Sec­tors prov­ing their worth

Finweek English Edition - - INSIDE - LEON KOK

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.

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