Look for firms that can ride out the viral storm
Covid-19 is everywhere and wreaking havoc on consumer sentiment. It was just a matter of time before a catalyst drove heated global markets down. SA’s economy was already poised for little to no growth in 2020 on the back of many factors, chief among them Eskom. There’s no hope for any growth this year.
Change perspective and think of this time as a big sale with highly discounted goods on offer. SA Inc has borne the largest brunt while rand hedges have plummeted, despite the rand losing 12% to the dollar. Since the beginning of March, gold has returned about 1% while the S&P has been clawing back losses and is now -16%, almost wiping out 2019’s gains.
The JSE all share’s year to date has also started to factor in some good news. Valuations were starting to look ridiculously cheap. But, having said that, I still kick myself for not buying more dollars a few weeks ago.
So, what to look for? Companies with undemanding balance sheets that can ride out the coronavirus storm should be sought out. Earnings will be squeezed in the short term for many counters. Good governance, annuity income streams and low working capital requirements will all help lessen the pain while waiting for better days to prevail.
We have long been holders of British American Tobacco (BAT) despite some regulatory noise that plagues it from time to time. It was just too cheap to ignore at the time when the market was not paying it much attention. It has been minimally affected by Covid-19. With strong management that sticks to its knitting, margin enhancements and commitment to innovation, we have seen the counter bear fruit.
Market jitters after the RJ Reynold’s acquisition have been allayed as they have managed to de-lever the balance sheet through continued free cashflow generation of almost £2bn at last report. All the while committing to a 65% payout. Reinet is another counter likely to be a good, longer-term play.
STRONG BALANCE SHEETS
Pension Insurance Corporation makes up a more meaningful proportion of its net asset value after growth and purchasing more stock. This company insures definedbenefit pension funds in the UK through pension insurance buyouts and buy-ins — a growing market and a welcomed strategy by companies that will want to remove pension fund liabilities from their balance sheets to rebuild their stability.
Some of the retailers, such as Pick n Pay and Truworths, offer value in that their strong balance sheets will allow them to ride out this precarious season. Another place to hide would be food producers, such as AVI and Libstar, which recently released decent results.
The weakened rand provides a defence against private label imports. Long4Life has an arsenal of cash ready to be deployed at the right price.
Both private and listed equity valuations have been elevated and now could be the opportune time for them to pick up some assets cheaply. The platinum counters have also suffered precipitous declines but we have been seeing some recovery of late on the back of Asian production recovery. The supply and demand dynamics, however, will be supportive to prices because of SA’s position as a dominant supplier.
These are testing times. Trying to stay calm as the storm rages seems like a tall ask, but having some excess capital ready to pull the trigger offers immense opportunity in the long term.