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By Garreth Montano
The Corion Prime Concentrated Equity Fund (the Fund) is markedly different from a traditional equity fund of funds or from any other equity fund for that matter. As opposed to investing in the funds of other managers, this fund allocates capital to the best ideas proposed to Corion by selected managers.
By investing in these best ideas, the Fund provides investors with exposure to high conviction investment calls from different managers with different approaches and backgrounds.
This week we are discussing Integral Asset Management’s (one of our selected managers) top performing idea, the rational for such and why the trade is expected to continue to add value.
The purchase of Thungela Resources Limited (Thungela), a coal mining company, was proposed by Integral Asset Management (Integral) in March 2022. Due to the impact on climate change, coal has been an underinvested commodity. Although the concerns regarding global warming are appreciated and understood, the social impact of job creation and the positive impact on the fiscal revenue for emerging markets is also a major consideration.
Within weeks of the Russian invasion of Ukraine, Integral recognised in Thungela’s December 2021 Financial Results that earnings per share had increased from a loss of R5.31 to a profit of R60.87. This was driven by an increase in the coal price in the reporting period from $75 per ton to $130 per ton. Notably, due to the supply shock caused by Russia’s invasion, the coal price was then trading at more than $250 per ton and Thungela had R6bn cash in the bank.
Over the next month, Integral purchased Thungela for the Fund at an average of R165 per share, with the underpin of cash on hand, potential for significant dividends and prospects for a coal price that would benefit from geopolitical risk.
In June, Integral upgraded their earnings and dividend forecasts for Thungela based on a coal price of $250 per ton * and an exchange rate of R15.50 to the US Dollar. These assumptions meant that shareholders could potentially earn back their original investment via gross dividends in eighteen months. Their confidence lay in the fossil-fuel squeeze, exacerbated by Russian gas cuts and OPEC not likely to flood the market with oil.
Thungela have just reported earnings for the six months ending June 2022. They have declared an interim dividend of R60 for the six months. The share is trading close to R300 per share, an 80% return since putting on the trade.
The obvious question beckons, at these levels is Integral now ready to take profits and sell? The short answer is no. With coal’s further gains and fundamentals for the coal market still looking good, they believe Thungela continues to be very attractive. If earnings remain where they are (the coal price can fall by 30% from current levels to be similar to Integral’s forecasts), the share would still be trading at a forward PE of 1.7 times. More importantly a further dividend of R120 – R138 could be expected, implying a dividend yield in the region of 55%. These metrics are exceptionally compelling, and Integral continues to believe in significant upside for Thungela, despite the stellar performance in 2022.
The Corion Concentrated Equity Fund allows for these high conviction calls to have the appropriate weighting in the portfolio and ensures investors benefit when our selected managers “beat the drum” on companies they believe will deliver outsized returns for clients.
*As can be seen in the below chart, the coal price is trading well above the $250 used by Integral in valuations, creating a buffer for any market correction.
- Fleeing the Flock
- Thungela Shares – Where to from here?
- Thungela’s wild ride as Transnet woes continue unabated
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