JOHANNESBURG — February was an exciting month for South Africans as Cyril Ramaphosa was elected President of the country, following Jacob Zuma’s resignation. Since 2009 the country has been on a marked decline, especially in keys areas such as economic growth and jobs, otherwise known as Zumanomics. With the key ingredient of the SA Champions Portfolio being one of finding South African entrepreneurs doing exceptional things on a global scale, with a listing on the Johannesburg Stock Exchange. Enter Ramaphosa and this turns on its head. The economic policy shifts from one of plunder and self interest to one of inclusion and growth. Hence the need to change the structure of the portfolio to focus on SA Inc. Alec Hogg spills the beans. – Stuart Lowman
It’s a very warm welcome to you from a very cold Europe. My goodness, the Russian weather has come to the UK, and I’ll show you in just a minute what it looks like over here. Thanks for joining us for the BizNews SA Champions Portfolio. I’m Alec Hogg and I’m coming to you from London. If you have a look around there, I’m going to try and show you outside of my window, and you can see it looks like a winter wonderland. I don’t know how much of that you can see but I can tell you, it was -5 degrees when we got back from London yesterday, and a very cold place to be. I was talking to one of our colleagues who said, ‘it was rather cool in Johannesburg.’ The rather cool Johannesburg that she was talking about was that it had gone to 21 degrees. Well, I can tell you what, to have that as an option in the UK at the moment, would be a real pleasure. I’m going to be bringing up the portfolio for you in a moment. I just want to make absolutely sure that we’ve got all the technical things 100% right. Stuart Lowman, my colleague, who’s managing-editor of BizNews is in Johannesburg. Stuart, do you want to just take us through how the webinar is going to work?
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Thanks Alec, always good to be here. Just quickly before we get started. There should be a little high-five button that you can push if you can hear my voice and you can see Alec’s presentation. If you can just click that so that I know everyone is on board. Yes, I’ve got a few hands. That’s excellent – thanks very much. The other thing is as we run through the portfolio Alec likes to keep it very conversational. There’s a little questions bar on the control panel on the right-hand side. If you plug your questions in as they come to mind, I’ll pass them onto Alec, and we can create a conversation on what’s being said. I think that’s it from my side so, we can get cracking on what’s going to be an exciting update.
Well, it certainly is. If you recall, going into the elective conference, we had a mandate, which said, investing in SA’s champion companies in the international sphere driven by its best entrepreneurs. We’ve changed that mandate after the ANC elective conference to invest in SA champion companies driven by it’s best entrepreneurs, i.e., no longer is it necessary for them to be global companies. We now want to take advantage of the opportunities that are available in SA. It’s a big change for us at BizNews. For the last, at least 4 years, we launched our Global Portfolio at the end of 2014, and our view then was that you needed to protect yourself against Zumanomics by investing offshore. We’ve now changed that philosophy and the view is that great opportunities exist in SA. I’ll tell you a little bit more about that as we go along.
Alec can I just jump in? I’ve got a few queries on the sound. It sounds okay on my side but if you can just bump your sound up a bit. They say you’re a bit soft.
How does that sound Stu?
Much better.
Apologies about that and thanks for letting us know. That’s the wonderful part about a webinar is that you can engage instantly. Just to get back to the thrust of what I was mentioning a moment ago. Our mandate has changed. No longer do we only invest in companies, which are international and protecting us against Zumanomics because Zumanomics is over – it doesn’t exist anymore. So we’re now talking about investing in SA champion companies driven by its best entrepreneurs. That’s the mandate for the SA Champions Portfolio and really, the restructuring of the portfolio today, and we’ve made some big changes, is due to a restructuring of the exchange rate. As you can see from this graph that we brought through from our new partners at the Wall Street Journal. By the way, if you are not a Premium subscriber, and you’re coming along for the ride, and we’re quite happy to have you here today. Just to let you know that we have two of these webinars every month, one on the Global Portfolio, which is generating 32% compound annual growth rate since launch December 2014, and the other one is this SA Champions Portfolio, which hasn’t done as well but we’ll tell you more reasons for that in a while.
The partnership that we’ve struck as of today with the Wall Street Journal has given our subscribers, BizNews Premium subscribers now get the whole backend of the Wall Street Journal as part of their subscription. We’re not increasing the price. It’s still £4.99.
In fact, if you have a look at the Rand here you’ll see that since mid-November the Rand has appreciated by 20% against the USD, also against the Pound. That means that your BizNews Premium subscription is 20% cheaper, so that’s all good news.
There we go, there’s the structural change in the Rand against the Pound. When you look at both of those the Rand was moving weaker against hard currencies until the elective conference, and there’s an absolute direct correlation here, as you can see, mid-December when Cyril Ramaphosa was elected as the ANC’s new President. The Rand just started rushing against the Pound from over R18 to just over R16 at the moment so a much better return for your Rands in a global sense.
From a broader perspective, the SA gross domestic product (GDP) in USD terms, in other words, how the country’s economy rated against other economies around the world. It was sitting at $400bn in 2011, and it had got as low as $300bn just over the last year so it’s been declining in a straight line, thanks to very poor economic management in the country. With the appreciation of the Rand we’re back at $400bn. It just shows you how big and how relevant this change has been – 25% contraction in global terms, of the economy, over 6 years has been wiped out in a very brief period of time. It still means that the economy in USD terms has flatlined since 2011, and now our belief is that that is going to improve.
This is the reason for it. Cyril Ramaphosa was elected very narrowly. It was a wafer-thin margin. There were 4,700 delegates. Of those 90 voted for Ramaphosa and gave him that majority. Had those 90 gone in a different direction, had they gone with Mrs Zuma, we would have had a perpetuation of the Zuma-legacy and that 20% depreciation of the Rand and the new hope that is being instilled in the country would not exist, it’s that simple. It was on a knife’s edge. Our view, incidentally, has been consistent throughout, was that Ramaphosa would win. Our belief that the ANC delegates would have a balance of those who realised that the country was going in the wrong direction and that they would vote in his favour, rather than taking the country towards a Zimbabwean-type outlook. However, it was a lot closer than we anticipated, and as you can see, certain deals were struck, as there always are in politics, and we now have a Deputy President in David Mabuza, who many thought was a most unlikely candidate. However, politics are sometimes the politics of compromise and that’s where we are.
We’re very excited about what’s happened since Ramaphosa was elected as the ANC’s new President. I saw, first hand in Davos, the excitement that was generated amongst international investors. Indeed, even before arriving in Davos, after being a polecat for investors around the world, SA suddenly was nominated as the hottest market of all emerging markets by Goldman Sachs, the most influential firm on Wall Street. That report circulated ahead of Davos. When we got to Davos we had pretty good access to Mr Ramaphosa but most of his time was taken up by talking to foreign investors. He was swept off his feet, as were other members of the SA delegation. So there’s been a seismic shift in the perception of SA internationally, and you saw that in the figures, in this graph here with the Rand. That kind of appreciation against the Pound and against the USD takes a lot of money. It’s a huge weight of money that would drive that and we’ve seen no reason or the Rand to reverse, post Ramaphosa’s appointment.
The way he managed Zuma’s exit was brilliant. It could really have been a lot more difficult. The SONA was excellent. The Budget – you can have all kinds of question marks around it, as we do, but it is based on the view that the economy is going to rise and if you look at this graph carefully again and you see the way that the Rand has improved, it’s telling you that the perception of international investors who come into SA is just that much higher so, as a consequence of that, we need to do something different with our portfolio. We didn’t panic ahead of the elective conference. The idea was, and I said this in the monthly webinars.
These are our stocks we have in our portfolio. We structured the portfolio for an international exposure. We did bring FirstRand into the portfolio recently and, as you can see, it’s been one of the star performers on the basis that it was investing in Aldermore. They spent R20bn in a British challenger bank when it made that acquisition. That gave us the sense that they would be looking more and more internationally, and all the other stocks in the portfolio have huge international operations. But if we’re now saying that that’s no longer the mandate that we have. That we no longer have to go just for SA champions/companies that are operating in the global market it means that we can make some significant changes to the portfolio. No surprise, and I always get the questions about Mediclinic, no surprises for those who’ve been following this portfolio for a long time that we’ve actually dropped that one out of the portfolio now, and here it is.
Here are our sales. Now we’ve rebalanced the portfolio, and you’ll see the rebalancing in a little while. It required us to sell two Naspers shares. It wasn’t that we’ve lost faith with Naspers. It still is our biggest holding with 25% of the portfolio but it’s down from 31%. We have sold out of Mediclinic entirely, and then taken that 26% loss. The MTN shareholding has also been sold entirely, both MTN and Mediclinic are turnaround situations so if you’ve got a few of them in your own portfolio and you’re prepared to wait for 3 to 5 years, you’re probably going to do okay out of both of them, but as far as this is concerned, the SA Champions Portfolio is concerned, we tried to unlock some cash to reinvest in SA focused shares, given the change in the mandate and, as a consequence, both of those stocks are now out.
FirstRand we really didn’t want to sell but we had to do so because it’s performance has been so good that it’s now substantially above the 8% that we’ve allocated to it, as a consequence, we took some profit on some of the FirstRand shares. Similarly, with Discovery, which has been a great performer, we have it in as 20% of our portfolio into the future because of the price rise it had gone way above that and we’ve made a nice profit of over 50%. That brings us to, and we raised cash from the portfolio from our R100k starting point to just under R34k, and that has been allocated in this way.
We’ve bought into the Ashburton MidCap ETF, I’ll explain that in more detail as we go through this presentation, but in essence, it invests in companies outside of the JSE top-40, and most of those companies are invested in SA Inc. so, they’re exposed to what goes on within the country – that’s the exposure we want. Wilson Bayly, although it has a fantastic business in Australia and it’s recently acquired a business in the UK, which is a very sensible way that its gone about it. Burn is a small investment in financial terms but a big investment in opportunity, but Wilson Bayly is clearly the market leader in SA in the construction sector. We’ve brought it back into the portfolio. Long-time followers of the SA Champions will remember that Wilson Bayly was in the portfolio at one point in time, and then we brought in Long4Life.
Now if you had been with us last month you will know that for those who are putting in monthly amounts through the EasyEquities bundle we said instead of putting it into Steinhoff, which we sold out of entirely after the disaster in December. We said that money would now go into Long4Life. You got in at around R5.00. Our portfolio is getting in at R5.67. So those who followed the Long4Life suggestion are actually doing okay, at the moment, more than 10% up. But as you can see, total purchases came to R32,500, which leaves us with R1,200 cash, which, according to EasyEquities, we need to have 1% in cash and there’s what the new portfolio looks like. Three new additions and four long-term holdings.
So Naspers, Discovery, and FirstRand have been our big winners here. Investec has started shooting up recently. I’m very happy with the 15% there, and then the newcomers, Ashburton MidCap ETF (an exchange traded fund), plus Long4Life, and Wilson Bayly so, that’s the look of the new portfolio. Stu, I see there are a few questions, do you want to take some now?
Yes Alec. Just from Phillip. He asks on the Rand hedge. Is the land expropriation without compensation process and associated change to the Constitution not an indication that we should stick to Rand hedging in the long-term?
That’s a very good question and it’s sticking out like a sore thumb. My sense of that issue is that there are historical things that happened in SA, which we cannot just wish away and that need to be address. If you take people off the land for political reasons, and we had the 1930 Lands Act and we had quite a lot of land expropriation without compensation after 1948. You’ve got to fix it and you can’t just let that festering sore continue, and that’s the reality of what Ramaphosa is saying. However, there is an example to the North of how not to fix it and what has happened in Zimbabwe is a very good lesson for SA, and with a Ramaphosa driving this rather than a Malema, you will have a far more measured and fair approach towards this issue. It’s a problem issue for SA. It’s one of those really raw nerves but it is something that is likely to be handled, from everything I’ve seen, in a responsible and mature manner. Everything about Ramaphosa is responsible and mature. He’s not going to become a populist and start throwing the baby out with the bath water to rectify something that needs to be rectified. So, no, I’m not concerned about how that whole, process will unravel. I’m actually, very happy that something is being done about it because the longer you leave a potential festering sore, and this is something in SA – the whole rise of the EFF and some of their insane economic policies that they’d like to introduce is a direct a result of not dealing with the land issue or dealing poorly with the land issue, in the past. Once we see that this responsible administration applies its mind and does things in the right way, I think that it’s actually going to be a positive for the country, rather than a negative.
There’s someone looking for comment on Sibanye Stillwater. I know it’s been big in the news with all the acquisitions and stuff. I don’t know if you want to keep that for after the company discussions.
I did look at Sibanye Stillwater. In fact, I’m a big fan of Neal Froneman, and the Stillwater deal is a good one. My concern about that is the longer-term prospects for palladium and platinum. With the shift towards electric cars palladium and platinum have got a lot of wind in their face. Unless they can find fuel cells or another alternative, and they are fantastic minerals, which surely would be able to be applied in other ways. Right now, remember that the majority of the off-take for both of those metals, and that’s where Sibanye is invested, is in catalytic converters, and catalytic converters are not needed in electric vehicles so you are investing in something which is probably not going to be required in 20 to 30 years’ time. But of course, there’s always an option or an alternative that it can go somewhere else. Neal is a very good miner. He’s done a good deal with the palladium business in the USA. He’s diversified the portfolio amazingly well but he’s still in platinum and palladium as his major output. From that perspective, apart from the overriding view, which is that you should be investing in people and not in inanimate objects. Inanimate objects can only give you a return of what the market is or the way the commodity prices are going. Whereas individuals can unleash huge potential. I’ve never really been a great fan of mining stocks. There are times when they’re cheap and people have made a lot of money out of them, but by the same token, people have also lost a lot of money out of them. So, sorry, no Sibanye in this portfolio for now.
Right, let’s move onto the individual portfolio. Just before we do that and just to dwell here for a minute. Naspers is about 25% of the SA index, depending on which one you’re looking at. So, at the very least, we’ll have that in our portfolio. I’ll tell you a little bit more about that in a moment, but if you have less than 25% of Naspers in any portfolio then you are taking a negative bet on Naspers, and I certainly wouldn’t be doing that.
Discovery has been our star performer, as you can see there, we have a 20% share, because it’s done so well the stake that it held in the portfolio went up to almost 25% itself. We’ve now reduced that in this restructuring to 20%. Investec Limited – we’re still sticking with 15% there, and there’s a very good story unravelling. Ashburton MidCap ETF also, at 15% so, between those four stocks you are sitting at 75%, three-quarters of the portfolio.
Then we had three stock-picks, with FirstRand, Wilson Bayly Holmes, and Long4Life, which are 8% each and then 1% cash and that’s the way that this portfolio has been balanced. I’ll take you through the individuals now.
Naspers, that’s Bob van Dijk, the CEO of Naspers. It is a play on Tencent. If you look at this graph carefully you’ll see that the black graph is the Naspers share price, which has performed incredibly well, and this is over the last year. The blue graph is the Tencent share price. Incidentally, this is taken from the Wall Street Journal, as a premium subscriber you can get into all of these graphs, manipulate them, and fiddle with them as you want to – SA stocks, international stocks, anything in the world. It’s a fantastic facility and this alone, is probably worth investing in our premium subscription. As you can see there Naspers has underperformed Tencent over the last year substantially. This is why in December, Bob van Dijk took his team over to New York to have a conference. Since December, the Rand has appreciated, that has kept the Naspers share price down again. So the Hong Kong Dollar (HKD) easing against the SA Rand. Hence, the widening in the gap.
I haven’t done the latest calculation on the two but the last time I looked there was a 40% discount between Naspers’ value and what it’s underlying portfolio was so you could buy into Tencent effectively at a 40% discount by buying Naspers shares. This is something that has been picked up by a lot of international investors and they’re starting to look at it. Of course, if they had bought Naspers shares recently they wouldn’t be terribly happy and the reason for that is that the Rand price of Naspers shares has, of course, fallen given the enormous strength that you’ve seen in the ZAR. As a longer-term bet, Tencent is a phenomenal business. It’s worth $550bn. It’s worth more now than Facebook and the future of this company looks stronger and stronger.
If you’re in China and you have a cell phone you don’t use an Apple system or a Huawei system or a Samsung system – you use Tencent. Your operating system is WeChat, which is used by 900 million people in China. Extraordinary numbers that we can’t even get our heads around as South Africans, given that we’re in a country, which has got less than 60 million people. So as a longer-term bet, Tencent is now moving into other parts of the world. Naspers has always resisted the demands from investors that it offloads or unbundles its Tencent shares. This is a demand that has been going on for well over a decade now because they only bought into Tencent in 2000. Naspers initially bought 50% of Tencent. It now, through the listing, etc., is down to about a third so it’s around 34% that it owns but that is 34% of one of the biggest companies in the world. As a SA shareholder you’ve got a wonderful option on this massively growing company and the difference between tech companies in USA and tech companies in China is that in China they have the support of the government. Whereas in USA, under Trump at least, they have an antagonistic flow from the government. As far as we’re concerned, Naspers is a cornerstone for any SA portfolio and, also, Tencent is a stock that if you have money offshore it’s probably not a bad idea to buy indirect.
Onto the second big holding in our portfolio, and the one that’s done incredibly well. In the past month, as you can see, Discovery has recovered. A lot of the international related stocks took a hiding in early February as did Discovery, but if you look at what went on in stock markets around the world, after that sell-off there has been a rebound, and it’s happened with Discovery as well. Discovery is a South African company. The head office, which I walked around while in Johannesburg last week, is the biggest office building occupied by a single tenant in the Southern Hemisphere – isn’t that interesting. It’s very smart and that gives you an understanding of how Discovery is preparing itself for a future where sustainability and engagement of its staff is a very high priority.
The Discovery story is a compelling one. It works on a shared value concept, where what Discovery does is it’s targeted the major areas that kill us, and that’s diabetes. Well, essentially what happens is as human beings we get sick or we die because of four things really, smoking, drinking, (I guess you could say both of those to excess), but anyway those two, a poor diet and no exercise. They translate then again into the four diseases that kill people and make us sick. 80% of your health costs are related to those four issues. So what Discovery does is, it incentivises its clients to smoke less or not, to drink less or not, to exercise more, and to eat better. By doing those four things or incentivising them, the clients benefit but so does Discovery benefit because its claims ratios fall. That’s really the essence of this business, and it is rolling out this idea around the world.
Ping An, which is the Chinese operation, the Chinese partner of Discovery, has already got nearly 4 million people who have signed up and they’ve only been going just over a year. The UK operation, Vitality, is going like a steam train – it made a £40m profit last year so that’s in a different stage of development. Of course, in SA, Discovery has a dominant position because it’s very hard once you have the scale that Discovery has and the incentives, and the groups around it. It’s very hard for competitors to get a foothold in that market. Discovery is a fantastic company with an amazing business model and very smart people so I’m extremely happy to have 20% of the portfolio on that one.
Just on Discovery, a comment from Ed, ‘why the move to banking?’
Maybe to start with the engagements that I’ve had with them. They have been into big data for years already. They are very excited about the potential that artificial intelligence can bring to making better products and to understanding their clients better and being able to, as a result, help their clients to be healthier and to make more money out of it for both parties.
As far as the banking is concerned. The Discovery guys told me that this is a ring-fenced operation. We do know that the former head of tech at SARS, and at Nedbank, Barry Hore, is the driving force behind the bank. Barry Hore is highly rated in everything that he’s done. If you look at SARS e-Filing (that’s his baby), and certainly when Nedbank was ahead of their game on technology, Barry was the guy driving it so, it’s got a great pedigree but it’s quite an obvious market for Discovery to go into given that it’s got a credit card with a quarter of a million people and it’s got millions of people who already signup through its health insurance plans, plus it has data on lots of them. So for Discovery to not go into banking would have been surprise rather than the fact that it is going in there.
It’s quite a contested space, at the moment, banking, certainly retail banking. Those of you who read Felicity’s comment this morning accompanying the Premium Newsletter letter will see that Goldman Sachs from the US, who are the bluest of the blue blood investment banks on Wall Street is also going into retail banking as well, because that’s where the margins are. So, to see Discovery making a move in that direction with someone like Barry Hore driving it doesn’t surprise me at all. It shouldn’t – it’s just a logical extension of their business model.
So does Hylton Kallner, who’s the head, I think Hylton has taken over the ‘Life’ business or one of the businesses there. He is also an actuary, and he loves data too. It’s a kind of company where people are…I remember a very smart venture capitalist once telling me that he likes to invest in businesses where he gets highly intelligent people, he puts them into a room, and just pumps in oxygen. He says, ‘the magic happens.’ That’s what investing really should be about, is investing in human potential and investing in this amazing thing that we’ve got called the brain, and let the magic happen. That’s exactly what is going on with Discovery. With 20% of the portfolio there – some people might say it’s a bit much. In fact, 45% in just two stocks.
I defer to Warren Buffett in this regard. He’s got 67% of his portfolio in just five stocks so, he’s got two-thirds of his entire portfolio in five stocks and his view on this is that you should invest in companies you know. Know them well, follow them well, understand them well, and then you’ll know when something is going wrong or indeed, if it’s worth adding more to your holding there. He’s got, in his portfolio, of his top-5 – three of them he’s held for something like 20 years, that’s Coca-Cola, Wells Fargo, and American Express. American Express he’s held since the 60s and the other two he’s held for at least 20 years. So those are the Buffett philosophies and we’re trying to do a similar thing here as well, wherever possible, to follow what Buffet believes in.
There’s Stephen Koseff and he’s going to be leaving Investec in the next year but the succession planning by Koseff and the man who runs the UK operation, Bernard Kantor, has been exceptional. If you have a look at the share price once the Steinhoff story hit in early December, the shares dropped from R95 to R85. At that time there were concerns, given that Bernard Kantor and Steinhoff’s principle, Markus Jooste, were close friends, and had racehorses together and certain other business interests. The concern was that Investec would have got sucked in to the whole Steinhoff-pot. It came out quickly, within days of the Steinhoff debacle, to articulate exactly what the exposure was, and it was limited. Most of the exposure to Steinhoff, apart from the shares that are owned by South Africans, was to international banks. Rarely is there an international bank coming out with results lately that hasn’t had to report some kind of a hit from Steinhoff.
If you go along the graph here and you see how it shot up in February. That was a result of the announcement of a change in the leadership, i.e., the succession planning. Stephen Koseff and Bernard Kantor have been running the organisation. They were co-founders of it. It was founded in the late 1970s, and there’s a huge benefit to having people like them at the helm for that long. But investors also like to see change, they like to see enthusiasm and new energy, and in the appointment of Fani Titi, who’s going to do Stephen Koseff’s job in SA, and Hendrik du Toit, who’s going to do Bernard Kantor’s job in London – you have got two, extremely able, new CEOs. The other thing that hasn’t been factored in the share price yet – and you can see how the share price has moved really well in the last month, but the other thing that hasn’t been factored into just yet is that Investec owns a very big and a very strong asset management division. That’s the division that Hendrik du Toit started, literally, from himself and a PA, from scratch. He’s built it up into this enormous giant. Biggest by far, of any SA asset management business, because of its London operation.
I mention this because it seems to be a trend now, where companies are considering spinning-off their asset management operations. Deutsche Bank are doing it, and they are expecting to raise €2bn from their spinoff. Investec’s asset management company is a very important part of the bank but on the other hand, it’s also very undervalued. So as one sees the valuations of the asset management sides of businesses, like Investec, getting closer to or getting more attention from the investment analysts. I’m expecting that that will then have a further impact on this share price. You’ve got two really good bull factors. The new CEOs, who will be coming, and they’ve been there for many years. Fani was the chairman of Investec and has been for quite some time. He is now going to take on an executive role and in the political realities of a SA – it certainly isn’t going to hurt to have somebody from his background running the business there.
Then you’ve got Hendrik du Toit, who’s been based in London for a long time now so he understands how the UK operation works and that is a very important. You’ve got those two points. So the succession is good. Also, neither Koseff nor Kantor are running away. They’re not leaving in a hurry. They’re both going to be there for quite some time. You can be assured there’ll be an efficient handover but there’s also this asset management game/play that hasn’t quite been brought to the fore. The final point about Investec is that it is a bank and banks are beneficiaries of economic upswings. The SA interests of Investec have been downrated over the years because of concerns about the economy. That is also likely to be a plus factor now, into the future, under a Cyril Ramaphosa regime.
Here’s the first of our new boys or newbies. We’ve put 15% into the Ashburton MidCap ETF. Why? Well this is an investment into the stocks on the JSE from position 41 to 100. So the people at Ashburton are not picking anything. What they’ve done is they’ve gone from the 41st biggest or most valuable stock on the JSE onwards. The reason we wanted this is because from zero to 40 most of those companies, or the biggest part of those ETFs are focussed internationally. These companies, and you can read them, Gold Fields, Exxaro – two mining stocks, not so much. But then you’ve got Clicks, Imperial, Foschini, Spar, Truworths, AVI, Life Healthcare, and so on. These are companies that are totally exposed, Netcare not so much, Barlowold, there’s Sibanye so somebody got a tiny percentage of Sibanye, Hyprop, Pick ‘n Pay, Impala, MMI, and so on. Most of these companies will benefit hugely from an uplift in the SA economy.
Don’t forget that the SA economy has been under huge pressure since 2011. Just to repeat again, in USD terms, the economy today, after a 20% appreciation in the ZAR is of the same size, $400bn, as it was in 2011. So we’ve lost all that time. Now, if you’re a significant sized business trying to make a living in a market or in an economy that is flatlining it is very difficult. However, once that economy starts rising you get a leverage or a gearing type effect. So I’m quite excited about this bet and I must thank my friend from Standard Bank, Brett Duncan, who was the one who suggested that we look at it in the first place.
Moving onto the share price or the price of these exchange traded funds, as you can see it hasn’t done a whole lot. Unusually so, in the recent times. It’s kind of bounced around from where it went to after the elective conference so while you have some big increases in share prices that international investors have been taking their eyes out of, on the SA rebound story, position 41 to 100 hasn’t yet felt that impact but it will because that’s the way it works. Usually the first thing is that investors buy the country, then they buy the big stocks, and then they buy the medium-sized stocks. So the medium stocks haven’t moved yet, and that’s the big opportunity that one is seeing here, on Ashburton’s side. Just to have a look at them again. As you can see, these companies that are here, and I’ve only put the top 20, There’s still another 60-odd companies with much smaller percentages but the top-20, by percentage, and you can see a very strong dominance there, of SA focussed businesses.
Just a question on the mid-cap ETF. How often does it reweight the stocks it holds?
I don’t know offhand. Traditionally, they reassess when the mid-cap index would reassess and the JSE would look at that periodically, at least quarterly – they would look at it. So not within the quarter but they’d get to the end of the quarter and then have a look at how the weightings have changed and then reweight it. Once they reweight it then the ETF management company reweights as well. So Ashburton hasn’t got a group of analysts there who are watching the share prices day-by-day and changing and trading. They will wait for the index itself to be adjusted, and once the index is adjusted – it’s always very well telegraphed. They will then do the adjustment themselves.
Moving onto another of our newbies, this is WBHO. That’s Mike Wylie, a fine entrepreneur. He’s been with the company for decades. He is the chairman of the company but still very involved in the business. He was previously the CEO, and WBHO is an incredible story, if you have a look at what’s happened in the construction industry. Over the last 20 years its come from being a relatively small player to comfortably, the dominant player. It’s turnover of staff has been far lower than elsewhere in the industry and its ability to win the contracts that it needed has been enhanced by the scale. It also has a huge business now in Australia, and a fledgling business in the UK.
We used to have Wilson Bayly in our portfolio but the reason we took it out was because the SA business was just too heavily… It was too important to the company and we were trying to look at the time, for international exposure. Now its SA business is a critically important part of this portfolio’s construct. Even though the share price has gone up, it’s quite interesting. When I did my road show in SA in mid-February, it was sitting at R160, and it was one of the companies that I recommended would be worth buying if you were going into SA Inc., and as you can see, it’s worked against us in this portfolio because it is now sitting at R172.
Nevertheless, if you consider the gearing effect that a company, like Wilson Bayly, in construction would have to a rebounding economy in SA, then it’s still got a long way to go. Interestingly enough, (and again looking carefully at that graph), if you go after the elective conference, this is one of the big winners. It came from at about R140 to nearly R160 in days. Then the enthusiasm tapered off but since then analysts have been doing their analysis and have been readjusting and rerating the company. I think the rerating has still got a long way to go, given that the new SA administration of Cyril Ramaphosa as it expands, as the economy expands, they’re going to need to build things. All you have to do is drive around SA and look at the projects that are being built and many of the most prestigious ones are Wilson Bayly. In Australia, they have a similar situation as well, where they’re building a huge construct in Melbourne, Sydney, and in Perth. Go and have a look at their website and I’m sure you’ll be just as enthused about this business as I am.
There’s the new CEO of FirstRand – Alan Pullinger announced this week that he will be taking over from Johan Burger, who retires soon. Pullinger comes from RMB. He’s been deputy-CEO of the company for quite some time. He knows the business a lot. FirstRand recently announced that it’s acquiring Aldermore, a challenger bank in the UK. I’m excited about that because having seen the way that UK High Street banks operate the opportunity for a challenger or for a retail bank in that space is significant. We know that FirstRand is the gold standard of banks in SA. Why FirstRand? Why is it worth buying FirstRand? Well, I think this graph will tell you everything.
After the elective conference the share price has gone from the mid-50s, and it hasn’t stopped. It’s continuing to go in the right direction. The reason for that is that banks need a strong economy and if you have a strong economy, and you’re a good and well managed organisation you will benefit from the economic growth. It’s almost the concept of ‘a rising tide lifts all ships.’ It lifts most banks anyway, unless you have smaller banks with specific concerns or issues – banking stocks generally tend to benefit from a rising economy. FirstRand is outside of Capitec, which is a focussed retail bank. Of the big banks, FirstRand has been the highest rated for a while now, and it’s a very well managed operation, in global terms, and one that is likely to make fewer slip-ups perhaps, that will shock the system than its competitors.
It is a gold standard and I really looked very hard at Standard Bank and I was a bit concerned. Well, Standard Bank is a fantastic business and it also is extremely well rated, relative to FirstRand. FirstRand is almost priced for perfection now. It can’t really make too many mistakes and retain this rating. Whereas Standard Bank, which is trading at a far less demanding rating has got potentially more upside. But in cases like this we’ve learnt our lesson from turnarounds. The turnaround potential of Mediclinic, it still exists, as does MTN, but who knows how long it’s going to be there for? Whereas, if you are now having a company that is geared to the SA economy, which we do believe is going to lift-off. Then you have to be invested in that stock.
Then finally we have Brian Joffe. Again, a great entrepreneur. The man who began Bidvest from scratch, much like the way Hendrik du Toit at Investec Asset Management started his company. Joffe was pretty much on his own. He left Weil & Ascheim and decided, with Investec interestingly, with their support to start Bidvest. Wherever you go in SA and in many parts of the UK now, and other parts of the world, you’ll see the fruits of those labours with Bidvest’s brands being pretty well identified all over there. He left recently to start Long4Life.
Long4Life, as you can see, had a good start to its listed career getting to just below R700, as there was a lot of excitement about what Joffe would do. That excitement dissipated, as tends to happen when people get over enthusiastic. Joffe himself, put his money in, R100m of his own money in at R4 a share. His supporters/backers all went in at R5 a share. At a time, they were looking a little sad because the rest of us could have bought it cheaper than those close to Joffe would have bought at. However, it’s moved up. In December, we said that in this webinar that the money that would have been allocated to Steinhoff would, in future, go into Long4Life, and now we’ve formally included it in the portfolio with this restructuring. If you buy or whatever you put into EasyEquities, into the BizNews SA Champions Portfolio now, 8% of that will go into Long4Life automatically, as part of your purchase.
There’s the portfolio as it stands. As you can see, we are now with three newbies, Ashburton MidCap ETF – 15%, Wilson Bayly – 8%, Long4Life – 8% so that’s 31% of the portfolio. The readjustment has been to take account of the changes the watershed that happened at the ANC elective conference, and nothing subsequent to that has made us feel anything less than terribly excited about SA’s opportunities. Of course, there are challenges, of course, there’s quite a mountain to climb for Cyril Ramaphosa and his team but seeing the reinstatement of Nhlanhla Nene as Finance Minister – a very brave, a very conservative and responsible Finance Minister, who was fired because the previous president was trying to grind through a nuclear deal and advised loans to some of the SOEs.
The return of Pravin Gordhan to the Cabinet to run the most difficult portfolio of them all – the State Enterprises Portfolio, where his job will be to get them back on track. Not only through attacking those who have corrupted those organisations but by giving them the kind of role that this Government wants in its developmental state or the development state approach. Whether you agree with that or not is kind of irrelevant for the moment because we are so far behind the black ball that we now need to at least get out of that snookered state, in the SA economy, to start growing again.
What Ramaphosa has done with his reshuffle, remember, it’s not an entirely new Cabinet because the former president resigned – it wasn’t a whole new change. But he’s managed to keep everybody comfortable. His SONA was inspiring. Certainly, what we heard in Davos was incredibly encouraging, when you see the rest of the worlds’ attitude towards Ramaphosa or a Ramaphosa-led SA. So the country needs economic growth to be kickstarted again. It has the benefit of very strong companies, which was sitting on R1trn that they can unlock. Once they start unlocking those and investing more into the future then the international community will follow suite.
There are three things that Ramaphosa is focussing on, he told us in Davos, and he hasn’t deviated from this plan. That is certainty of legislation in the first instance. That he’s attacking corruption in the second and fixing SOEs in the third. He’s put his trump card, if you like, Pravin Gordhan to do the SOEs. He’s now put Bheki Cele as the Head of Police, and very soon we’re likely to see a new Head of the NPA, to go after the corrupt and an example of greater certainty in the legislation has shown by his appointment of Gwede Mantashe, into the very controversial previously mining portfolio. The miners are delighted. They know Mantashe. He comes from that area. He was formally with the National Union of Mineworkers. He knows how mines work, and he will be able to provide a greater sense to the legislation that has actually stopped investment into SA.
When I spoke with Roger Baxter from the Chamber of Mines about this he said that, a poll amongst his members showed that they were prepared to inject 80% more into capital expenditure if they have the right person running the mining portfolio. The appointment of Mantashe, the way it’s been welcomed by the mining industry will say, that that door has now been opened.
The other significant appointment was in the energy sector, where Jeff Radebe, who’s a veteran politician and a man who understands the business world as well. He has been given that responsibility. You might have forgotten but it wasn’t long ago that Royal Dutch Shell was prepared to spend hundreds of millions Rands prospecting for shale gas in the Karoo, but it turned off the taps entirely because of legislation that was wonky. Similarly, Total was spending lots of money and drilling for oil off the east-coast of SA, and they also switched off the spending there. Now, with more certainty in the energy sector for starters you could see that coming to the fore. SA has, depending on who you believe or which research you believe, between the fourth and the eighth largest shale gas reserves in the world, and the shale gas has transformed the American industrial complex. It could do the same for SA, and a whole lot more.
The potential of this country has always been there. It just needed the right management to unlock it. In Cyril Ramaphosa, a man who was instrumental and very involved in the National Development Plan, you have the right person. I am very confident about the way that the economy can go into the future, hence the changes to our portfolio.
Just a question on a company not in the portfolio. Neil wants to know your thoughts on Capitec. Obviously, it was one very much in the news with regards to Viceroy, etc.?
Neil, Capitec have managed the communications of the Viceroy attack extremely well. It is a good company. It’s well managed. The people, I’ve met them, they have integrity. They have the technology that gives them management information systems that enables them to produce their annual results within a month of their year-end. If there’s any surprises in Capitec, they would know all about it. On this one, whereas Viceroy were absolutely right when it came to Steinhoff. The stuff that’s coming out of Steinhoff is staggeringly concerning. But as far as Capitec is concerned – they have really engaged well. Remember, they were rated the best bank in the world by Michael Lafferty not long ago. In fact, for 2017, and Michael is the former banking and accounting correspondent of the Financial Times of London so he’s done his work on that one. He runs an operation that just looks at retail banks throughout the world.
Capitec is an organisation that has however, perhaps from a stock perspective, from a valuation perspective overrun itself, and I’ve consistently said this. At 6, 7, or even 8 times price to book – you are really pricing this not for perfection but for utopia, when you’ve got FirstRand at 3.5 times price to book, that’s my concern. Can Capitec grow at double the rate of FirstRand indefinitely? I doubt it. It’s got to the stage where even now the 20% plus growth rates are now coming down to below 20% in Capitec’s case, and that would be my concern with them. Not that there’s anything crooked that’s going on there. The Reserve Bank has also come out to say that it supports what Capitec has done, and it’s not the first time there’s been an attack on Capitec.
You might remember the ratings agencies at some point, one of the rating agencies had a full go at Capitec and the Reserve Bank too, came out at that stage. But are the shares cheap or offering huge value? No, I wouldn’t see that. I would see the stock as being extremely fully priced. If you own them and bought them a long time ago, there’s no reason to get concerned now, but if you’re thinking of buying the stock at this level – surely there’s better opportunities in the banking sector elsewhere?
Just before we go. Paresh wants to know your thoughts on the education sector, with the likes of Curro and AdvTech etc.?
Paresh, that’s just got to be one of the huge opportunities into the future. I was talking to Ann Bernstein, who is with CDE, an organisation or a think-tank, if you like, in SA that influences thinking and does a lot of research, and then she shares that with the business sector. She was telling me that private schooling is booming in areas where we wouldn’t have thought of. For instance, in the old townships, where many private schools have been created. Where there’s a need, where Government is not providing, and education is an obvious area with the stranglehold that SADTU has on it with the way that some of the jobs within education are actually bought and sold within the Union – it’s a mess. Cyril is going to take a while to get his hands around to fix. But while that is continuing, or the parents of children are going to be looking for alternatives. The boom of private education in areas that you wouldn’t have anticipated that would exist tells you that in the more formal sector where an AdvTech or a Curro play – the opportunities are as big as ever and certainly, if you have them in your portfolio – there’s no reason to reconsider. I know that Curro has made some pretty aggressive announcements, post-ANC elective conference. It’s reaffirmed its confidence in SA, and rightly so, I believe.
Excellent Alec. I think that’s time-up on our side, and thanks for answering those questions.
It is indeed. We like to keep these presentations to exactly an hour and I see we’ve got 14 seconds left so it’s been a real privilege to be with you today. Those of you who are not Premium Subscribers – you can join us next month, if you sign up, you’ve got a 30-day free trial that you can go for. Those of you who are Premium Subscribers, I look forward to being in your company again. We will next month be reverting back to mid-month for the SA Champions and at the end of the month for the Global Portfolio. So we’ll get back to normal again. We changed these a little, given my trip to SA over the last 3 weeks, but a very valuable exercise that was indeed. When we look back in time, I’m sure historians are going to say that that was a three-week period that will go down in history as the time that the country changed for the better. Thanks for being with us. I look forward to being in your company again. From me, cheerio.
