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