On­go­ing op­por­tu­ni­ties

Finweek English Edition - - EQUITIES -

The maze of short-term he­li­copter views put out by in­vest­ment com­men­ta­tors i s i nvari­ably both tire­some and con­fus­ing for in­vestors, but one specialist house that is ro­bustly bot­tom-up and proudly so is Old Mu­tual In­vest­ment Group’s Elec­tus Bou­tique.

“Sure, we take note of macro de­vel­op­ments but ul­ti­mately we are bot­tom-up,” says Bou­tique head Neil Brown.

With over R30bn un­der man­age­ment and a limited eq­uity ca­pac­ity to R60bn in to­day’s money, Elec­tus does not fo­cus ex­clu­sively on the JSE Top 40, but also in­vests in South African mid- and small­cap shares. Eq­uity re­search is owned, man­aged and driven by it.

The most i mpor­tant tenets i n its analy­ses are re­turn on cap­i­tal ex­ceed­ing cost of cap­i­tal, qual­ity busi­ness mod­els, proven man­age­ment teams with strong cap­i­tal al­lo­ca­tion skills, strong earn­ings and div­i­dend growth rates, co­gent cash f lows, and high mar­gins of safety in fun­da­men­tal val­u­a­tions.

“We al­ways strive to buy into high­qual­ity businesses at prices that are low com­pared to their long-term in­vest­ment val­u­a­tion,” says Brown.

A fund that strongly ref lects the Elec­tus house view in the large-mid­cap cat­e­gory is the Old Mu­tual Top Com­pa­nies Fund which boasts an ex­cel­lent long-term per­for­mance record and is cur­rently well­po­si­tioned for fu­ture ex­cess re­turns.

Brown es­ti­mates that the upside to port­fo­lio fair value is 21.1% com­pared with the JSE SWIX bench­mark -0.1%. The earn­ings per share growth dur­ing the next 12 months is put at 20.4% com­pared with the bench­mark 15.9%. The rolling div­i­dend yield is in line with the JSE SWIX, while the, price/ book ra­tio and price/cash f low ra­tio are all cheaper than the bench­mark fig­ures.

Re­cent changes in the port­fo­lio ref lect much of where Brown and co-man­ager Richard Has­son are go­ing.

Though wary of banks in gen­eral be­cause of the South African slow­down and in­ter­est rate cy­cle, they’ve topped up on In­vestec, Bar­clays Africa and Stan­dard Bank which they be­lieve of­fer good value at present. Their prize choice other­wise would be FirstRand, but they be­lieve that it is slightly pricey. They had ex­po­sure to Ned­bank via Old Mu­tual but sold out six months ago and haven’t gone back into it again.

Brown and Has­son be­lieve t hat In­vestec with its good as­set man­age­ment, cor­po­rate f inance and South African bank­ing ca­pa­bil­i­ties is worth R90/share against its present R75/share.

They’ve also pur­chased Clien­tele which they con­sider a good busi­ness all round, has boasted spec­tac­u­lar growth, and doesn’t have a legacy of high cost struc­tures. In fact, the busi­ness was re­cently slowed down to im­prove its qual­ity.

On re­sources, they’ve bought Northam Plat­inum and An­glo Amer­i­can, sold down Sa­sol, and off loaded Gold f ields en­tirely.

“We l ike plat­inum in gen­eral and Lon­min and Northam in par­tic­u­lar”, says Brown. “Plat­inum is still the best re­source in­dus­try in South Africa, pro­vid­ing 70% of new sup­ply. And Lon­min and Northam are the best op­er­a­tions in the in­dus­try, with Lon­min’s im­proved op­er­at­ing per­for­mance and Northam’s ex­cel­lent man­age­ment and Booy­sendal ex­pan­sion”.

He points out that Elec­tus is well-dis­posed to­wards Lon­min, in spite of Marikana. “Man­age­ment is do­ing the ba­sics prop­erly; it’s get­ting pro­duc­tion back from 680 000 ounces a year ago to 750 000800 000, and in do­ing that doesn’t need too much capex.

“In Novem­ber 2102 it had a big cap­i­tal squeeze, fol­lowed by a big rights of­fer, and we fol­lowed our rights at ef­fec­tively R20 a share and the post-rights price was about R38. Now it is 50% above that. Cur­rently trad­ing at R60/share, we think that it’s worth about R80/share”

Brown says that his team dumped Gold Fields at R59 to avoid the value trap that it posed and be­cause the group didn’t meet three con­di­tions it (Elec­tus) thought nec­es­sary. These were main­te­nance of its div­i­dend pol­icy; no ac­qui­si­tions; and up­hold­ing its com­mit­ment of 700 000 ounces of gold from its South Deep oper­a­tion by 2016.

“We said that if it didn’t deliver on these, we’d kick for touch. In the end Gold Fields bought three mines from Bar­rick; paid no div­i­dend, and back­tracked on the 700 000 ounces.”

Among in­dus­tri­als, the f und pur­chased Sun In­ter­na­tional, Aspen, and Re­unert, but re­cently sold Net­care and Telkom. Sun In­ter­na­tional’s ap­peal is that the new CE Gra­ham Stephens is look­ing to lower the high-cost struc­ture and re­trench a huge in­fra­struc­ture of non-in­come gen­er­at­ing staff. This could in­clude 1 700 people.

Both Net­care and Telkom did well for it and they took money off the ta­ble.

Pur­chases among i ndus­trial rand hedges have been BAT, Stein­hoff and Reinet In­vest­ments, but Brown and Has­son have sold down MTN and Tren­cor.

Brown a nd Has­son have been im­pressed with Stein­hoff ’s re­struc­tur­ing in Europe, par­tic­u­larly its con­sol­i­da­tion of new businesses, cen­tralised sourc­ing and po­ten­tial for sig­nif­i­cantly higher profit mar­gins. They’re not overly con­cerned about lo­cal fur­ni­ture re­tailer JD Group’s lat­est poor re­sults which they point to be­ing a small part of the over­all busi­ness.

BAT and Reinet are con­sid­ered qual­i­ta­tive and re­li­able de­fen­sive plays. Be­sides, BAT is at the right en­try price at present and Reinet trades at a 30% dis­count to net as­set value. Brown is not alarmed on a 10-year view about the grow­ing bias against smok­ing.

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