As Charles Koch once said: “The future is unknown and unknowable.” Looking forward into 2021, amidst all the uncertainty, we have to ask ourselves a few philosophical questions: What do we know, we know; what do we know that we don’t know; and what don’t we know we don’t know? Considering the year that was and towards the year ahead, we know that market crises offer future investment opportunities.
The pandemic came to SA when the country was already on the backfoot. The country faced unfavourable politics related to state capture and a growth dilemma with respect to gross domestic product (GDP), as well as muted growth and unsustainably rising debt, which all put pressure on the fiscus. However, the crisis facing the globe and SA offers exceptional opportunities to buy assets because when there is pessimism, the prices in the market reflect this. If followed through by the discipline to recognise these buying opportunities, this may lead to fruitful rewards while a recovery takes shape.
Here are some of the more prominent SA counters and a view on how they are positioned going into the New Year:
- Naspers, Prosus And Tencent
Naspers is an investment holding company with a holding in a very significant asset, Tencent – the Chinese social media platform behemoth. We believe that value for Tencent is lofty when growth rates are at their peak in the current environment. In our view, growth in Tencent’s high margin gaming business will slow going forward, as the world returns to normal and people will have less time and money to spend playing mobile games. Future growth from its payments and advertising businesses is at a lower margin compared to the gaming business and will lead to the group’s margin trending lower over time. This will make it a challenge to maintain the profit growth rate that the market is pricing in.
Furthermore, regulatory pressure is growing across the globe and in China that can force the tech giant to give up some of its massive advantages as its seeks to level the playing field. Naspers is set to continue to invest high levels of capital in developing its online food business, hence profitability may take longer to achieve and it remains unclear whether this investment interest will deliver the adequate and desired returns as the world recovers from the pandemic.
Prosus provides the same underlying exposure as Naspers, trading at a narrower discount to its net asset value (NAV) versus Naspers due to its listing in Amsterdam, which provides a more tax-efficient environment.
- British American Tobacco
British American Tobacco is a global tobacco giant. The company is defensive with strong cash flow generation that provides support in tough economic times and earnings that have been resilient during the pandemic. A significant portion of its revenues is generated in the US where regulatory pressure has been mounting. In our view, the company has a history of navigating and adapting to a changing regulatory environment, which is not being reflected in the share price. A high dividend yield gives a certain return in a very uncertain world.
The banks are trading at record-low valuations where balance sheets have proven to withstand the brunt of the pandemic storm. We believe the resumption of dividends and the release of provision over time are not being reflected in the share prices. FirstRand is transitioning to a financial services platform where its eBucks ecosystem provides a source for a competitive advantage in its ability to both improve product sales and retain customers over time. We see growth opportunities in the insurance and asset management operations as return on equity (ROE) gradually picks up, as it requires less capital versus a traditional lending model.
- Anglo American
Although its diamonds and coal divisions were hit in 2020, the diversified nature of the business has stood the overall business in good stead. The iron ore business will benefit significantly from the buoyant prices, the copper operations have performed well and, despite operational issues, the PGM operations (Amplats) should still have a good year even though it should have been much better. The pandemic has had an impact, with some loss of production generally due to various lockdowns and a slowdown in its project at Quellaveco, but the overall business remains resilient with most of its assets in the lower half of the cost curve, a strong balance sheet and a recognisable growth profile.
Operationally, Covid-19 has been supportive for the business and other cellphone networks alike. Working from home has led to increased data use in practically all markets, driving earnings growth. While there was some offset with a fall in voice traffic when the strictest lockdowns were enforced, generally speaking, voice has recovered as lockdowns have eased, while data usage has remained at high levels as people adapt to new ways of working. The strategy of realising value from non-core assets has continued and this has helped in strengthening the balance sheet for the group. The main drawback has been the low oil price, which has meant MTN has been unable to upstream dividends from its Nigerian operations. This has also probably led to a delay in the listing of its Towers business. These are hopefully temporary delays that are overly compensated for in MTN’s current lowly rating.
- AngloGold Ashanti Limited
Beyond a cyclical recovery from a steep fall in global growth due to Covid-19, we note that global growth has been trending lower. Global levels of government debt have grown to unprecedented levels due to efforts to cushion the economic impact of the pandemic. The long-term impacts of high debt levels and ultra-low interest rates are unknown, although given the level of uncertainty around long-term growth, monetary policy and heightened geopolitical tensions, we therefore consider it prudent to have some gold exposure.
AngloGold has a globally diverse portfolio of operating assets which stand to generate significantly higher levels of cash at prevailing gold prices. The business has been steadily reducing gearing and has recently sold the last of its high cost underground South African assets.
- Foschini Group
The Foschini Group (TFG) operates in South Africa, the UK and Australia. South Africa is the most significant region but Australia is the fastest growing. In South Africa, ongoing investments in its local supply chain and design capability have enabled the group to deliver more consistency, and a stable and lower product inflation than its competitors. The group has dialled up the focus on its digital strategy in the wake of Covid-19. A number of the group’s brands have not reached saturation point. TFG recently acquired JET out of a business rescue process undertaken by the Edcon Group.
This acquisition has given TFG a strong foothold in the value retail segment at an attractive deal multiple. As a result, we believe that the market share gains the group has achieved can continue for a number of years. TFG continues to improve its cash flow generation through a focus on cost savings and working capital optimisation. Sales in South Africa are no longer dominated by credit, as the group has incrementally pivoted towards cash sales. Future earnings should therefore be less cyclical than historic earnings as this transition advances.
- Standard Bank
Banks are trading at record-low valuations where balance sheets have proven to withstand the pandemic. We believe the resumption of dividends and the release of provision over time are not being reflected in the share prices. Standard Bank offers a diversified business versus its peers. Furthermore, efficiencies in terms of revenue growth less cost growth will support improvement in the quality of earnings and returns (namely ROE) in South Africa. A rebound in its African business also adds support to its earnings growth.
Consumer goods companies, in particular brewers, are normally considered defensive. The impact of social distancing and hard lockdowns has made this crisis different. An otherwise defensive company has been exposed to a cyclical downturn in revenue as bars, restaurants and sports events were closed for extended periods of time. We believe Anheuser-Busch, owner of some of the world’s leading beer brands, is trading at a discount to its long-term intrinsic value based on the assumption that beer consumption will normalise on a three to five-year view.
In addition, the firm is a skilled marketer and has begun to adapt to new ways of reaching the consumer during the pandemic. The balance sheet is highly geared following the acquisition of South African Breweries (SAB) However, the debt repayment profile has been well structured and does not pose a threat to liquidity even in the prevailing environment.
Siboniso Nxumalo is head of Old Mutual Equities.