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Well-known as one of South Africa’s best fund managers, Piet Viljoen joined the BizNews Power Hour to discuss what’s caught his eye on the markets. From Sanlam to Old Mutual, editor-at-large Jackie Cameron picks Viljoen’s brain, gaining his insights into various investment opportunities. He weighs in on coal investing as well as global mobility platform, Karooooo. – Jarryd Neves
Piet Viljoen on the Old Mutual unbundling:
I think the most important piece of news is probably Old Mutual unbundling a further portion of the stake in Nedbank – I think they still own around 19%. They’re going to unbundle about two thirds of that to their shareholders, which I think is quite interesting.
I think Old Mutual is one of those shares on the JSE which, as a business, has underperformed dramatically since it listed more than 20 years ago. It went off to London, acquired all sorts of business internationally – as a lot of South African businesses do – wrote off a lot of money, lost a lot of money and wasted a lot of money. They came back to South Africa with their tail between their legs, and the market is now discounting them.
In my opinion, it is probably one of the cheaper shares in the market right now. Any sort of news that indicates that they are busy extracting value and doing the right things in terms of capital allocation, I think, you’ll see the sort of uplift. It’s happened [at] Old Mutual and happens in many other shares where management takes a bit between their teeth and actually does the right thing in terms of capital allocation. It’s as a result of the undervalued situation we find ourselves in with many companies.
On why he thinks Old Mutual will be able to unlock value for shareholders:
Old Mutual is doing the right thing – it’s unbundling a non-core asset to its shareholders. Where it owned Nedbank on its own balance sheet is just passing it on to shareholders – who are in exactly the same position, except they now have more flexibility [and] more optionality. They can either sell the Nedbank shares, which they received from Old Mutual or keep them. Old Mutual itself is a focused life insurance business. What Naspers and Prosus are doing is just getting more complicated and intertwined. I’m not sure that what they’re trying to do is unlock value.
On Sanlam vs Old Mutual:
If you go back, they both listed – I think – within a year of each other, in the late 90s/early 2000s – and they took a completely different paths. Sanlam stayed in South Africa [and] built a quality, diversified financial services business. It invested in value creating activities in South Africa, whereas Old Mutual went offshore, listed in London, bought all these other fancy businesses and wrote it all off again. Sanlam has by far outperformed Old Mutual. In fact, I think the Old Mutual share price, currently – and I’m speaking and correction here – lower or not far off the price at which it listed 23 years ago.
Sanlam’s share price is probably seven times higher than when it listed at the same time, or within a year of Old Mutual – which shows you the massive value that’s been created by Sanlam and its good capital allocation and management team. It’s definitely a share that investors should be aware of and should be looking at. Whether the price-to-value ratio for Sanlam makes sense right now; it’s not clear to me right now, but it’s definitely a far superior business to Old Mutual.
On coal prices and investing:
There’s two things here and the first is – should we invest in them at all? My answer to that is, yes, we should. It is far better for coal assets to be under the ownership and stewardship of a responsible and listed public company – which has to report to its shareholders, directors and to the investment public at large – as to what it’s doing with this asset, than it is for the market to force these guys. To sell them to unlisted private businesses who don’t operate in the public sphere and have no responsibility towards the public sphere.
I think you’ll get far worse outcomes if that happens. That’s point number one. I think these companies should be supported by investors and investors then should support management in transitioning the business to a cleaner operating model at the time. I think that’s a good thing. So, yes, I think one should invest in these businesses, per se. Secondly, should we invest right now? Well, right now they look extremely cheap – because there is such a focus on ESG – by all sorts of headline investors, who are saying they don’t want to touch anything that’s dirty.
There’s a lot of negative sentiment around companies like coal mining businesses and other ‘dirty’ energy businesses, if you can put it that way, to the extent where the current share price by far undervalues its assets – even on a view which says that within 10 years we will have migrated off coal as a source of energy – which I find unlikely. Even if you take that view, the current share price of this business by far undervalue that situation. I think they they make a good investment opportunity right now as well, in terms of price-to-value relationship.
I think, at the moment, it is probably on the expensive side of things. I’m not intimately familiar with the business and I haven’t analysed it to any great detail. But for me, what stands out here is a business that [was] started in South Africa, by South Africans and built up in South Africa. It was always valued at quite low levels when it was a South African listed company. If you recall, it was trading between, say, R10 and R20 for quite a long time. Then it listed on the Nasdaq and now it’s trading at R50.
It went up a multiple of five times, just through changing its domicile. Same business, just a different domicile – a different set of investors looking at it through a different set of eyes. I think South Africans tend to be too negative on our local businesses and as a result, our local businesses are undervalued. If it takes a simple change in domicile to extract the value, that just highlights that situation. I think there are many still good opportunities for investors in South Africa, to invest in really good businesses run by good business people. They’re just unrecognised because they are listed and domiciled in South Africa. I think the whole Karooooo thing just highlights that sort of opportunity that I think still exists here.
On the JSE:
There is a large subset of the JSE which I’m quite optimistic on – smaller cap, mid-sized companies run by entrepreneurial management, which are undervalued because the large fund managers are just not investing in these companies. Most investors just want to invest offshore. There’s a lot of unrecognised value in that part of the market. Broadly speaking, I remain optimistic on the outlook for equities generally.
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