose further. Both of those adding to the portfolio. The downside, we had another decline in the share price of Brait and we had that shock that hit Steinhoff, which is now 10% below the price at which we bought in at. Both Steinhoff and Brait, in this past month were underperformers in our portfolio. As far as the overall is concerned, that R6,000 gain after costs, has come roughly through Discovery. In fact, it’s been the best performer in nominal terms. That’s given us R3,500 profit, Naspers R3,000 profit and Glencore R2,500 profit. Against that, the big loser has been Brait, which has lost us R4,000. Your R6,000 is, well it’s a bit of a fiddle around between the rest but Naspers, Discovery, and Glencore have been the 3 big beneficiaries for us.
Thanks Alec. Just to jump in quickly. On Changes, Thomas wants to know if you’ve ever considered Mondi? He says, ‘they’ve had pretty solid returns over the last 8 years, and they operate internationally, in central Europe and Russia, what are your thoughts?
Thomas, I’ll let you in on a little family secret here. My cousin, who’s a chartered accountant is married to the ex-CEO of Mondi so it is a company that I’ve watched very closely for that reason. It’s a good business. When I put the portfolio together it was overvalued relative to what we were looking for from an intrinsic value point of view. I did all the numbers, I ran them out. It’s a really good business and David Hathorn has left a great legacy there and we can expect it to continue to flourish in the future. But my problem there was that it was overvalued, relative to the other stocks that we put in the portfolio at that stage but thanks for the reminder, and I will have another look at Mondi.
Thanks, Alec.
Stuart, do you have any more questions?
No Alec all the other queries were on the sound issue at the start of the broadcast.
Let’s move on. There’s Naspers’ share price, and that as you can see, has been a really good performer in the last year. It’s been up, well it’s been our best performing stock in the portfolio. That R2980 was the share price as of this morning so, it’s getting close to an all-time high.
Let me just give you some insights on what happened in the last month. You will recall that there was an annual general meeting at which some of the shareholders in Naspers were unhappy at the remuneration that was being paid to Bob van Dijk, the chief executive (CE). There’s also concerns around Naspers’ ownership structure but my view on this is very clear.
In the media industry, and it is the one industry that I know better than any other, having run and listed a public media company and obviously, running one now, in both Moneyweb before and BizNews now – you need to be able to take long term bets (long term decisions). I’ll give you an example of what we did at Moneyweb. When we moved our radio show away from Classic FM to the SABC. In the short term, it caused an enormous amount of problems for the business. It hurt us from an immediate and profitable impact, but in the long-term it was a wonderful decision. However, if you’re just operating a business for quarterlies or every quarter, and if you have shareholders who jump on your heads, fortunately Moneyweb was too small for the shareholders to worry too much and at that stage I controlled the company myself. So, I could explain to myself, if to nobody else, why that decision was taken, but the shareholders sometimes like to be driven by short term views. With Naspers, there is an inclination of shareholders to say, ‘but why is Naspers trading at a 30% discount, to its ownership of Tencent shares alone?’ Let alone all the other investments that it’s made around the world so short term driven shareholders and particularly share activists would, if they had the opportunity, force the managers of Naspers to sell the Tencent shares.
Now, if you’d done that any time in the last 20 years, if these activists had had their way, and forced the sale of Tencent, all of Naspers shareholders would have been far worse off today. Tencent has continued to flourish and likely to continue into the future. It has an amazing franchise, 900 million people who use the app as their primary entry onto their cell-phones in China, and it’s now starting to move into other areas of the world as well. Had Naspers been forced or its managers been forced by short term, profit driven shareholders or traders to make that kind of transaction then we would have had a much poorer company, and it’s like this in many media businesses.
If you have a look at Google for instance, it’s got 2 classes of shares. The founders, Larry Page and Sergey Brin, and the chairman, Eric Schmidt, have between them got about 60% of the voting shares but a far smaller percentage of the economic interest. It’s a similar story with Facebook, where the founder Mark Zuckerberg, has got high voting shares and he retains control of the votes in the company, even though his economic interest is much lower. And part of Naspers’ success, in my opinion, being in this industry and having sat in a far smaller seat but having sat in the same position. Is that the company, and the current ownership structure of the company gives the managers or the owners the ability to take long-term decisions.
Now, in Naspers they’ve got 2 vehicles which control over 50% of the voting rights of the company so, that’s why the N shares, the Naspers N shares are the ones that are listed. So, the voting rights of over 50% are unlisted. The listed shares have less than 50% of the vote. As a consequence of this, Naspers’ managers can be independent. They know there’s continuity. They know they can take long-term decisions. They know they don’t have to listen to activist shareholders who are trying to get them to sell Tencent, which would have been a disaster and, also more than anything else perhaps, given how important Tencent is in the lives of Naspers, they are satisfying the Chinese Government, who’ve got some pretty prickly views on media ownership. In this ownership structure Naspers can never be the subject of a hostile takeover.
Let me tell you, when you spend decades as they have in building a business like this. There’s nothing worse than finding one day you wake up and somebody else owns the control of your company and all the hard work that you put in has been taken away by people who either don’t really know what they’re doing or are looking for a short-term benefit. As long as Naspers has its current ownership structure – you should be happy to be invested in this company. I know that it’s not a popular view at the moment. Some shareholders are saying they want to make the decisions. Well, if they want to make the decisions it’s pretty simple, in my view – don’t buy the shares. If you don’t like the way that the company is being run, and this has been one of the most spectacularly well managed businesses on earth, let alone in SA, then just sell the shares, and go and find yourself something else. As far as media companies are concerned, you see it with Google and Facebook, you also see it to a degree, with the Murdoch’s in their News Corporation. Media companies need long-term decisions. You need to think long-term and not worry about the short-term fascinations in market sentiment.
Moving onto Mediclinic. This is a company that you also have to look at long-term. As you can see from Mediclinic, (this is a one-year graph), it’s really been a pedestrian business for most of the last year. We had that little uptick in May in Rand terms. Remember it is a FTSE 100 company so it’s also listed on the London Stock Exchange. But it’s been bouncing around about just over R120 a share. This is a stock that is going to move very quickly when the Pound starts appreciating against the Rand, which if you have a look at or you talk to most analysts around the world, they will tell you that the most undervalued currency on earth today is the British Pound and the ZAR is significantly overvalued against the Pound. Even those who believe that the ZAR has got some scope to rise against the USD or the Euro will tell you don’t bet against the Pound. As Mediclinic is listed in London. That’s where the share price is made. The underlying business of the company is very strong. They’ve invested in Switzerland and in the Middle East. I’m quite confident that we’re going to see a good return from this one. You’ve just got to be patient as one has to do in any type of investing.
Here’s our big problem, not Christo Wiese but our problem in the portfolio is Brait and as you can see it has come down a long way in the last year. In fact, if you go back a little bit longer you’ll see that it’s fallen even further. We’re at a price now below R60 a share for Brait. Brait itself has been piling into the stock doing share buy-backs in the mid R60s. So even the managers are now shaking their heads and thinking ‘what the heck is going on here?’ The reason why Brait has fallen out of favour is its acquisition…Well let me just go back a little. Brait had the good fortune to be used as the vehicle for Christo Wiese’s private interests so what Wiese did was he injected into Brait the shareholding that he had in Pep, or a big chunk of the shareholding in Pep. So when Pep did the merger in 2015 with Steinhoff, that gave Brait a massive uplift. It also gave it a huge amount of cash and clearly Mr Wiese had been eyeing out some opportunities in the UK. He’s already been represented there with quite a few businesses but one of the businesses that he was particularly taken by was a company called New Look.
Well it wasn’t the smartest move, as it turns out, because they bought into New Look at a price that is substantially higher than the current value. New Look’s fortunes have really gone the wrong way in the last year, or since the acquisition on the buy Brait on the 26th June, when he bought 81% of the company. The consequence of this has been that Brait has refocused its attention on New Look to try and find out how it can turn this around. Brait really is, if you like, it’s 4 businesses. It’s got New Look, which was the biggest part of the business but it’s been written down substantially. It’s got Virgin Active, which is primarily in the UK. It’s got 57% of Iceland, which is also in the UK and that’s a very successful franchise. Iceland provides frozen meals, essentially, to the UK market. Then in SA it has the old Premier Milling, which you probably remember quite well.
Now, 3 of the 4 cylinders are firing really nicely but New Look has been a disaster and as a consequence of that the impact of that on their portfolio and our portfolio overall, as well as more particularly on Brait’s valuation has been significant. At the beginning of this month, Brait took another step in fixing New Look where it got rid of the CE, Anders Kristiansen, who’d been there for 5 years. He’s a Dane. He was appointed in 2012 by Apax Partners, the private equity firm that sold New Look, which is a retailing firm. It was very strong in women’s wear. It has about 3.5% of the UK women’s wear market but under Anders Kristiansen it went into China where he has experience. It’s built 100 stores there and it started creating stand-alone men’s wear shops.
Neither of those have worked out. China is still not profitable at the moment and the men’s wear shop hasn’t done well. The UK market is one where there’s huge competition in the clothing field and costs are rising higher than the revenues are rising so after the results came out for the year to March, the writing was pretty much on the wall for Kristiansen and he finally left the company at the beginning of September, after a fifth successive quarter of falling sales. What happens next, well, they’re going to find themselves a replacement. Wiese is pretty good at this as you can see from his track record over the years. He’s been able to spot the right kind of talent. They have put Danny Barrasso, who is the MD of the Ireland and the UK operations in as the interim CE of New Look but they have also said that New Look will be looking around for a new even CEO.
Yet another step in a turnaround of this business and that’s really the swing factor. Since the latest results came out we saw a further decline in the share price to below R60. It’s kind of lifted its head in the last few days. I would like to believe that the worst is over and indeed, when you talk to the investment analysts over here in the UK, they say that whoever comes in as the next CEO is actually going to be given quite a nice bit of runway because there’s been huge investments in the infrastructure. They’ve got a good online presence, which is very important in this market and that the CEO will be able to cut back on capex, drive sales. Also, they’ve got plenty of liquidity. The bonds that they’ve issued are only coming due in 2022 so, they’ve got 5 more years before they have to worry about their liquidity or going back to bond holders to reissue or rollover new bonds.
In that time, one would anticipate that New Look would come right. The rest of Brait’s assets are going well so I’m quite happy. I’m happy to have the stock. I did write about it a little while ago. In fact, one of our Premium subscribers asked me whether he should put all his money into Brait. I’m so glad that the response was, ‘no, that’s never a wise idea, rather spread it around the portfolio.’ But by the same token, I’m quite happy that we’ve got Brait in the portfolio at the level that we have, around about 11%. It started at 15% so, it can just show you unfortunately what happens when you start losing money in a stock or when a stock goes backwards but this is a long-term portfolio and I’m quite comfortable to be invested there as well.
While we look at the picture of Adrian Gore, Stuart you must just interrupt me if there’s any more questions.
Thanks Alec unfortunately you can hear crickets in the question room. There’s nothing through yet but I do encourage people please, anything that comes to mind. As I say, there’s no silly question so just pop them in there and I’ll pass them onto Alec soon as.
Yes and it’s a good idea if you can send your questions through. The reasons for that we tend to get many questions towards the end and they we’re unable to answer them so, it’s far better if we can get onto those early enough.
Here’s Discovery and Discovery brought a trading statement out this month. It was a very positive trading statement. One where the headline earnings for the year to end June, are going to be up between 18% and 22%. I’m going to be watching the financial results, which come out on the 18th of September, (next Monday) to make sure that they’re still on track. Well, there isn’t really much you have to worry about on the profit line because headline earnings, call it up 20% in a year, is fantastic. The big move is probably happening in the UK, where there’s been enormous investment. They say the difference between earnings per share, which are going to be up about 10%, and headline earnings per share, which are up 20%, is because there was significant investment, a once off investment last year in the UK, which of course has an impact on headline earnings per share, but not on the earnings. Don’t ask me why but that’s what the accountants tell us.
In the UK we can see it. If you live here and you look at the Vitality brand, particularly now during the football season. It gets enormous coverage and with everyday that passes, the NHS (National Health System) seems to creak a little bit more so, the opportunity for private healthcare insurers, like Vitality is and that’s a subsidiary of Discovery, seems to brighten up just a little bit more. If you recall, Warren Buffett said, ‘the way to business success is to widen your moat every day by doing just something, just a tiny little thing, to make your customers happier,’ and that’s what Discovery is doing in SA, and certainly it’s doing it in the UK, with Vitality where its future is going to be.
There are lots of other businesses around the world and there’s no doubt that they are also going to be playing their part in the future, but the one that we keep our eye on now, for the moment, is the UK business, particularly as far as the SA Champions Portfolio is concerned. The other big story for Discovery is the banking license it was granted from the Registrar of banks – it is allowing them to move into the banking field next year and I’ve got to believe that banking stocks are, in SA, the big banks anyway, are very questionable at the moment. They’re sitting on low PE’s but we see what Capitec has been doing to them and with Discovery coming into this market – there has to be further pressure on the prices of the SA banks.
Discovery has been an excellent disrupter in every field that it’s gone into. Its original field was healthcare, where it completely disrupted the market. In the insurance field or motor vehicle insurance field, Discovery Insure, is doing the same thing. When it goes into banking it’s not going there just to keep the executives occupied. You can be sure there’ll be a very modern, high end banking offering, which is going to hit the big or traditional banks in SA, at the top end. Whereas, Capitec has been hitting them at the bottom. Neither of those competitors are going to be stepping back against the incumbents. I would be a little concerned if I was invested heavily in SA banking shares.
Incidentally, there was another bit of news coming out of the ‘big four’ well the old ‘big four’ because Capitec has now replaced Nedbank as number 4, by market cap anyway. At Standard Bank the joint CEO positions, between Ben Kruger and Sim Tshabalala have now been changed. Ben has stepped down as joint CEO with immediate effect. I wonder why it was immediate effect, and Sim will now be the sole CEO. Ben Kruger is staying on with the bank, he’s not leaving. He’s staying on as an executive director of the company. They’re taking their bets at Standard Bank but there’s an enormous amount that they’re going to have to do to get themselves ready for the challenge that will be coming from Discovery, as all the other banks as well. Interesting times in SA.
Thanks Alec. George wants to know a quick thing on Naspers. He’s a bit concerned about the Chinese Government investigations, I think it’s on the subversive content and before that it was the online games. Do you think this will affect the Naspers’ share price?
George, you never really know with China but what we do know is that Pony Ma, who is the CE of Tencent, is a past master in dealing with the Chinese Government. They are an enormously powerful business with 900 million Chinese who use the WeChat app. In the same way, as in the Western world if you have an Apple phone you charge up IOS. Or if you have an Android phone you’ll charge up the Google written software operating system, Windows on those and has its own market share as well. But when you look in China most people work through this WeChat, which then gives Pony Ma’s business a very strong positioning but they don’t push it. It’s almost like they deal with the government in a deeply respectful manner within the cultural environment that works for them and the government, and from time-to-time there are going to be issues that are raised.
If you have a look at what happened with the share price of Tencent when that problem was flagged by the Chinese Government. The share price came back for a couple of days and then it just carried on steaming ahead, as investors saw it as very much a warning shot or just be sure that you don’t overstep the mark, kind of message. Rather than anything that’s going to affect the underlying business. Remember China, being the second biggest economy on Earth. Whereas it sits with 4 times as many people as America, which suggests that at some point in time it should have 4 times the size of the economy, and it’s still only about half the size of the American economy so it’s got a long way to go but China is wanting to do that by creating its own global champions. And one of the global champions is Tencent so it’s most unlikely. Well, you can never say never but it’s very unlikely that the Chinese Government would smash one of its own champions or potential champions. That’s very much where Tencent is.
By contrast, we are likely to see Tencent move into Western markets. It’s already moving into Africa and taking on WhatsApp in Africa, quite aggressively. We could expect it to learn from its mistakes. It hasn’t been too successful at this point, and to then move into the Western markets so that’s more likely and the Chinese Government would be delighted to see one of its champions succeed in areas where, at the moment, well the Chinese companies haven’t been that successful so, yes, you’ve got to keep an eye on it but the bigger picture would be one of supporting Tencent, I would say, rather than putting it out of business.
Thanks Alec, a question from Graham and you might have touched on it with Brait, but he says, ‘is there any share strategy in which to take advantage of the low British Pound exchange rate?’
Brait is one. Another one is, in fact, through the various trading operations, you can buy the Pound directly if you feel that way. I always worry about that because the Pound has been undervalued now since Brexit, and that’s over a year. My thinking is rather go for a longer-term bet and invest in these companies that we’ve got in the portfolio that are very focussed in Britain. There you’ve got Investec as one, (the one on the screen now), they’ve got a huge franchise in the UK. Brait is another and Discovery is another, just for starters.
Just to put it into context. I was doing the numbers the other day. SA and the UK have roughly the same number of people, round about 60 million, SA has 56, but the economy, the GDP per capita, in other words you take the economy and divide it up by the number of people. In SA is $5,000 and in the UK it is $30,000. You’ve got an economy, which is 8 times bigger in the UK than it is in SA, and as a consequence of that if you can get it right in this much bigger market of course because it’s bigger it’s potentially a lot more competitive. But if you have a business that’s outgrown or hit its limit in SA and is able to take a chunk of the UK market then clearly, you’re betting on a horse that’s got a lot more in the tank.
The other thing is that if you are able to buy in at a lower price now (lower Rands), which is effectively what you’re doing by buying the shares on the JSE, then that would make a lot of sense. The obvious alternative to that is to invest directly in British companies, in Pounds, or to invest in the FTSE 100 perhaps, if you’re looking for an ETF. Either way, it’s pretty well known that the Pound is undervalued at the moment, because of the concerns around Brexit but that’s not going to last indefinitely.
Thanks Alec. I’ve got a question from Margaret and I think you’ve touched on it quite extensively with David Shapiro, and there’s been a lot on the website around it. She says, ‘BitCoin, talk to me, Alec.’
David Shapiro is starting to panic because he says it reminds him so much of what’s happened during the past bubbles. For me, I’ve lived through the 1987 crash, and just as on the side. Back then I was this young guy who thought he knew a bit about technical analysis. I had an Aunty Jean Moon, who was a technical analyst back in those days. In fact, she’s very good. She’s written a couple of books on it and I would plot the charts. Anyway, I was working with a company that we subsequently bought at MoneyWeb called Prescon Publishing, and we brought out a weekly newsletter called Capital Gains. People in those days paid R1,000pa for it, and it was all about share tips. So, we’d have technical analysis, maybe 4 or 5 shares in this little newsletter that people would then read because they were looking for share tips everywhere.
I’ll take it one step further. Back in those days, in 1987, there wasn’t the internet. The distribution of information was very different to what it is today, and we used to have a phone line, I kid you not, that people would phone in the morning. They would subscribe, and again it cost R1,000 a month. Martin Spring certainly knew how to charge his market, he was the CEO and the founder of that company. At R1,000 a month, it would give them the right to phone in in the morning and we would then tell them… It would be a recording, which would tell them what the share tips of the day were and what the technicals had said on them.
That is the kind of extreme situation that you see in stock market bubbles. I’ve seen that one in 1987, it was absolutely crazy. I remember as well, in 1987, that Sanlam came out with an analysis to show that if you were to take inflation out of the equation that the share prices in 1987 were actually no higher than they were in 1969, and 1969 was the previous big crash. So, what this is telling us is two things. One, when everybody is tipping and they don’t care anything about an analysis. They just want to be part of the action. They want to buy stocks to make money to pass onto a greater fool. That is when you need to worry about it.
The second point is that when people start justifying the unjustifiable or defending the indefensible, that’s when you need to worry as well. The point David Shapiro makes was in 1929, which was the biggest crash that the world has seen. Joe Kennedy, the patriarch of the Kennedy family, the family that gave us JFK, the president, and Bobby Kennedy, who would probably have been the next president had he not been assassinated. In 1929, he was on his way to work at the Stock Exchange and he stopped at the shoe shiner, and the shoe shine boy gave him a tip on a share and he said, ‘when a shoe shiner is telling me what I should be buying on a stock market, then the public has taken over and it has become a casino.’ He sold all his shares and the Kennedy fortunes were made. He obviously missed the crash that came not long afterwards.
David says, when he looks at BitCoin, it gives him the gut feel of a bubble. When I look at it, I think that it reminds me a lot of the internet bubble or the NASDAQ bubble in the year 2000. When of course, as things would be different and we know that the internet will change everything. The only problem is that markets tend to exaggerate things in the short term, and then underestimate it in the long-term so, if I extravagate what happened with the NASDAQ in 2000 when, if you recall it went through the roof, and then of course, it fell down just as quickly. If you overlay that onto BitCoin, you’d now be looking at a situation that sure, you might get in there today and double your money. But the greater likelihood is that the market will collapse before it then goes back and has a nice, long term trend. For me, if I was going back in a time machine to the NASDAQ bubble, I would not have bought Amazon.com just before the bubble burst, where the share price was 1/10th of where it is today. But in fact, it collapsed by 97%.
It’s hard to believe this but with the NASDAQ bubble, Amazon went down 97% before it then started growing again and it grew up to a point where it is today 10 times what it was at the peak before the bubble. I guess, if you’re going to buy BitCoin now and you’re going to forget about it for 20 years – you might sit with something that’s worth 10 or 20 times, (its value in 20 years) but something is likely to happen to us between now and then. My suggestion to you would be that if looks like a bubble and it smells like a bubble. They say, ‘if it looks like a dog, and walks like a dog it probably is a dog.’ That would be the right way to do this one.
Thanks Alec. I think it might be more for EasyEquities, a question from Graham. He says, ‘with them opening up the USD account, does it change the structure of your portfolio, to include some of this direct USD investment?’ But I think that would be covered with the Global Investing Portfolio.
Yes, it’s a good question but as far as we’re concerned here, this is the SA Champions Portfolio, it’s for investments on the JSE, and it’s all through Easy as well. We actually, are talking to Easy about putting together a bundle on US shares, which will be very similar to our Global Investment Portfolio. It’s likely to be similar but not for this portfolio. This is very specific. It’s Rand hedges, SA Champions and SA run companies in the global arena.
Thanks Alec, that’s it for now.
Onto Investec – it’s been steady, as you can see from the share price graph there. Investec hasn’t really had a whole lot happening in the last month. We will be looking forward to maybe breaking out of that channel that it’s been in for a while. I can see how well Investec is doing here in the UK, in every single scale. You see the guys getting quoted in the newspapers or online. You see the adverts and you see the presence of Investec is significant in the UK. When the Pound gets back to its rightful level Investec’s share price will definitely benefit. At the moment, it’s been held down by the undervaluation of its UK assets.
Steinhoff had a very turbulent past month. We’ve known for a while what’s been going on with an investigation. It’s a quite funny story this. Just before Steinhoff listed in Frankfurt, in fact it was in the week before the listing so, can you imagine this. You’re putting the whole company together. It’s the most exciting time probably in your life. Your primary listing is going to be on a Frankfurt stock exchange, an international stock exchange, the biggest listing of that particular year, it was back in 2015. The week before you list there is an investigation from the tax authorities. Talk about somebody peeing on your parade.
Well, that’s happened again in the past month. We’ve had an article in Manager Magazin, where they’ve warmed up the old soup, and they said that there were problems with the accounts, illegal accounts, or illegal entries into Steinhoff’s accounts, and they suspect accounting fraud. That’s what the magazine wrote. Steinhoff came back and said – they’ve had an external auditor, who’s come in, had a look at this, after what occurred a couple of years ago, on the week of their listing. Had a look at this and the external auditor has found that there has been absolutely no law violated. The allegation is that the subsidiaries between themselves were doing transactions that they inflated.
Now, I don’t know what the benefit of that would be. An accountant will be able to tell us that, but that’s the big allegation. That there’s been fraud because they’ve inflated the value of transactions between subsidiaries. Steinhoff says, ‘an external auditor came and said there was no problem.’ What they do say though, is that they are busy with litigation with a guy, who was a former partner of theirs in a joint venture, and that litigation, although it’s not going to be material to the Steinhoff company, is bringing up some ugliness and they accused this partner, and I’m going to quote this to you, ‘abusing the press as part of the process of litigation.’ So, when you step away from this it just looks too suspicious, doesn’t it? The timing of these articles, the timing of the investigation from the tax authorities.
Incidentally, Steinhoff says that they’ve been engaging with the tax authority since that day of the raid or the allegations made of the week ahead of its listing in Frankfurt. There’s been nothing more to report and nothing more has happened but it does appear as though the backstory here is they’re in litigation with somebody. This person has threatened to besmirch their name. They said, ‘we don’t give into blackmail,’ and Steinhoff has continued in its business and this guy, every now and then, finds some willing journalist to run a story, which alleges that Steinhoff is doing things wrong.
You’ll see the share price went all the way down, it dropped 10% on that magazine article in Germany but it has recovered much of that. It’s still a long-term bet for us, Steinhoff. We like what’s happening around the world. I really like what Sean Summers is doing with the Mattress Firm in the US. This month was also the announcement that Steinhoff is going to be hiving off its African assets and listing it in a company, with a really lovely name, called Star, which will be Steinhoff Africa, and it will likely be reinstating the deal that had been spoken about with a merger with Shoprite because Steinhoff now has secured an option to buy the controlling shares in Shoprite from Christo Wiese.
All of this is happening on the one side, they will be listing Star, (Steinhoff Africa) before the end of September. That will mean that Steinhoff International will be free of any African assets and the African discount is likely to go, which will then give Steinhoff International, it will bring it onto the radar screens of investors who are not that keen on Africa. A consequence of that is likely to be a rerating of the Steinhoff shares so, we’re very happy to sit with Steinhoff. Having known Markus Jooste for many years, I’m pretty sure that what he tells us about what has happened with the allegations of tax fraud or accounting fraud, is exactly the story as he has outlined it.
Thanks Alec. Just on Star. Alan, I think, just follows up on what you were saying now. He says, ‘how does it affect the actual price of Steinhoff, in your view?’ And do you recommend applying for the Star stock itself?
Not in this portfolio. In fact, what is good for us is that Star will mean that Steinhoff then becomes even more of a global champion. So it will take its SA assets right out. You can, as things stand right now, you will probably find that the Star plus the Steinhoff International share price will add up to the current share price so, we’re trading around, (there we go), R64.50. You are likely to see that Star, for arguments sake is R20, and you would then find that other parts of Steinhoff will be R44.50. So, they’ll take a while to sort themselves out but what tends to happen is that the market would calculate what it thinks the two parts are worth. Remember, there are some very well paid, very intelligent investment analysts, whose only job is to check these kinds of things and to make sure that they don’t get their ratings too wrong.
Where I’ll be excited is that once we get to say, R44.50, for Steinhoff International. We would then sell our Star shares, the SA shares, reinvest that in Steinhoff International, so we would sell the R20, and then we’ll go back to put it into Steinhoff International, that’s sitting there at R64.50, and that would give us 100% of a global champion. A 100% offshore so, remember our play here is that we think the Rand will weaken so, when the Rand weakens you get 100% of the benefit rather than 80% as you would be getting at the moment. That’s what we’ll be doing in this portfolio when that transaction is done.
Sometimes, when there’s a spinoff it does lift the share price or the whole, the 2 parts sometimes are worth a lot more than the whole. There’s a wonderful example of this and that’s when Iscor, the old iron and steel company that was once government owned. When that split into, what is now ArcelorMittal, and Kumba. If you had kept the 2 separate you would have made a lot of money, and it was worth a whole lot more than the combined unit.
Moving onto Glencore. There’s an article that came out in August, which is one that I urge you to read. The economist has got a good opportunity for people to have a look at the publication before they actually subscribe.
If you look at this, if you read this article and you aren’t convinced that Glencore is a fantastic opportunity then I don’t think you ever will be. You might remember that we bought into Glencore after the AGM where Ivan Glasenberg, the CE, made the case for Glencore being a pick and shovel, or the provider of the pick and shovels for the electric car boom. That’s essentially what he was saying. The reason for that is that Glencore is the number one producer of cobalt, the number one producer of copper, and the number 3 producer of nickel in the world.
What I’d like to remind you of is that at the moment, copper production is 20 million tons. Glasenberg took a view that 95% of cars that are being produced in 2035, so 95% of the cars that are then produced will be electric cars. It’s not surprising because this week we had China, the Vice Minister of Industry saying they’re looking to ban sales of internal combustion engines at a point in time. We’ve got both France and Britain who say there will be no more sales of internal combustion engines in 2040 so, it’s coming and it sounds like a long way away but in these kind of industries, when you have a massive change in industries, you need to look ahead.
But take it on that basis. The annual production of copper is 20 million tons a year. To get to the amount of copper that will be needed for electric cars in 2035, given the projections of where electric cars or production is going to be. They need to add another 23 million tons to the demand. So the production must go from 20 to 43 million tons. Obviously, that’s going to have an impact on the price because those tons just aren’t available. More exciting, as far as Glencore is concerned, is cobalt where it’s number one in the world, and the total production of the world right now is 100,000 tons a year. It’s going to require, to put these electric cars together, 679,000 tons, an extra 579,000 so you’re going to have to increase the production of cobalt sevenfold. Now, clearly that’s not possible so what happens is that the price adjusts accordingly and that is where you’re looking very good if you’re a Glencore shareholder. Given that they’ve made these bets long before the rest of the market.
Nickel, the current production is 2 million tons, they’re going to be adding another 1.8 million tons just for electric cars. It’s a very bullish story and as a consequence of that, and the more people who pick up on this and you can see it was almost at the time that Glasenberg told the story that the share price started turning around. It now is a play on electric cars. On this sizeable shift in the motor vehicle market, away from internal combustion engines to electric cars. It’s been a wonderful performer for our portfolio, has Glencore, in the relatively short time that we’ve had it on there.
Just closing off with MTN, my word, there’s all kinds of punts, beliefs, or views on MTN. I remain very comfortable. We’re backing management here. We’re backing management, who’ve got investments in Africa and in Iran. We also believe that the team that’s running it now was handpicked by Phuthuma Nhleko, and he is the chairman. He’s a very smart operator. He’s the man who transformed MTN from a very poor second, behind Vodacom, into certainly a potentially bigger or a more valuable company. They aren’t looking like it at the moment, but it will get there. The share price is still trading at a little bit of a discount where we bought in. But with the new management team all in place now, you can expect interesting things to happen there.
Just to close off with, there’s the portfolio as it stands. As you can see at the bottom there, MTN down 4%, Investec up 2%, Mediclinic down 4% – those are, if you like the ‘as you were stocks’ but the 3 big winners, Naspers, Discovery, and Glencore. Then the big loser has been Brait. We’re not worried about those winners being overpriced nor that Brait is going to be falling further so, that’s the portfolio. To me, it’s very nicely balanced at the moment. I see that Brait is now down to 10% of our portfolio, and Naspers, through its increase and through the additional investment we’ve made, is now 20% of our portfolio.
That’s a nice place to be and it’s almost self-correcting as the companies like Naspers and Discovery outperform, they become a bigger share of the portfolio. Unfortunately, Glencore, we only put R7,500 in because that’s what we got from our Wilson Bayley investment and we just channelled that straight back in there but already it’s gone up to 9% of the portfolio. Stu, any last question?
Just one from Len on Glencore. He just wants to know if he should rather buy Glencore with Dollars? I’m not sure if he’s trying to invest offshore rather than on the SA side, but that’s the last question from the listeners.
I would be buying it in Rands and the reason why is that your Dollars that you happen to have offshore are a lot more valuable. Or rather you’ve got a far bigger universe to invest in. When you’re sitting with Rands your universe is just the JSE so, if you’re going to buy the stock use Rands if you have them and buy it through the JSE because the price equalises. Eventually the Dollar price of the stock will be reflected on the JSE so there’s no problem in doing it that way.
That’s it, thanks a lot Alec.
Well, we’ve come to the end of our 60 minutes for today. Thank you very much for being with us. The portfolio, as you can see, is lagging behind the JSE all share index but it is in positive territory so, we’ve taken care of all our costs and it’s up. We put in R100,000 to start with. We’re now at R107,600, and we’re up from where we began. We are positioned very well, in my opinion, for what we do believe will be a decline of the ZAR in the medium term. That’s really what this bet is about but this a long-term bet. It’s a long-term portfolio and you can buy it easily and cheaply through EasyEquities. In fact, I think it’s as little as R500 or R250, you can get this whole portfolio broken down by them in your BizNews SA Champions Bundle that they offer. I hope you take advantage of that and I hope to be back with you again next month. Cheers for now.
