Sectors proving their worth
GRINDROD ASSET MANAGEMENT’S VIEW Grindrod Asset Management’s CIO Ian Anderson made some i nteresting points i n Januar y about expected value in the South African market, saying that much has to do with who you listen to.
A predominant view, he notes, is that South African equities are greatly overvalued and that the best value lies offshore. However, that isn’t a notion that he buys into completely. What’s overlooked, he argues, is that many domestic medium- and small-cap shares offer considerable value, but are invariably dismissed by bigger asset managers because they’re considered too illiquid. Yet several small asset managers have done extremely well from them in the recent past.
Examples i nclude Bidvest, KAP, Mpact, OneLogix, Net1 UEPS Technologies, Mediclinic, Spar, Capitec, Brait and the JSE.
Another case of muddled valuations, he believes, has been domestic listed property. Many pundits early last year didn’t expect any good news to be ref lected in the short term, but the sector ended up tops for the umpteenth time with a 26.6% nominal return and 15.3% US dollar return.
Anderson considers l i sted property still to be good value with an 8.5% yield growing at 9% a year. “We are mindful that there are some companies that have pushed prices beyond where we see fair value (such as Hyprop and Resilient), but there is still significant value elsewhere.”
He chuckled at the widespread prominence given to resources in late 2013 and early 2014. “It was anticipated to be the best performer for the year and ended up more than 15% down.” COMMENT FROM CORONATION FUND MANAGERS Coronation Fund Managers head of equity Duane Cable meanwhile says that while the decline in commodity prices continues to weigh in on the resource sector, his investment house retains a healthy exposure to it in its equity and balanced funds.
“As painful as it has been, the market has been very quick to price in the bad news. Many commodity prices are now below the marginal cost of production and we are starting to see the supply response needed to improve the demand/supply balance.”
Coronation’s preferred holdings are Anglo American, Mondi, Sasol and Exxaro. Says Cable: “We continue to favour platinum over gold producers and our preference remains the low-cost platinum producers Impala Platinum and Northam. In addition, we have a healthy weighting in platinum and palladium ETFs.”
Among domestic equities generally, he says, Coronation continues to favour quality global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Richemont, Steinhoff and Naspers*.
“Although these shares have performed extremely well relative to the broader market, they remain attractive based on our assessment of their intrinsic value and particularly attractive relative to our pure domestic businesses.”
Cable notes that Coronation has held strong shareholdings in only a few local businesses in recent years, especially consumer-facing ones, on the basis that valuations were not attractive. However, it has retained its position in Foschini and Clicks despite recent strong performances.
“We believe that these companies trade on undemanding ratings based on our assessment of their normalised earnings. We used the sell-off in Woolworths following the announcement of its takeover of the Australian department store chain, David Jones, to build a sizeable position in the South African company.
“Woolworths is a quality business with a world-class management team, trading at an undemanding rating based on our assessment of normalised earnings.”
Cable says that the large commercial banks’ current earnings approximate Coronation’s assessment of normalised earnings. “Valuations are reasonable and we have maintained our weighting.”
Life insurers, on the other hand, currently trade on premiums to their embedded value and do not offer value in Coronation’s estimation. PSG ASSET MANAGEMENT’S HOLDINGS When one looks at PSG Asset Management’s current equity portfolios, it is interesting to note the relative consistency among its top holdings.
These include Capitec, Anglo American, Steinhoff, Sasol, Super Group, Berk sh i r e Hathaway, Microsof t , Brook fi e l d Asset Management, Sainsbury Plc and Porsche.
Sainsbury is particularly interesting, given the current attention given to it by London-based value investors. It is considered a good buy.
Interestingly, also a proponent of luxury car companies is Coronation’s David Cook who says their attraction lies in a combination of inexpensive valuations, solid growth opportunities and the market’s underappreciating of the innate quality of a premium OEM (original equipment manufacturer).
In Porsche’s case, he points out, it is the holding company of the global VW Group which accounts for more than 90% of the value of Porsche’s assets. The remainder is mainly in cash.
Porsche, he says, currently allows for a discounted entry into VW. Its current market value is 40% lower than the combined value of its stake in VW and its cash holdings. A total of 55% of VW’s earnings are generated from its premium brands (Porsche, Audi and Bentley) and just more than half its earnings are from emerging markets.
Further, VW is in the middle of a heavy investment phase as it rolls out modular production technology. According to Cook prof itabilit y should improve as savings from the new technologies feed through and as VW’s model replacement cycle moves into a more favourable phase.