Matthew Warren’s advice on playing Tuesday’s new listing Anchor Capital
Investors in what until Tuesday is the JSE's only listed pure asset management company, Coronation Fund Managers, have had a wonderful ride. The share price is up almost 20-fold since 2009. As a result, there's plenty of excitement around the arrival of next week's debutant Anchor Capital, a mini Coronation. Its founder, Peter Armitage, has a fine investment market pedigree and with backing from some super-rich individuals, Anchor is being tipped for big things. But on CNBC Africa's Power Lunch today, Matthew Warren of First Avenue was circumspect. As an industry insider, his views should be taken seriously. Also, those joining the scramble for Anchor shares should remember that before its sensational recent run, Coronation's price did little for six long years. Anchor's pre-listing private placing raised R60m and was priced to provide stags with a healthy profit. But listening to Warren, the smart call for those who didn't participate would be to wait for the hype to blow over before buying. – AH
ALEC HOGG: Let's have a look at how the market traded today. Matthew Warren, Partner and Head of Financial and Retailers at First Avenue is with us in the studio. Do you think they're interested in this in (your home town) Chicago? I know 'The Good Wife' was set in Chicago, wasn't it?
MATTHEW WARREN: Yes, sure enough. It reminds me a lot of the O.J. trial in terms of the public interest and media. Some folks in the States are watching the proceedings as they unfold.
ALEC HOGG: But we move on. Lots of people have made a lot of money, particularly the legal fraternity. While all this was going on though, it was interesting to see the trade yesterday on the JSE a little bit muted while Judge Masipa was busy with her judgment. It's the same thing this morning, but probably back to normal this afternoon.
MATTHEW WARREN: Yes, it's certainly drawn a lot of attention around the country – many eyes on those stories, I think.
ALEC HOGG: And something that's quite an interesting development is that Anchor Capital, Peter Armitage's business fully subscribed the rights issue, raised the 60-million, lists on the 16th of September next week. It could be quite an interesting investment prospect, don't you think?
MATTHEW WARREN: I haven't looked at it. I saw an estimate of the market cap, which would put it in a relatively small cap space on the markets. Asset managements…if you can build a good franchise, it tends to be scalable. It could bring good margins and good return on capital as long as once you get to that point, the trick is obviously to maintain performance. I think it's always tough as an equity analyst looking at another asset management firm. They're working off some different philosophy process, maybe multiple processes and asset classes. I think it's difficult to get a read on performance going forward. The likes of Morningstar does it on a global basis and they tend to look historically – maybe makes some comments about the current and the future – but it's difficult as an outsider, I think.
ALEC HOGG: If you could have bought into Coronation when it first listed (and I'm sure many private investors were thinking the same way – it became a license to print money once it hit scale), do you think that's a prospect that could happen with Anchor?
MATTHEW WARREN: I think with Allan Gray and Coronation, you had a situation that was ripe for a new entrant that was not tied to a bank and not tied to an insurance company. I think that very unique situation is perhaps gone now, so for new asset managers on the scene it's really about having a philosophy in process and the actual ability and skills to get there.
ALEC HOGG: Well, they don't lack ambition.
MATTHEW WARREN: It's tough for market now.
ALEC HOGG: Anchor certainly don't lack ambition, so it will be interesting to follow their story. Another small company that doesn't lack ambition is Taste Holdings. They've brought out a trading statement to say that the numbers are going to be poor for the six months to the end of June, but this is primarily because of the deal they've done with Domino's Pizza.
MATTHEW WARREN: I haven't had a chance to look at those, but if you look at the space in general between Famous Brands and their expansion into a touch consumer environment, McDonalds has been here for a long time. Burger King's making a big push with Grand Parade and you see a lot of traffic being diverted to Burger King, so you can see new entrants being successful. The whole category's growing, so it's relatively underpenetrated compared to the United States or Europe – the amount of fast food being consumed – but I think in this business in particular, it's very important to be one of the top tier brands. If the whole space is growing, you might do okay as a second or third tier, but once it becomes more competitive/more mature down the road, it's really the top guys who are going to win out, in my opinion.
ALEC HOGG: And that could be the global brands.
MATTHEW WARREN: It could be. I think they're doing well and I think Famous Brands has some very solid positions across different formats as well.
ALEC HOGG: Do you know Taste well? Do you know the business?
MATTHEW WARREN: I don't. I looked at it – just briefly.
ALEC HOGG: You do know Sibanye, I hope. I know it's in mining, so it's a little bit out of your sweet spot, but that's an incredible success story – more than double the share price in the past year – but now they're going through the tough times. Now, they're looking to lay off people.
MATTHEW WARREN: Yes, I stand corrected, but I believe they're a relatively high-cost mine here in South Africa. What you end up with there is that you're gearing to the gold price, which hasn't really been doing a lot lately. But the Rand certainly has helped in the last couple of years. If you look at gold mining in South Africa as a whole, you have to have a weakening Rand. Maybe that will happen, but the Rand bails you out from your employment costs, which are going up in double digits if you don't have either the Rand of gold price to help you out, you're looking at a tough spot in a relatively short-term horizon. The costs will keep creeping and if the revenue isn't going with it, you'll run into tough times.
ALEC HOGG: Did you follow the Anglogold announcement earlier this week where they're going to be splitting off their South African assets from the rest of the world assets? Some people are saying you could have another Sibanye opportunity here.
MATTHEW WARREN: Investments banks love these types of deals – creating activity in a; slow market – but you can make the argument that cost capital or risk that might be higher in South African assets. I think that's the argument to split the two and perhaps get a higher rating on international assets. If that works in the marketplace, you might receive that benefit. Global investors are wary of the South African landscape, especially if you're not in the very low part of the cost curve with ample room to protect you from commodity price to the currency.
ALEC HOGG: Okay, onto your sweet spot now. The whole Telkom sector had another interesting development this week. The ICASA ruling on the termination rates: the analyst that we did have in the studio earlier, said that it is good news for MTN and Vodacom. It could have been a lot worse.
MATTHEW WARREN: Yes, I think that's right. They're continuing to cut the termination rates, but the proposed asymmetry was reduced in this version and asymmetry is what gives Cell C the firepower to be more aggressive in the competition. Its Cell C that really, stepped up the competition in this market with the help of lower MTR's, so I think this takes a bit of the wind out of their sails. The equity isn't publicly traded so you don't get a lot of information on the financials, but a lot of things you see indicates that there's quite a bit of leverage there. There's a shareholder spin (I guess you can call it very patient to this stage)…
ALEC HOGG: You guess… I might have walked away a long time ago.
MATTHEW WARREN: I think they need to get to profitability, don't they, just to deliver, show some kind of return, and asymmetry – the bigger it is…that would have helped them that much more, to gain traction, gain market share, get the bigger scale, and bigger profits. I think it's going to be tougher now.
ALEC HOGG: They've been in the country since '99 (Cell C). I don't think they've turned a profit yet.
MATTHEW WARREN: Well, the crazy thing about it is if you look at what the Regulator did… Just before they entered, they hiked up the interconnect fees dramatically to very high levels on a global comparison. It's the opposite of what a Regulator would want to do to increase competition, so whatever the reason for that was, it made their entry into the market extremely difficult.
ALEC HOGG: But that's very interesting Matthew, because that was also the time that MTN went into Nigeria – at exactly, the same time. Perhaps, had MTN not had the benefit of increased termination rates at home, they might have been a little bit more concerned about going into Nigeria.
MATTHEW WARREN: MTN has become a national champion in South Africa. They've sped across the African continent and built quite a large business.
ALEC HOGG: The Regulator helped them – however you want to look at it.
MATTHEW WARREN: Certainly on a cash flow basis and fending off competition: that's what it looks like when you look at it retrospectively.