[TOP STORY] The end of high-tech flyers at extreme valuations?

‘The story has changed very quickly from growth to cash flow’: Jacques Plaut – portfolio manager, Allan Gray.

SIMON BROWN: I’m chatting now with Jacques Plaut, portfolio manager at Allan Gray. Jacques, I appreciate the early morning time. ‘End of lazy investing’ was a note you put out. I loved the title to it. I suppose ‘lazy investing’ really was the high-tech flyers with, [in] many cases, little or no cash flow, extreme valuations, but exciting stories that propelled them higher. The market suddenly seems to be taking a more jaundiced view towards them.

JACQUES PLAUT: Yes, Hi. Morning, Simon. For the longest time you’d hear these people on the radio or on podcast saying you don’t have to look at the fundamentals, you don’t have to think about how technology’s going to change the world, just buy the tech stocks – [with] no knowledge or conscience of price. That does seem finally to be coming to an end with investors, well, actually realising maybe if you are paying 30 times earnings for a stock and actually the stock’s not growing, then you’ve got a problem.

SIMON BROWN: The CEO of Uber – and I’m not going to try and mangle his name [Dara Khosrowshahi] – he put a note to staff maybe a month or so ago, saying there’s only one thing that matters these days: positive cash flow. It’s a return to old-school investing, which is ‘show me the money’ in a sense.

JACQUES PLAUT: Yes. I saw that note. The story has changed very quickly from growth to cash flow. Delivery Hero is another one. They put out every quarter (or every half-year) ‘Growth is our one priority’ and all it takes is the share price to be down 80% and all of the sudden now we’re about cash flow. Some of the stocks are finding the transition quite difficult and I think one thing to be aware of is that they’re talking about cash flow, but actually what they mean by cash flow is very different from what I mean by cash flow. They mean positive Ebitda, (earnings before interest, taxes, depreciation and amortisation). And then often what they do is they adjust that number: so they take all the stock that they issue to staff – that’s not a cash flow number, that’s correct, but you’ve got to account it. So if you want to be strict and really look at what’s in it for a shareholder of this company, you’ve got to take off depreciation, you’ve got to take off taxes, you’ve got to take off interest and you’ve got to take off shares issued to staff.

SIMON BROWN: That shares to staff – I was digging into I think it was Meta Platforms and the numbers being issued. They’ve been buying back, but they’ve been issuing it almost at the same speed as they buy back shares.

This then brings a question. Is there still some opportunity? Is Allan Gray seeing opportunity and is it in tech, or perhaps it’s a case of let’s move on from tech and seek opportunity elsewhere?

JACQUES PLAUT: Our top 10 shares – a lot of them are global stocks that just happen to be listed on our market, and they are stocks which we think are cheap. We are very happy with the valuations. It’s not the best of a bad bunch.

So British American Tobacco will be one on 10 times earnings, at almost 10% dividend yield. Glencore, Nedbank, Woolworths, Sasol are still super cheap. Remgro is trading at a big discount, AB InBev.

I can talk about the valuations with more if you want. We do have Naspers in our top 10. Naspers is a little bit of a different story from the big US tech stocks, I think.

In China obviously Naspers is big. It has the position in Tencent. It’s also a growth stock, which was on a very high PE, which is now no longer growing. So that part is the same. But then you are buying it via Naspers at like a 65% discount to the value that it’s trading at at the moment. Plus they have some other tech exposure in education. They actually own a big chunk of Delivery Hero. But that discount provides quite a big margin of safety. It’s been as bad as the other tech stocks. It hasn’t been a good two years for Naspers, but I do think the valuation is quite different now.

SIMON BROWN: I take your point on, on the discount and particularly the stocks you said: British American Tobacco, Sasol, Glencore. The one trend we see across all of those is massively cash-generative shares. They throw off cash. And to your point, Jacques, this is real cash. This is not Ebitda cash. This is money that you can put in the bank, money that you can spend.

Jacques Plaut, portfolio manager at Allan Gray, I appreciate the early morning time.

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