In a captivating episode of Fantasy Fund Manager, BizNews’ Stuart Lowman speaks with Garreth Montana of Corion Capital and Kanyane Matlou from Terebinth Capital. The duo discuss the intriguing trend of company delistings, highlighting the reasons behind firms opting to delist. Matlou provides a detailed insight into his day-to-day tasks as a senior portfolio manager, sharing the nuances of the listed property market. They delve into the changing dynamics of the South African property sector post-COVID, emphasising regional disparities and gearing comparisons. As the Fantasy Fund competition nears its end, both guests share gaming strategies and underscore the importance of long-term vision over short-term market noise. Remember, each dawn of Monday is your chance to pitch your winning stocks. With enticing prizes awaiting, the game is on. Rally your comrades and head to www.fantasyfundmanager.co.za to register—big thanks to our platinum sponsors, Sharenet, Terebinth Capital, ClucasGray Asset Management, and MoneyBetter. And mark your calendars: Subscribe now to our podcast to keep up with every episode.
Stuart Lowman: Welcome to the Fantasy Fund Manager podcast. Today, we have Garreth Montana from Corion Capital and Kanyane Matlou, senior portfolio manager: Listed property at Terebinth Capital. Garreth, Textainer has been in the news, especially after announcing its intention to delist. Over the past decade, we’ve observed a 28% drop in listings on the JSE. This isn’t solely a South African trend. What’s your perspective on this development?
Garreth Montana: Indeed, Stuart. We’ve touched upon this topic a few times, particularly concerning the valuations of SA Inc. stocks. To clarify for our listeners, by “SA Inc.,” we’re referring to companies that primarily operate within the South African borders. These valuations have faced challenges for a while. There comes a moment when shares become so undervalued that the benefits of remaining listed diminish. Listing has its burdens – regulatory oversight, costs, and more. If these don’t translate to a share price boost, we might see more firms opting to delist.
Stuart Lowman: Kanyane, it’s your first time here. Could you briefly describe a typical day for you to our listeners?
Kanyane Matlou: Certainly, Stuart. At Terebinth Capital, I start about two hours before the local equity market opens. This allows me to review our property positions, keep tabs on global market movements, and stay updated with international and local news. I meticulously go through major financial publications and review announcements released overnight. During the results season, I delve deep into company financials, participate in results webinars, and update our investment strategies for the stocks we monitor. Days can get hectic, but I’m continuously monitoring Bloomberg screens and, when necessary, executing trades to capitalize on significant market shifts. In short, that’s a day for me.
Stuart Lowman: How’s your experience been with Fantasy Fund Manager?
Kanyane Matlou: It’s been captivating and quite entertaining in the office. We have an internal leaderboard, so seeing the weekly standings is intriguing. It’s always a humbling experience when investment pros like us get outperformed by colleagues from other departments. It’s quite the competition within Terebinth.
Stuart Lowman: Does Corion Capital share a similar enthusiasm?
Garreth Montana: We have several individuals topping leaderboards, and they don’t hesitate to flaunt it. It can be a bit hard to swallow at times!
Stuart Lowman: Shifting back to delisting, is the trend also evident in the listed property space?
Kanyane Matlou: Not as pronounced as in the broader market. Half a decade ago, property listings were frequent. As the sector became less popular, listings dwindled. Delisting, on the other hand, isn’t about companies going private. Instead, we see companies from within the sector making bids for others. A recent example is Liberty 2 Degrees; Liberty, a part of the Standard Bank Group, has made an offer. But such instances aren’t as rampant. And echoing Garreth’s sentiments, the current environment questions the advantages of remaining listed.
Garreth Montana: Kanyane, it’s noteworthy to mention the post-COVID era. The property sector has been under scrutiny, with regional disparities evident. There’s a certain pessimism surrounding properties in Gauteng compared to the Western Cape. As an industry expert, how do you perceive the South African property sector? Do you believe there’s a massive revaluation on the horizon? And how do our listed property companies compare gearing to their international counterparts?
Kanyane Matlou: Regarding gearing, the average LTV (loan-to-value) ratio in South Africa is roughly 36 to 38 percent. We’re broadly in line compared to markets like Australia and the UK. But we’re lower than continental Europe, where property companies have higher leverage. In comparison to the US, they have slightly better balance sheets.
However, it’s not just about the debt-to-asset ratio; it’s crucial to consider how often your operating income covers your interest expense, especially in this climate of rising interest rates. In South Africa, the interest cover ratio is between two and a half to three times, which means operating earnings can cover the annual interest bill 2.5 to 3 times. So, from a gearing perspective, I believe our local companies are well-positioned.
Regarding valuations since the COVID outbreak, we’ve noticed a recovery in the property sector. Companies are showing improved operating numbers, from vacancies to rental growth. Yet, stringent monetary policies have affected the sector’s sentiment in recent months. While risk-free rates, like the US 10-year or our local 10-year government bonds, are high, viewing it from a longer-term perspective is essential. Over three to five years, the current property stock valuations appear attractive, considering potential income growth.
Stuart Lowman: Kanyane, a recent census report suggested Cape Town’s growth is outpacing Johannesburg. With the shifts in work dynamics post-COVID, are you observing any impact on companies operating in these cities? For example, the Western Cape-specific Reit, Spear?
Kanyane Matlou: Yes, over the past year or so, the Western Cape’s economy has outperformed Gauteng’s, and even KwaZulu-Natal has shown growth. Companies like GrowthPoint, which has a vast portfolio spread across regions, have observed that their Western Cape operations, especially in the office market, are significantly outpacing their Gauteng operations. The Western Cape’s robust performance emphasises the property mantra of “location, location, location.” REITs with more significant exposure to the Western Cape consistently present better metrics than those in Gauteng.
Stuart Lowman: When evaluating specific property counters, do you see distinct value in certain counters or potential pitfalls in others?
Kanyane Matlou: Across the sector, Equites, a logistics specialist, stands out. They’ve benefited from macro trends like the growth of e-commerce and supply chain optimisation. However, their earnings have been rebased due to some adjustments in their UK portfolio. This rebase presents an opportunity for organic growth moving forward. Regarding potential pitfalls, it’s essential to be discerning about the resilience and visibility of earnings, especially in the current economic climate.
Stuart Lowman: Given the recent census trends, would you lean towards property with exposure in the Western Cape or offshore?
Kanyane Matlou: In the SA space, few equities stand out individually. There are specialised ones where you can obtain almost 100% exposure to a single sector. For instance, Spear offers 100% exposure to the Western Cape, while Stor-Age provides 100% exposure to self-storage properties. However, generally in this sector, you encounter diversified exposure across various subsectors such as office, retail, and industrial. Consequently, it’s challenging to allocate based on these themes. On the offshore front, roughly 50% of the entire property index is situated offshore, spread across regions like the UK, Central and Eastern Europe, and Australia, among others. A significant offshore exposure also exists within the SA property sector.
What’s crucial is understanding the geographical differences in economic growth. Central and Eastern Europe have performed well recently, as evidenced by companies like Nepi Rockcastle’s results. In contrast, Australia, influenced by its interest rate environment, has faced challenges, impacting companies like Growthpoint Properties due to its Australian subsidiary exposure. Essentially, most of these companies have diversified exposure; it’s about understanding the specifics of this exposure. Allocating based on a macro theme or a top-level perspective is not always feasible.
Stuart Lowman: Garreth, do you have any property stocks in the Fantasy Fund Manager?
Garreth Montano: I don’t. However, from Corion’s perspective, we’ve been underweight in property for a while but have increased our property allocation in the past 3-6 months. Recalling a few years ago, the prevailing sentiment was “TINA” (There Is No Alternative), which pushed everyone towards equities. But today’s discussion with Kanyane reiterates the vast tools available to us. While market sentiment can sometimes be negative, we now have instruments like REITs and bonds. Recent market shifts and revaluations offer opportunities to delve into new sectors, enhancing portfolio diversification and potential returns. Despite downturns, it’s possible to structure a defensive portfolio focusing on undervalued property shares, especially with yields exceeding 10% in a 6% inflation environment. This strategy provides a real yield opportunity, along with capital growth potential.
Stuart Lowman: As we approach the end of the Fantasy Fund competition, any final tips for our listeners?
Garreth Montano: As the end nears, it becomes a gamble. My choice was Pick n Pay, which, as known, has done wonders (saracastly). Similarly, Andrew Vintcent had the same sentiment. When it comes to a week, it’s mostly about luck. My advice? Choose something bold if you’re aiming to move up the leaderboard swiftly.
Stuart Lowman: Kanyane, any gaming tip for the concluding week?
Kanyane Matlou: A week is a tight frame to strategise for. My general advice leans towards long-term plays. In the short term, market noise is abundant, which you should try to overlook and focus on the eventual outcomes. However, in the final week, it boils down to luck. Adventurous participants might want to take bold bets and see where they land.
Stuart Lowman: Thanks to both of you for sharing your insights. Special thanks to our guests, Garreth Montana from Corion Capital and Terebinth Capital’s Kanyane Matlou. Our gratitude extends to our sponsors: Sharenet, Terebinth Capital, MoneyBetter, and ClucasGray Asset Management. To our listeners, don’t forget to subscribe to our podcast and make your picks by 9 am on Monday. From me, Stuart Lowman, until next time, cheerio.
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