JOHANNESBURG — The Biznews South African Champions portfolio was launched in January this year. It was designed to take advantage of the entrepreneurial spirit of saffers running JSE-listed companies on the global stage. The portfolio consists of 8 stocks, and while the mantra is to hold forever, certain events sometimes lead to a shuffle. In this monthly update Alec Hogg explains why we’ve dropped Brait and Glencore, and replaced them with FirstRand, and an extra handful of Naspers shares. – Stuart Lowman
My apologies for the slight delay. I did an update last night on my computer and it was one of those Microsoft updates and it seemed to find a little trouble with me. My name is Alec Hogg. Would you raise your hand, there’s a little hand button there, if you can see the screen, please? Fabulous, thank you very much for doing that. As always, I’m in London and my colleague, Stuart Lowman, is in Johannesburg, Stu…?
___STEADY_PAYWALL___
Yes, thanks Alec. It’s always good to be here. Apologies for the little delay. A somewhat chilly Jo’burg today, with a bit of rain but otherwise it’s lovely to be here, as always.
Don’t talk ‘chilly.’ You’re talking to someone who’s more than ‘chilly’ at the moment. I can tell you what, we’re at 2 degrees. Sorry, I apologise, 6 degrees at the moment so, it’s a little better but I’m in training for Davos, Stuart so, when I go there in January and it’s -6 or -10, hopefully I’ll be suitably attired as remember the wonderful saying of Benjamin Zander. Who said that his father explained, ‘there’s no such thing as bad weather, just inappropriate clothing.’ Well, I’ll be sure that I have appropriate clothing when that happens.
Let’s get into the presentation. Now, just to remind you that the SA Champions Portfolio is all about hedging against the Rand, by investing in SA global champion companies and we do try to find those that are driven by its best entrepreneurs. That’s really the essence of what we’re doing here. Find a super Rand hedge, if you like and if the ZAR performs well then clearly, you would be under a little bit of pressure. On the other hand, it’s a lot of stock selections and stock picking is an important part of this portfolio.
As relevant, is the ZAR/USD, and as you can see in the past year the ZAR has been a little weaker.
Well, we started the portfolio on the 23rd of January and, as of yesterday when I closed things off. I did all of this last night because you can imagine it’s 08h45 in the UK at the moment. As from the 23rd of January to the 14th of November, the ZAR went from R13.50 to its current level of R14.40. So, the ZAR has depreciated and we have seen the impact of that on our portfolio in some positive sense. However, it’s been very turbulent and as you can see, during much of this time the ZAR also was a lot stronger than it was trading at when we started. So, there’s a little bit of a balancing act and that’s why my suggestion is usually, if you’re going to buy stocks offshore what you should be doing is staggering your purchases over 3 months because as you can see from this table or the graph in front of you that the volatility of the ZAR means if you buy it at the wrong time you can look very silly. Look at that in mid-April. If you had happened to have taken money offshore and then, by the same token, had you desired to make your investment offshore in mid-June you’d look pretty good. But if you had gone mid-April, mid-May, and mid-June you’d have averaged out quite well so that’s the story, try and average out when you’re investing offshore.
This of course, is a bundle that we have with EasyEquities and as a consequence of that we change the bundle when we change our portfolio and there’s some big portfolio changes in this period. Just one other graph that I wanted to point out as we start, the All Share Index on the JSE has done very well. In the last year it’s up 20%. In the period that we talk about, from the 23rd of January until today, it is up at about 12% so, if you go year-on-year that’s what this graph is showing you – a 20% gain since November last year. We of course, only started the portfolio on the 23rd January so, there’s a 12% gain, which we are underperforming and there are some very interesting reasons for that. The ZAR hasn’t really fallen out of bed and the other reason for that is that we had one disastrous investment, which I’ll tell you about in a moment.
Just to start off with, on the 23rd of January the portfolio changed, going into today. We sold those Blue Labels and switched that into Naspers at R25.60, with Naspers sitting at over R3,300 a share. That clearly hasn’t been a bad investment. It’s been a good switch and similarly we sold Wilson Bayley and bought into Glencore at R47.50, and with that share price just under R70, it was also a good switch. Let’s hope today’s ones have the same consequences. Here’s what we’re doing today. Well, I’ve lost patience with Brait and there’s very good reason for it. We sold out of Brait in fact, in the last few days. It’s been done already in the portfolio, if you’re on the EasyEquities portfolio. You don’t own any Brait shares anymore – 190 of them were sold. That’s what we had in the portfolio, at R48.60 and that unfortunately, has been an awful investment for us. I’ll go into some reasons for it in a moment but essentially, we’ve taken a 39% knock on the Brait investment.
On the other hand, we were pretty fortunate with Glencore. We bought those in, as you saw on the previous slide, at R47.50, and we sold them out at R69.28. Now, I’m not a trader so it wasn’t an intention to buy in and trade in either of these stocks. Both of them, the intention was to hold them forever but circumstances have changed rather dramatically in both instances and that is the reason why both have been sold out. We have bought into the portfolio 178 FirstRand shares. What it means essentially, is we put 8% of the portfolio into FirstRand. Why FirstRand? Well, FirstRand is in the process of becoming a global champion. It’s made an acquisition or in the process of making an acquisition of a company called Aldermore, and I’ll give you more insights into why I believe that this is a fantastic deal for FirstRand and into the future. It’s going to reward shareholders significantly.
Then we bought more Naspers – three more Naspers which cost us R10,775, which has taken the portfolio now into an overweight position on Naspers and it’s a very important situation to be in because the SA dominance of Naspers on the SA market means that you either go underweight, if you go on less than 25% of your portfolio in Naspers, you are underweight the SWIX, which is the SA owned shares in the JSE, 25% – that’s how big Naspers is. In fact, Naspers’ market capitalisation is worth 1/3rd of the SA economy, and the reason why Naspers has been such a screaming success story is because of its investment in Tencent and Tencent we have as a separate holding in our Global Portfolio, and that’s been one of the star performers there. In fact, in the last month it’s gone from HKD350 to HKD390 (Hong Kong Dollars) – it just keeps soaring.
Anyway, we’ve decided to go overweight on Naspers. After starting with a small possession of only 8%. We then bumped that up. As you can see we bought 3 Naspers in May and now we’re buying another 3 of them in November. What that has done is change the portfolio structure quite significantly. Our portfolio now will have 31% of its investment in Naspers. In other words, we’ve gone overweight with the Naspers shareholding and it would have been a good idea to have started off like this because at the beginning of the year Naspers’ share price was considerably lower. In fact, it’s gone up more than 70%. I’ve no reason to doubt that it’s going to go higher still, particularly because of a view that the ZAR at this point in time, is extremely vulnerable.
You can see there that the 15% investments that we started off with, in Discovery, Investec, and Mediclinic are still there. Out is Brait, which was a 15% as well. Out is the 8% that we invested into Glencore. The one made a good profit – Glencore on each R100,000 that you have in the portfolio. Glencore generated about R4,000 or call it R4 profit for every R100 invested. Where on the other hand, Brait lost R6 for every R100 invested so, thank goodness, the one offset the disastrous investment and as Warren Buffett says, ‘you should be talking most about your losses and the things that you got wrong.’ Boy, did we get Brait wrong but not as wrong as the people who run the company got, and certainly not as wrong as many other investors have done. We were inspired by Brait, by the investments that were being made by the insiders but they got it wrong really badly.
Anyway, we’ll get onto all of this in just a moment but let’s start off with Brait. One of the reasons we went in there was because of Christo Wiese, the great entrepreneur who’s done amazing things in SA. He’s also been pretty fluid in his investments into the UK but on one investment he made an absolute disaster. It’s got to be the worst investment made by any SA company in the world ever, and that’s a strong statement. He bought a company called New Look, which is a retail chain in the UK and the investment that Brait made was £780m. Brait has written that down to zero and the investment was only made 2 years ago. If you’ve got, and I’d like to hear, if somebody has got some other ideas in the webinar later of an investment that even rates as bad as this one.
Throughout we’ve held it. The share price of Brait has gone down. I’ve got more and more bullish because my intention, or I listened to what the managers of Brait believed. Incidentally, they only did the deal in June 2015 so it’s just over 2 years and they’ve lost £780m. If you work that out in Rands, and you’ll come up to about R35bn, extraordinary that they’ve written this off. The rest of Brait is looking pretty solid. The investments they’ve made in Virgin Active, and Iceland Foods, and Premier is all very good but at the time they made the investments New Look was about half of the portfolio. At the time we bought in it had dropped to as little as 15% of the portfolio. Now it’s dropped to zero – an absolute zero.
Why are we selling when they’ve already written off the whole investment and the share price has fallen in the way that it has, R48.69 was the price that we got out at yesterday? Well, have a look at that. You can see that the decline in the shares, this is since we started, in the past year, has been relentless. Is it going to go further? It could but in a case like this you have to consider whether it’s going to be able to rebound and that I don’t see happening. The investments that Brait have outside of New Look are solid and are likely to continue doing reasonably well into the future. The New Look investment unfortunately, comes along with £2bn of debt. Now, although they’ve written down their investment, their £780m investment to zero/nil, the problem is this company is still deeply indebted and as a consequence of that Brait is almost caught between a rock and a hard place. It could walk away from the deal now and probably the bankers will come after it for the debt that’s sitting within New Look. It could also sell New Look to somebody else, maybe even have to pay somebody, when you take on so much debt.
The problem with New Look is that it does appear to have been completely; we have all been completely misguided in the information that’s been coming out of Brait on this one. To me, I was of the opinion that with Brait itself buying back its shares so aggressively, and even the management took Brait, buying back or increasing their stake in the company that they must have seen something in New Look that the market wasn’t seeing. As it now happens the managers of Brait and the executives of Brait appear, themselves, to have been misled. The CEO of the company did leave, the man who had been there for 5 years left recently. They’ve now brought back the guy who was there before, the Scandinavian who was running the company, and the hope for Brait shareholders is that he will be able to turn it around but in the media, here in the UK, the stories that we get is that he’s not terribly impressed with what he has discovered.
New Look was moved from being a bit of a discount play, which is where Christo Wiese’s strength is, into a focus on women’s fashion. What I also liked about it was the investment into China of more than 100 stores but if you get China wrong, you lose a lot of money. So, that’s where we are. We’ve looked at Brait carefully. To me, the upside potential is now going to take a long time to come through. It’s not the kind of stock I want to be invested in, with the high risk that’s there and I’m sure that you will agree that the portfolio is going to be a lot better off not having this one in it. A 39% decline, from 15% of the portfolio, has been quite a hit that we’ve taken so, there’s the Brait story. When you appreciate that you’ve made a mistake it’s best to get out. How much further can it fall? I don’t know – there is still a lot of downside risk here, given the debt that sits in New Look. How quickly can it recover? It’s going to take time and if you put that into the rational brain you can see what the consequence is.
Glencore, on the other hand, was a stock that we bought for its electric car option. That’s a picture of Ivan Glasenberg, the CEO, and it was taken from a webcast that the company did for their annual general meeting. At which Glasenberg explained to us why Glencore was so well positioned for electric cars, and he certainly is. There’s nothing to change your mind on that. What bothers me about Glencore though is on the one hand, the electric car premium, if you like, has been certainly built into the shares. It’s surged by almost 50%, since we bought in, and considerably more from its bottom-end last year. But the other thing is that they did appear in the latest scandal – the Paradise Papers scandal, where Glencore was operating a big part of the legal firm, who had been investigated by journalists from all over the world for a period of time, a bit like Mossack Fonseca in the original Panama Papers. They had a whole war room for Glencore and a lot of the work that Glencore did was in the DRC, and some of that work was with a chap called Dan Gertler, who is not the kind of person I would like to be in business with. As a consequence, we’ve had a good run with Glencore. The price of these shares is now fully discounting, certainly in the medium term, the benefits it’ll get out of electric cars down the line but the risk here has grown, given what has been going on behind the scenes – stuff that we didn’t know.
You might remember that we sold out of Barclays, that was in the Global Portfolio, after it became apparent that the CEO of Barclays was gunning for a whistleblower. So, instead of supporting a whistleblower they were gunning for them. That worries me. I would rather do business with people that I can fully trust. It worries me that Glencore is doing business with people that certainly, I’m not very comfortable being in so off we go – goodbye Glencore, goodbye Brait, and the portfolio… There we go, the Glencore investment, which has treated us very well – thank you, Glencore, for performing as well as you have but we would rather let somebody else take the risk from here.
Here it is, the one that I am very-very happy to be invested in is Naspers, and Bob van Dijk. We are now, as I said earlier, overweight Naspers relative to the JSE. That is our index that we will be looking at as a comparison. We’ve underperformed the JSE All Share Index, as you saw earlier – let’s just go back to that quickly. You can see on that Champion’s Portfolio graph we have achieved a 7% profit on the portfolio overall. Pulled there by Naspers. Our benefit on Naspers of course, has been much higher than the 35% that you see there. That’s the average profit on the average price and we’ve averaged in our price at R2,659. Our initial purchases were much lower than that.
Discovery has done well as well, and Investec, together with MTN, is pretty much level pegged. Mediclinic – we’ll talk about them in a moment, they’re under a little bit of stress, and then Steinhoff too, have been the poor performers. But again, on both of those, I can live with them and I’ll tell you exactly why. Whereas on Brait not so happy. Naspers just a phenomenal company. The past year’s share price performance tells it all but the real reason here is the investment that Naspers has in Tencent and more than that the brilliance of the Naspers management in deflecting those who have wanted at any time in the last 20 years, Naspers to take profits.
You ride your winners and you stay with them. If that is one thing that we’ve learnt from the Naspers story it is something that we should be bearing in mind here. Tencent is a company that has come from nowhere to be the major player in the Chinese internet market and it is a company that is continuing to expand. Just to put it in perspective it is unlikely to be threatened by the big internet companies from the US. (A) because they can’t get into the Chinese market for starters, or if they do, they come in under very strict rules. The Chinese government is promoting Chinese champions rather than allowing free competition. You might have moral objections to that but the reality is that’s the way the economy works in China, at the moment anyway, and Naspers owns 34% of the company that dominates the internet space. But (B) the reason why it is impregnable to attacks from the likes of Facebook, Apple in particular, even Samsung is that in the way that it works in Tencent is that the operating system is irrelevant. The WeChat app is the dominant operating system, if you like, in China. So, Tencent has got 900 million people who use the app on their phones and on their computers every day. That’s the reality of where they are.
Whereas if you were in the US you would use the Apple operating system. In China, Apple will have its own operating system but the user will actually apply the WeChat or the Tencent owned app and that gives it a unique position in its own market and one from which to actually expand elsewhere. You might have seen in the past week Tencent bought a 10% stake in Snap so it’s looking to go head-to-head with some of the big technology giants in the US, through the owner of Snapchat, recently listed, and it also bought into Tesla so it will be partnering there as well. There are some very interesting plays that one will be seeing from Tencent in the future and whatever else you want to think about Naspers, it’s a cheap way into Tencent. The value of Naspers trades at a discount to what it owns in Tencent. Everything else that comes with Naspers is a bonus.
So, the wonderful deal and the wonderful work that’s been done by Bob van Dijk, the CEO, who’s been there for 5 years now, on things like Delivery Hero in Germany, Flipkart in India, and other investments, PayU, the big emerging market payment system that Naspers owns and it’s making more and more of its own progress. It recently acquired a chunk of Remitly, one of the big payment operators in Silicon Valley. So, all of these things are now working in our favour just by owning the Naspers shares. It has the other advantage that if you don’t have a lot of them then you’re going to be underweight against the JSE All Share Index. Of course, the big advantage here is that the Tencent share price is traded in HKD, and the HKD is closely related to the USD, and as a consequence of that if the ZAR falls Naspers automatically, the value of its investment in Tencent rises so, it’s the perfect Rand hedge. Imagine this that you’re actually buying HKD, or call it USD, at a discount. That’s what you’re doing with the Naspers shares, at the moment so, it is almost the perfect hedge for somebody who is nervous about the ZAR and what’s happening in Zimbabwe today has to make you even a little more nervous than you were perhaps when you went to bed last night.
Alec, sorry just a question on Naspers, before you get onto FirstRand, and I think it comes up quite often. Pier wants to know, he says, ‘recent articles note that the other assets within Naspers, excluding Tencent, are loss making at a low to zero value.’ Just your thoughts on that.
You’re half right and half very wrong. Where you’re right is that they’re loss making because they’re investing. It’s what happened with Google, with Facebook, and it’s what happened with Amazon. Amazon is loss making, if you want to put it that way. They’ve recently, only after 25 years of business have broken into profit. So, what we need to understand in an exponential portfolio and in the way that the world is moving, in the Fourth Industrial Revolution, is that the old system of buying blocks that are going to give you profits year after year, and then it’s going to give you a PE ratio that you can work things on. In other words, a very simplistic approach, a rational approach but rather simplistic where you can look into the future and be quite comfortable with what that company is going to be generating. Those companies are few and far between.
In the Fourth Industrial Age what you’re having is technology companies who are wiping out the old business models. Just look at Amazon against Walmart. In fact, if you have a look at any of the exponential companies and what they are doing, these technology-driven companies, what they’re doing to entire sectors. You will see that the rules of the game have changed. Now, one of the worst things to an investment is when you are told that things are different, this is the new era, but wherever one looks in the Fourth Industrial Age or Revolution, things are turning topsy-turvy so, don’t worry about the bets that Naspers is making that are not yet generating profits because it is doing a Google, it is doing an Amazon, and it is doing the right thing for this kind of market where you are investing to acquire market share.
At some point in time you can switch that on as Facebook, Google, and Amazon have done and the profits will be exponential. That is what the rump of what Naspers is doing so they’ve got the best of all worlds, if you like. They have this huge investment in a massively profitable business in Tencent in China, which dominates that market and is going into new areas all the time to generate more dominance in new fields. On the other hand, they’ve got their own pot of gold, which they are allocating to different investment opportunities like PayU, like Flipkart, like Delivery Hero that I mentioned, and there are numerous others. They’ve also been smart enough to get out of some companies, Allegro was one they recently got out of in Poland, for €2.5bn, which again, they could deploy that cash better. This is a fine company. It’s a global company. It’s a world class company run by world class executives who have been educated in humility and humility is the one thing that I often find lacking in companies of the old era. They think that things are going to be the same into the future. They just aren’t and if you have a look at share market performances over the past couple of years that is something that should be coming out and emphasising.
Thanks, Alec. It seems that Naspers has generated a bit of interest here. Moore wants to know, he says, ‘in terms of investment strategy as a young guy with a young family and not a huge amount of cash to invest – how risky is really overweight in Naspers, within a personal portfolio of 50% plus?’
A 50% plus, wow?
Yes.
There was a time, I remember I had an email from someone not long ago, when I was really hot on Brait, given that Brait had spent so much money. It bought back something like 10% of its equity. I thought a smart guy like Christo Wiese, who’s been around the block, he’s in his 70s, he’s seen it before. He wouldn’t be throwing good money after bad and I wrote that as an opinion. I had no intention then of selling Brait out of the portfolio. As a consequence of that, and somebody actually might even be on the webinar today, emailed me and said, ‘shall I put everything into Brait because it looked like such a good thing?’ Thank goodness, I wrote back and said, ‘no, that’s a dumb thing to do.’ You don’t over invest, especially in risky situations. As we saw from the Brait share price, we were trying to catch a falling knife, or anyone investing there now is trying to catch a falling knife.
On the Naspers side, as much as I love the company, as much as I think it’s…I’m very happy to have 31%. In fact, we’ve got 34% of the portfolio in there because of the appreciation in the share price. I’m very happy to have say, 1/3rd of the portfolio invested. I would be cautious to go any more than that because the chances are something unexpected is going to happen, at some point in time and that is the reason why we diversify our portfolios. You’re a young guy, you look at this, you say, ‘in 20 years’ time Naspers will outperform everybody else.’ It probably will but on the other hand by putting all your eggs in one basket you are looking for trouble. Buffett says, ‘have a few eggs, put them in a basket and watch them carefully.’ What I’m hoping we have now, with the structure of this portfolio, and you’ll see as we go into it more, is we have those few eggs, the right eggs now, but the big one being Naspers and quite a few others that have great potential, and then we watch them. When a Brait happens we get out, or a Glencore happens we get out.
Thanks, Alec. Margaret says, ‘thanks for addressing the issue around changing strategies with the change in stocks.’ She says, ‘previously we were wedded to dividend-generating shares. Where do they feature in this new world?’
Margaret, it’s the same response as the one earlier, to PE ratios and profitability. You only pay dividends if you’re profitable. As a consequence, if you are investing in a new era or in a new environment for the world you should be looking at those companies that are doing the investments, rather than those companies who are throwing the cash back at shareholders. Sometimes you’ll get a case like Apple, which can’t find new investments. Literally, it can’t – it’s got such an amazing ecosystem. It’s got $200bn in cash and it is sitting on the cash looking for something but not sure what. Now, what do you do with $200bn? There are not a lot of companies that would be outside of your radar if you wanted to acquire them. So, I guess what’s happening in the Apple mindset, but Apple also doesn’t like making acquisitions. They like to develop organically. In their mindset they’re saying, ‘okay, let’s give shareholders some dividends as well.’ That’s fine, live with that but in a case like Naspers. If they were to start giving huge dividends, they’ve got a factional dividend yield. If they were to start paying out 5% of their profits in dividends, or 10% of their profits, you’ve got to start worrying because it’s telling you that they don’t believe they can find better homes for that cash. Their management team can’t find better homes and actually just giving the cash back to you.
The obvious instance or example of all of this is Berkshire Hathaway, where Warren Buffett has never paid a dividend because he believes that he can find better opportunities. Remember, he deals with the old economy. Okay, he made a big investment in Apple, which is now his second biggest shareholding, but for the most part Warren Buffett says, ‘I can invest that cash better for you than you can for yourself so, I’m not going to pay you any dividends.’ So, the whole dividend distribution fashion, it came into fashion at a time that companies were maybe wasting their dividends by buying back shares at inflated prices but it isn’t, in essence, the kind of policy that you want to see from a company because it sends other signals.
Thanks, Alec. I think we can move on.
Isn’t that a beautiful photograph? That’s Bank Station, and I go there quite often, with the Bank of England behind it. That’s why it’s called Bank. It’s in the centre of the city of London and that’s where the 3 guys on the left, the 3 entrepreneurs who started FirstRand, GT Ferreira, Paul Harris, and Laurie Dippenaar. They’re going to be spending a bit more of their time in the next little while. They’re making an investment of £1.1bn in a company called Aldermore. Up to this point only 4% of the group’s income has been generated in the UK. They’re expecting that that’s going to significantly increase after this acquisition and I like the fact that they’re making the deal at this point in time, and the way that they’re going around on it.
FirstRand, first of all, when you look at it as an investment case although, this is a SA Champions Portfolio, you’ve got to see what the bulk of their assets are in and the bulk of FirstRand’s assets right now are invested in SA. They’ve got a holding in the rest of Africa. They also have a business in India but essentially, you’re buying a SA banking business right now. The value of that business, in my opinion, is still pretty reasonable. This is a 5-year graph that you can see on your screen. You’re buying into the company at the current price, or we bought into the company at the current price levels at the same level that it was trading at in 2015. So, you’re getting a stock at a 2.5-year price level.
What it’s done since 2015? Well, I took a few numbers out, I pulled some figures out since then. Assets are up 15%, deposits are up 15%, headline earnings are up 12%, but more importantly, when it comes to banks, the tangible net asset value is up 20%. So, you’re getting a stock today or a company today that is worth 20% more than it was worth 2.5 years ago. That can’t ever be a bad thing. Unless the company is about to hit a brick wall, and then it is a very bad thing. In FirstRand’s case is it about to hit a brick wall? Absolutely not. When you have a look at the SA banking market it continues to dominate there. Its technology investments are paying off, Rand Merchant Bank, on the investment banking side, is the market leader. FNB is the market leader, WesBank is the market leader so, it’s done incredible work within its home economy, and now it’s getting ready to expand into the global market with a vengeance.
The company that its bought, Aldermore, is a smallish bank. It’s what they call a challenger bank here, in the UK. It only started in 2009, to have a go to set out to disrupt the UK banking market, to disrupt the status quo, and I would urge you to go and read the transcript or listen to the interview with Metro Bank’s chairman and founder Vernon Hill. Metro Bank is about the same asset base as Aldermore has so that’s an interesting point. The scalability or the size that FirstRand are getting in and Vernon Hill says, ‘he cannot believe how useless the big 5 British banks are.’ As somebody who lives in this country and has had the misfortune of dealing with them, I cannot believe it either. One of the reasons perhaps is because most of the banks had to be bailed out in 2008 and 2009, and when you’re bailed out by the government the government is a hard task master. It wants its money back and it also wants to make sure that you aren’t wasting any money.
In many people’s cases a bureaucrat will see marketing, for instance, as wasting or good service levels as wasting when indeed, they are really nothing more than investing in the future. As a consequence of this the British banks, the big 5 banks, Vernon Hill of Metro calls them the ‘Big Bank Cartel.’ They have become fair game or fair meat and for a very good operator like FirstRand is, to come into the UK market to attack those big 5 banks directly or head on, is just music to any ears of somebody who wants to get in at the ground level. The point is they’re not coming in here waving the flags and saying, ‘that’s what we are out to do.’ It’s likely to be a consequence of the investment that they have made.
Aldermore has itself said, ‘that’s what they want to do.’ They started off with asset finance, invoice finance, mortgages, and certain deposit products. But it’s very instructive if you read through all the information that FirstRand has put on its website about the rationale for doing the deal. Amongst the rationale, from both sides, from both Aldermore’s team – they’ve got about a thousand staff at Aldermore, 230,000 customers so, it’s a sizeable bank. They’ve lent £8.5bn already. In SA terms you’re talking about R160bn and that’s big in an SA context but what both sides are saying is that they’re looking to expand into this market. Bring in new products and look to bring in new competition to UK banking.
Those top 5 banks, the ‘Cartel Banks’ as Vernon Hill calls them, are extremely vulnerable in the UK. It looks like FirstRand is making a serious challenge against them. Only recently FirstRand, incidentally, opened a branch in Guernsey, a retail transaction branch. They’ve got about 3,500 clients there. Already they’ve got deposits there at £250m but its existing operation has been going for quite a while it’s called MotoNovo, a second-hand car finance company. It’s got a book of over £3bn and makes profit of £69m. If you work that out you’re getting close to R1.5bn. That’s not a small business so, they’re going to be putting together MotoNovo with Aldermore and watch out UK banks. I’d like to be in on the ride here.
Knowing FirstRand from the SA context what an amazing performer it has been in the SA market, you have to believe that it’s got a reasonably good chance of succeeding in the UK. Knowing the UK market and again, just go and read that, I see Stuart has put it up on the chat channel there – go and read that interview with Vernon Hill. It’s extremely instructive. He’s going for a different approach. Metro Bank is going more on the retail market whereas FirstRand will be going for a far more targeted approach and you can be sure that they’ll be very strongly technology driven. Having accounts in both countries the SA banking technology is world class, probably world leading, and putting that into the UK into a market where people are a bit jittery about their banks anyway is not a bad thing.
Just a final point on FirstRand and the UK advance. What makes it easier to build up a base of clients in the UK even though the surveys say, ‘only 1% of Brits like changing their banks.’ What makes it easier is they have an arrangement between the banks where you literally sign if you want to move your bank account from one bank to another. This was done as part of perhaps a pre-emptive strike against the politicians forcing them to do this. If you want to move your bank account from one to the other it’s incumbent on all parties that that happens smoothly. So, it goes formally, it goes smoothly, and it makes it very easy for people to move their bank accounts. I’m very excited about this Aldermore deal.
Did they buy it expensively? No, they’re paying 1.8 times book. FirstRand trades at about 2.8 times book so, depending on where you want to put the share price at the time. It was a premium on the closing price and the investors in Aldermore have made a good return since the company was listed on the stock market 2.5 years ago. They’ve made about 63% once this transaction goes through. What I also like about this is there’s no new shares being issued by FirstRand. It’s a cash only deal and it will reduce the exposure to SA and hence, make the company a good participant in our portfolio. An interesting story this one and I’m looking forward to going along for the ride, as we all are in this portfolio.
So, there are two things that can lift FirstRand. First of all, if the right kind of decisions are made by the ANC in December, the moribund SA economy will definitely see an uptick. You can’t buy a company on that basis, it’s too high risk, but what you can say is that the downside from where we are in the SA economy right now has to be limited. The crooks just can’t get away with more. They can’t channel more money out of the country. Those routes have been blocked – HSBC have blocked all the Gupta bank accounts so that’s one good thing that’s happened there so, you only have upside if you like, from December as far as a banking institution is concerned. The share price not moving in 3 years gives you a rationale for that but secondly, their investment into the UK could be very exciting indeed. It’s a good long-term investment. It’s a kind of stock that I’m going to be happy to put into the bottom drawer and then look at it in 5 years’ time. As Buffett says, ‘if the market were closed for 5 years, would you like to own it?’ Very much so.
Thanks, Alec. Just on FirstRand obviously, with the move into the UK. Ian Ross wants to know, ‘any thoughts on the Rand/Pound exchange strength.’
Ian, yes that is probably the best play if you’re going to be a betting man. You would be of the opinion that the ZAR is likely to weaken against the Pound over the long-term. In the short-term there’s lots of moving parts. There’s December with the ANC, which as far as the ZAR is concerned, it could go one way or the other. It’s a watershed moment for the country. I believe it’s going to go the right way so, I believe that the ZAR will probably enjoy temporary strength as a consequence of what happens in December at the ANC. Again, a big signal has been sent by what’s going on in Zimbabwe right now, with Mugabe finally, it appears coming to the end of his reign.
The second thing though is in the UK, more and more you can see that Brexit is not going to be the dramatic shock that people in the markets in particular, have been hedging against. Yesterday we had the news that Theresa May has agreed to put the final Brexit deal before Parliament. So, Parliament will vote on the final Brexit deal before Brexit happens. Now, this is a big change. It was quite well covered yesterday but it hasn’t been fully appreciated yet because if the final deal that the EU and the Brexit negotiators put on the table is unacceptable to the British people, and as Philip Hammond, the Chancellor of Exchequer, has said on numerous occasions the Britons did not vote to leave Europe to become poor so, if Brexit is a bad deal then the Parliamentarians will vote against it or lose their seats, essentially so that’s the one thing, and the second thing that’s coming through is yesterday even the biggest pro-Brexiteer, the Brexit Minister Davis got together with the financial services community at the Landmark Hotel in London, and at that meeting he gave them everything they wanted, plus so, it appears as though rationality is coming back into the whole Brexit debate. What that will do, if you recall, the Pound took an awful hiding after the vote and continued to slide for quite some time but that was on the view or the concern that Brexit was going to be highly disruptive and really damage the British economy.
As often happens in these things over a period of time sanity is starting to come back into the picture and starting to prevail once more. As a consequence, you could expect that the Pound will be stronger rather than weaker and many foreign exchange traders say, ‘the Pound is the cheapest currency on earth.’ Not many foreign exchange traders who say that the ZAR is the cheapest currency on earth so, you have your solution there. Just to show you the Pound exchange rate. Did FirstRand buy in at the right time? I think that was really the subtext to the question that you asked. Here is a 10-year graph and as you can see we’re back, as far as the ZAR is concerned, not much higher than where we were 4 years ago, in 2014, and that also gives you a very good indication of what happened post-Brexit, with that enormous decline in the value of the Pound against the ZAR from over 22, back to just over 16. The recent move in the Pound has been in the direction that one would expect over the long-term. Surely, if FirstRand were doing this deal at 25 to the Pound you would have to start scratching your heads but it does look like the decision has been made at just about the right time possible. Have we got more questions, Stu?
No, Alec. There’s a question on Tesla but I think we should move that to the Global Portfolio but otherwise it’s all clear.
All right, let’s look at Discovery. There’s one of our better performers outside of Naspers. This has been our other big winner. There hasn’t been a whole lot of news flow on Discovery in the past month but the share price has been moving in the right direction and I’m quite comfortable. Nearly R100bn market cap, can you believe it, on this stock now? So, we’re very happy to be invested in Discovery. It’s some of the smartest people in SA. What I like about this is that the investment that they’ve made in the UK has been in a sector, through Vitality, where the competitors are not really that good and that’s because they have a public-sector competitor. You don’t really want to have to pay for health insurance if you’re getting a good service from the government.
In Discovery’s case, Vitality is offering health insurance and the service from the NHS (National Health System) in the UK, with an overburdened ex-checker is that it’s unlikely to get any better. So, if you were to take at ground zero today you would be saying, you’ll be investing against the NHS. That would be your bet and that’s exactly where Vitality is. The other story on Vitality is that it is doing extremely well in the life insurance area. If you have a look at the recent results you’ll see how they’re expanding there so, steady as she goes.
A similar story here with Investec. A lovely picture there of Stephen Koseff getting his honorary doctorate from Wits, his old university. Again, nothing much happening at Investec in the past few months with the share price. It’s been bumbling along but I can tell you that within the organisation things are happening. You can see it, you can see the presence. You can see it from being a client of the company. You can see it when you talk to the people at Investec, they are rejuvenating their private bank in the UK. It’s really humming and expanding, and starting to make some serious inroads. You’ve got to remember this, when you invest in a global market and I found this as well from our little BizNews’ perspective. You have to be educated first, in humility. If you come into a foreign market and you think things worked the way that they worked at home or if you think that you can teach people in the new geography, and in particularly an old society in the UK, how to do things. Unless you are going into a very sloppy area and in my opinion the big 5 banks is one of those areas, and Vernon Hill’s success has already shown us that with Metro Bank. But if you are going into an area where the competitors are good, and look at that in retailing for instance, you cannot afford the luxury of arrogance. That’s the one thing that Investec have done very well. They’re a humble bunch. They’ve come into the UK very carefully. They’ve been here for 20 years I think it is now, and they are moving in the right direction.
Investec is one of those sleepers. It’s a fabulous business. They’ve got everything right. It’s one that you can just put in your portfolio and not worry about it. I’m very happy to have it in the portfolio.
Here’s Mediclinic and there’s a big story here. Mediclinic has been through quite a month. You can see the share price has fallen. The reason for that has been a dual thing. The CEO, Danie Meintjes, has said that he will be leaving the company in June next year. That is never a good thing particularly if your CEO is 61 years old, and he’s been around for a long time but that’s the way things work when you are 61, I guess. Is that you’re working for a corporate, and he’s been steering the ship for a long time. A lot of the credit for the internationalisation is to his benefit and he’s decided to call it quits next year, which does give a new succession challenge to the Mediclinic team but Edwin Hertzog, the chairman who essentially founded the company, and he’ll still be in the saddle so, I wouldn’t worry too much about that.
The one thing that you can worry a little bit about is the hostile takeover bid that has been launched for Spire. Spire is a British hospitals services company of which Mediclinic already owns 29.9%, no mystery in that. If they had gone to 30% they would have to make an offer to everybody, to all shareholders so, they stopped at 29.9%. They got to know more about the company. They’re the biggest shareholders in Spire and now they want to have 100% of Spire. So, Spire, which is a listed company, it came out with its results – they were awful. The share price plummeted. Apart from being poor results they also had huge exposure to one of their surgeons, who appeared to have done some really crazy things. You can imagine this – they put aside more than £25m to meet legal liability claims from one of their surgeons, extraordinary.
So, that’s what’s going on in Spire. The share price plummeted and Mediclinic then launched a hostile takeover bid. It’s become hostile because they made an offer to the directors of Spire. The directors felt that Spire was worth a lot more money than Mediclinic was offering it and indeed, Mediclinic itself probably thinks so because they’re offering at under 300 pence per share, whereas they bought in initially, for 350 pence a share. Mediclinic would probably argue that the value of the company has dropped, subsequent to its investment so, it isn’t underpaying at all but hostile takeover bids are never good things. They always shakeup the staff, they hurt morale, and they’re not always successful so, it will be interesting to see how this whole thing pans out but we’ve got to keep our eyes on this space.
From where I’m sitting the takeover, were it to go through, would be a very good thing for Mediclinic. It would drop the SA exposure to below 20% of this company. In a completely international business, or mostly an international business, and that means it’s no longer subject to some of the vagaries of SA legislation in the healthcare space. Remember, Mediclinic’s major investment is in Switzerland. About 50% of the business is in Switzerland now. About 25% of it is in the UAE, and a deal for Spire would turn that into even more of an international component. Is it a good business? You bet you. When SA doctors go around the world they are admired, as are nurses, as are anybody really, in the healthcare industry. It’s one of those pockets of excellence in SA, which has been exported very successfully.
MTN – there’s not a whole lot that we can talk about here. It’s still going through its rebuilding phase under its new CEO, Rob Shuter, and his team. In this case I think quiet is good. They are being threatened with Turkcell with a longstanding court case. I’m not worrying too much about that because a UK judge has already looked at it, gone through it all, given his procrastination to say that MTN has no exposure. But the market is still a little nervous so this is a time for a long-term investment that you should be looking at it. I love the new management team that’s been put in place here. I love the chairman, Phuthuma Nhleko, one of the great entrepreneurs to come out of Africa. I love the fact that they’re playing in a space and in an area, that they know, the African Continent, and Iran. I just believe that at some point in time MTN is going to be too juicy an opportunity for an international player. MTN is a very good company with a huge base of customers who can be suggested to open their wallets a little more. Although the headwinds have come in from the old call sector, that’s been more than made up by what’s going on in the data sector as that’s expanding as we’re getting into a network world. MTN is really, a long-term bet on that and very good value.
Steinhoff, wow, look at that share price. In the last month it just dropped like a stone. What’s going on with Steinhoff? I don’t know. I hope we don’t have another Brait on our hands here. Steinhoff however, appears to have been hit by an allegation of a court action that’s been going on in both Germany and the Netherlands. Steinhoff maintains that this is a court action that has been brought by an unhappy former joint venture partner. Who was trying to squeeze more money out of the company and threaten the company by going to the media. As a consequence of that, those media attacks have come through but somebody is taking a negative view of this and I don’t want to be too absolute. Do remember that Steinhoff has made some big investments. It bought Mattress Firm in the USA for R55bn.
Now, what makes me feel a little more comfortable about Mattress Firm than you would be feeling about let’s say New Look, is that Mattress Firm is dealing with the bed market. It’s the biggest in the USA. It’s not unheard of for SA companies to dominate whole sectors in the USA. You can think of Belron run by Gary Lubner, a South African from the old Lubner Company, which is the biggest replacer of windscreens. So, if you buy a windscreen in the USA you’re likely to buy it from one of the Belron subsidiaries so, it can be done. Mattress Firm also has the huge advantage in that it is not exposed, well not much anyway, to the Amazon-effect.
Amazon is wiping out industries now but Amazon’s strength is being able to deliver small things to you quickly. Mattresses and cupboards are not that easy to deliver and I’ve seen that from personal experience where I ordered 2 big bookcases and I ordered them in August, they didn’t arrive when they should have, in September. Then they still hadn’t arrived when they should have in early November. I’m hoping they come next week and I might even be able to show you at the next webinar if they do come but it’s not the area where Amazon is good. It’s very good in small products and Steinhoff is in the discount market, where Amazon is also not very good.
I don’t know what’s going on. I’ll try and get a hold of Markus Jooste. If anything, it should be going the other way after the listing of Star, on the JSE. It was listed at R20.20. It’s gone to R23.90 so that’s actually an uplift for the Steinhoff share price yet the shares are under some pressure at the moment. At the moment, right now, I would be very comfortable giving this company the benefit of the doubt.
And there’s our portfolio, overall. As you can see, we’re 7% higher. We’ve now got 34% invested in Naspers, 18% in Discovery, 14% in Investec, 12% Mediclinic, etcetera, and it’s really a tale of two big winners, Naspers and Discovery, the third big winner we have sold out of, Glencore, for reasons that I’ve articulated earlier. One big loser, which was Brait, another one that’s concerning is Steinhoff, and then Mediclinic, which has got problems of its own making at the moment. FirstRand has just entered into the portfolio, and MTN of course is bumbling along, as is Investec.
That’s the story. I’m heavily invested in this portfolio so, I’m with you. I’m very comfortable that we are well-structured and we have benefited to the tune of 7%. It’s behind the JSE All Share Index but these things tend to happen in that way sometimes, particularly as we were hugely underweighting in Naspers, which has been the best performer of the JSE. If you took Naspers out of both this portfolio and the JSE I think that you’d probably find that we were pretty level pegging at the moment. That’s my story. Stu, have you got anything more to add?
Alec, there’s just a quick question on Tesla, otherwise there’s nothing else. If you want to have a quick fire at it. It’s from Paul Jefferies. He just wants to know, ‘what are you doing with the Tesla shares in the Global Portfolio?’ I think he’s just asking following Felicity’s newsletter on the potential downgrade on the credit.
Yes, Felicity and I have got opposing views on this. I’m a long-term holder. I’m a great believer that Elon Musk knows what he’s doing and I’m very happy to continue to hold the shares. I’ve been watching it. It dipped below $300 a share for a period but it’s one of those stocks that you have to know that in the short-term it’s probably overvalued but in the long-term it’s probably horribly undervalued. Elon Musk plays open cards. He puts his heart on the table and that’s always a good thing but when you’ve got somebody who’s prepared to share what’s happening in the business with you. Also, he’s a South African, it’s not a huge investment we’ve got there and we’re making a massive profit. He’s done us well. We bought it around $200 a share and it’s sitting at $300 a share – 50% in a year, ‘please God, if you could do that on every stock that you buy.’ So, I’m quite happy to let the turbulence, bump around now. We didn’t buy Tesla to trade it. We bought Tesla as a bet on electric cars in the long-term future and that’s the reason why I certainly am not going to be panicked into selling the share, in the same way as I haven’t been panicked into selling Naspers.
The decisions that we’ve made in this portfolio, and it’s been interesting. In the Global Portfolio, which is now 3 years old, we made some significant changes over the period where we saw that things had changed. Where we saw for instance, that Novo Nordisk was not what it was made out to be. It was promoted as this wonderful Scandinavian business model to the rest of the world and in fact, their CEO was even nominated by Harvard Business Review, as number 1 CEO in the world but it didn’t work out that way when the wheels started coming off there on an insulin maker. A similar thing with IBM. We bought the story of IBM until Warren Buffett decided not to buy the story anymore and we followed him out of it. There are going to be those kinds of changes that you’ll find. The same with Barclays. I didn’t like Barclays because of the way that they treated the whistleblower. Not because of that instance in particular but because of what it tells you about the culture of the business.
We want to be in business with, and remember when you invest in companies, you’re a co-owner. We want to be in business with management teams who share our values, and management teams that we can trust are doing the right thing and are sharing their information with us. That’s really, as a co-owner of a business, what you’ve got to be hoping for. The worst thing you can do as a co-owner of a business is to look at a management team or reassess your investment not on the team that’s running the business but on the way that the voting machine, the share price, happens to be working at that point.
Excellent thanks, Alec. I’m all clear this side.
Wonderful well, thank you for joining us today, it’s been a pleasure. I do apologise for the technical errors to begin with, these things happen from time-to-time but I’m so glad that you were able to stay with us for the past hour and look forward to being back in your company in a month’s time. We will, now being November, we’ll be around about this time in December, before we go on holiday or before SA goes on holiday. The rest of the world doesn’t really do that. We will have another update and don’t forget that as a BizNews Premium member you are welcome to send us emails. You are welcome to send us letters. We look after our Premium subscribers and we will respond to that in any way that we can. Please, you’re a member of the club, we want to make you feel happy, we want to make you feel welcome, and we will do our utmost to ensure that that relationship gets expanded for years to come. Thanks for being with us and look forward to catching up with you next time, cheerio.
