Un­sure mar­ket holds back

Con­duit’s pur­chase of two busi­nesses seems to have made in­vestors cau­tious about the com­pany

Financial Mail - - MONEY&INVESTING - Marc Hasen­fuss hasen­fussm@fm.co.za


Look­ing fur­ther ahead, Bain pre­dicts that the global lux­ury goods mar­ket has the po­ten­tial to achieve sales of €290bn in 2020.

The big win­ner in the im­proved global lux­ury goods mar­ket seems set to be jew­ellery, with con­sult­ing firm Mckin­sey pre­dict­ing sales growth of 5%-6%/year in the five years to 2020.

Branded jew­ellery, says Mckin­sey, will lead the field, with its mar­ket share grow­ing from 20% in 2016 to as high as 40% by 2020.

This should be a big plus for Richemont. “Richemont’s jew­ellery brands have a strong her­itage,” says Van Cuyck, who points to the likes of its Cartier brand, now in its 170th year.

Har­tard is also pos­i­tive. “I see Richemont’s jew­ellery mar­gins ris­ing more than the mar­ket ex­pects,” she says.

Richemont en­ters the lux­ury goods mar­ket’s up­turn from a hugely strong po­si­tion, with its bal­ance sheet sport­ing cash of €4.45bn. But don’t ex­pect a spe­cial div­i­dend.

“Jo­hann Ru­pert [Richemont’s chair­man] is very con­ser­va­tive,” says Van Cuyck. “The cash has en­abled Richemont to con­tinue grow­ing its div­i­dend de­spite the fall in earn­ings, and un­der­pins in­vest­ment in in­no­va­tion, brand and re­tail de­vel­op­ment and mar­ket­ing.”

Richemont’s share price has risen strongly of late, gain­ing 37% in the past 12 months and boost­ing its rat­ing to a 34 p:e. But this heady rat­ing has to be seen in per­spec­tive.

“Richemont’s earn­ings are at a cycli­cal low,” says Van Cuyck. “On nor­malised earn­ings it is trad­ing on a for­ward p:e of about 23 on an 18month view.”

It makes Richemont a share worth strong con­sid­er­a­tion.

Shares in small fi­nan­cial ser­vices counter Con­duit Cap­i­tal have lost a good deal of trac­tion since peak­ing briefly at 390c at the end of Septem­ber 2015.

The shares have lost around 14% this year to set­tle (at the time of writ­ing) at 215c — a level last seen in April 2015.

Clearly the mar­ket, which pre­vi­ously en­joyed flirt­ing with Con­duit, has turned wary.

The trans­ac­tion that seemed to turn the mar­ket off was Con­duit’s pur­chase of in­vest­ment com­pa­nies Snow­ball Wealth and Mid­brook

Lane for R465m and R168m re­spec­tively. The deals, set­tled in scrip, al­lowed Con­duit to in­crease its po­si­tions in com­pa­nies it was al­ready in­vested in. But some ob­servers felt it was a deal that ben­e­fited Snow­ball and Mid­brook Lane, giv­ing them an op­por­tu­nity to sell out in­vest­ment port­fo­lios at net as­set value (NAV) in ex­change for pa­per, of­fered a dis­count on the un­der­ly­ing NAV of the same in­vest­ments.

One as­set man­ager, who asked not to be named, says Con­duit has taken some big bets in its in­vest­ment port­fo­lio. “But what is the over­all strat­egy? It’s some­thing that it still needs to com­mu­ni­cate clearly to the mar­ket.”

On the other hand, listed in­vest­ment com­pany RECM & Cal­i­bre (RACP) ap­pears up­beat about its sig­nif­i­cant mi­nor­ity share­hold­ing in

Con­duit. In the lat­est an­nual re­port, RACP CEO

Piet Viljoen wrote: “We have a high re­gard for man­age­ment and its busi­ness and in­vest­ment strat­egy.”

Essen­tially, Con­duit’s op­er­a­tional cogs re­volve mainly around Con­stan­tia In­sur­ance, a spe­cial­ist in­sur­ance op­er­a­tion that has per­formed steadily over the years. The sec­ondary an­gle — al­beit the more in­trigu­ing as­pect — is that Con­duit mo­bilises Con­stan­tia’s in­sur­ance float to make se­lected strate­gic in­vest­ments rather than, as most in­sur­ers do, com­pil­ing a port­fo­lio with a mul­ti­tude of di­ver­si­fied hold­ings (bonds, shares, cash and prop­erty).

Of­fi­cially, Con­duit has am­bi­tions to “de­velop a high-qual­ity di­ver­si­fied in­sur­ance group com­ple­mented by a non­in­sur­ance value-ori­en­tated in­vest­ment pro­gramme”.

There’s not much to fault at Con­stan­tia. In the year to end-march, its gross writ­ten pre­mium de­creased 4.2% to R481m — but net pre­mium in­come in­creased 34% to R229m.

At that point direc­tors ex­plained that the in­ten­tion, over time, was to in­crease net pre­mium in­come at suit­able un­der­writ­ing prof­itabil­ity lev­els. “In­creased re­ten­tion al­lows us to build our cap­i­tal base, which in turn al­lows us to write more pre­mium for our own ac­count.”

De­spite the solid show­ing by the in­sur­ance op­er­a­tions, Con­duit’s in­terim pre­tax profits slumped 41% to around R18m. In fact, the in­sur­ance op­er­a­tions in­creased pre­tax profits by 62.5% to around R23m be­fore head of­fice costs, with the drop in profit at group level trig­gered mainly by lower re­turns from the in­vest­ment port­fo­lio.

At this point it seems in­vestors are tak­ing their cue from Con­duit’s in­vest­ment strat­egy rather than the fun­da­men­tals of the niche in­sur­ance op­er­a­tions.

The is­sue with the in­vest­ments is that Con­duit does not — ei­ther in its last an­nual re­port or its in­terim re­sults — clearly and neatly set out the main com­po­nents of its in­vest­ment port­fo­lio.

But re­cent Sens dis­clo­sures in­di­cate that the Con­duit port­fo­lio has sig­nif­i­cant (or in­flu­en­tial) stakes in small spe­cial­ist bank­ing group Fin­bond, Namib­ian in­vest­ment com­pany Trustco, in­dus­trial con­glom­er­ate ENX Group, fast food group Taste Hold­ings, low-cost hous­ing de­vel­oper Cal­gro M3 and ve­hi­cle re­tailer Com­bined Mo­tor Hold­ings (CMH).

With­out try­ing to sound dis­parag­ing, it is clear that Con­duit’s in­vest­ment port­fo­lio is un­der­pinned by small-cap coun­ters, some­thing

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