Lockdown exposes SA’s mom and pop shops – Piet Viljoen

Piet Viljoen returned to the BizNews Power Hour as co-host today. The Counterpoint value fund manager told BizNews two weeks ago that ‘investing in South African residential property doesn’t make sense’. Viljoen elaborated on that perspective today, stating that ‘equity is a much better asset class to own for building wealth over the long term than property.’ When asked about stocks which have caught his eye lately, Viljoen made an insightful analogy between a portfolio and twigs; ‘Each individual stock is a twig, quite a brittle, easy to break twig – but if you bundle them together and tie them together, it creates quite a strong element.’ Another topic of discussion was lockdown, particularly with reference to the restaurant industry. While he believes that listed companies will likely survive this lockdown, he fears for the ‘mom and pop shops.’ – Nadya Swart

Piet Viljoen on his assertion that investing in residential property in South Africa doesn’t make sense:

Look, I mean, I’ve looked it up on spreadsheets. Being a financial analyst, that’s what I do. And it just doesn’t make sense. It can make sense for two reasons. One is emotional security. One understands that some people find value in owning a home and the security that it offers you – and that’s an intangible value, which you can’t quantify. Some people have that, so there’s that.

The other thing is that you can leverage. It’s one of the very few assets banks are willing to lend you money against. However, that only works if the value of the asset goes up over time. And that’s not always the case, especially in South Africa, with a lot of our municipalities going backwards, pulling down property prices with them. That could be a problem. 

On whether your money is better off left in the bank:

Well, no, I don’t think it’s better left in the bank. I think one needs to own assets. I just think there are better assets to own than homes or houses or property. I think there are many, many companies listed on the JSE and internationally that grow despite the economic environment in South Africa, and because of the economic environment offshore. [There are] paid dividends. It’s not like you have to phone your tenant and say, ‘You’re three days late with the rent, please pay me.’ You get a dividend check every six months – or three months as the case may be in the US – and it just pops into your bank account. And it’s clean and easy and simple.

Yes, sometimes companies get dividends because they go through a tough time, but that’s just like losing a tenant in a house who moves out and it takes you a year to replace the tenant. That’s the same sort of thing. So I actually think equity is a much better asset class to own over the long term than property. It’s just for building wealth. 

On Sabvest’s financial results and the company’s progress:

If you look at the track record established and, especially, Christopher Seabrooke‘s track record in managing the assets of Sabvest – he has by far outperformed the all share index in terms of the returns being generated in terms of the growth in NAV per share. And you are able to still purchase this at roughly a 35% discount NAV.

So, the assets are being discounted and these are good assets that have shown the ability to grow at high rates over time. So I think it’s a win win and remains so, even though the share price is up by, I don’t know, probably 20, 25% since we spoke six months ago. But I think there’s a lot more to come over the next five to 10 years from Chris and Sabvest.

On what’s caught his eye lately:

Well, another one of the stocks that I spoke about – those twigs – when I put the portfolio together.. Each individual stock is a twig, quite a brittle, easy to break twig – but if you bundle them together and tie them together, it creates quite a strong element. And that’s how I look at a portfolio. So we can talk about specific stocks, but I might be wrong or right on any specific one. But altogether they make a strong portfolio.

Another one we did speak about was CAXTON, which was trading at below net current asset value six months ago. In other words, you could liquidate the whole business, pay off all the liabilities, just using their current assets, ignoring their long-term assets and still have money left over. It was ridiculously cheap. Since then, the share price has gone up and it looks like they are making a play for Mpact – the packaging recycler here in South Africa. 

On Mpact:

I think it’s a good business. I think a large line of business is packaging recycling, and I think recycling is the way to go. If you walk into Woolies or Shoprite these days, you know, you buy anything there – it’s packaged to the hilt. There’s lots of packaging happening there. So there’s lots of recycling to happen as well. So I think it’s a good business and it could have growth prospects. 

On Tongaat Hulett’s good performance:

I think it’s a reassessment. I think a lot of these businesses like Tongaat – that got into trouble -their share prices went to very low levels, extremely low levels – where there was antagonism, where there was hatred, where there was dislike, distrust. All those things baked into the share price. And then, as they start recovering, as they get management in who starts right sizing things, who starts getting the train back on the tracks – their share price starts acknowledging those efforts of management and possibly starts accruing or according more value to the assets that are on the books already. So that’s a process that’s happened with many companies like Tongaat.

As you know, South Africa has had quite a few scandals over the past few years. Scandals always tend to come out in tough times, and we’ve been going through tough economic times in the past three or four years. So we’ve had quite a few scandals and many of those shares have rebounded quite sharply from their low levels. Tongaat is one of them. So there’s probably a lot of stuff going on there that we don’t know. A lot of restructuring happening, a lot of repositioning happening, a lot of refinancing happening. But when the results come out shortly, then we’ll know a lot more. And I think they have postponed the release of the results, most likely to do with IFRS and adjustments. But I wouldn’t worry too much about that. 

On whether there are any companies to worry about that won’t survive the current lockdown:

I do think [that] if you went into this with a lot of debt, if you didn’t use the last six to nine months to get your financial house in order and you went into this with a lot of debt, it could tip you over. It’s quite possible. I wouldn’t want to speculate on Sun International – whether that will happen to them or not. I know they have quite a heavy debt load. But the other thing one has to say is that these businesses, like Sun International, like Tsogo, like City Lodge – they’ve also learned how to manage their businesses with a much lower cost base and in line with government regulations and maintain their business.

So, they’ve learned from the previous lockdowns. This lockdown, hopefully, is only two weeks. I think most businesses should be able to see through it. It’s tough. It pushes out what you wanted to do by another two weeks or a month or however long it takes. It’s hard, but I think most businesses will have learned from previous lockdowns and are facing this one with a bit more confidence. 

On the tough position that the restaurant industry is facing with another lockdown:

I think there are very few listed companies that will be exposed. Spur would be an obvious example, but there’s a lot of takeaways as well. They’re financially strong. They’ll be able to see through the two week period. Famous Brands has mostly takeaways, which won’t really be that affected by this. And so they will be able to see it through. So I think they’re OK. It’s the mom and pop shops that are the main problem. It’s the neighbourhood shop, the mom and pop shop, that enterprise that has two or three people working there – those are the ones that I feel very sorry for, that are really facing some tough times.

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