Coronation Industrial comment - Sep 04 - Fund Manager Comment19 Oct 2004
The fund had another good quarter, with the rolling one year return of 47% comparing favourably to 45% from the All Share Industrial Index. For the rolling three year period, the fund achieved a 25% p.a. return, which also compares favourably to the 16% p.a. from the index.
Despite a very strong performance over the last 18 months, we continue to believe that industrial stocks offer good prospects of above-average returns:
- These good returns came off a very depressed base which offered investors an extraordinary investment opportunity. The market has almost forgotten that, at the April 2003 low, the industrial index had delivered negative returns in the prior six of the seven calendar years.
- Valuations, despite being more demanding than they were a year ago, remain attractive. The average share in our portfolio trades at 8.6 times earnings one year out and offers a forward dividend yield of 4.4%. This compares favourably to the long-term averages, especially when one considers that interest rates are at 20-year lows.
- Companies continue to deliver good growth in underlying business value. Of the 80% return delivered by the industrial index over the last 18 months, only half of this has come from re-rating. The rest has come from earnings growth, with domestic companies benefiting strongly from a buoyant local economy.
- While retail shares are now showing many of the telltale signs that indicate one is nearing the top of the cycle, much of our universe is operating at, or below, our assessment of normal earnings (particularly in the case for rand hedge shares).
Trading activity in the quarter remained low. This is typical of our investment style. We buy undervalued businesses, quite often when the news-flow is poor, and often have to wait fairly long periods of time before that value is realised:
- We sold our holdings in Barloworld, which reached our assessment of fair value, and Massmart, which is now trading at a full rating on a reasonably high level of earnings.
- The large position we took early in the year in Peermont paid off handsomely, resulting in a 52% gain upon listing. We reduced our holding, but still retain an exposure.
- We added significantly to our positions in AECI, Naspers and Mr Price. All three shares are high conviction ideas as profiled in previous quarterlies.
Our feature stocks in this commentary are Aveng and Tiger Brands.
We initially acquired our holding in Aveng at around R8, on the investment thesis that earnings in the construction business were depressed. This included some 'optionality' exposure to large-project spend (domestic fixed capital investment is very low by international standards, despite a firm commitment from government to close this gap). We were too early, and suffered a setback when the company published its second profit warning. At the R7 lows, Aveng was trading below the value of its steel and cement interests. This meant that the construction business was being offered in the market at a negative value. This was not a bad deal, given that the business has R7.5bn turnover and a 50 year+ business franchise. We increased our shareholding. Since then conditions for steel and cement companies have continued to improve. Despite a rebound from R7 to R9, we believe the construction business is still being offered at a negative value and continue to hold our position.
Tiger Brands has been a core, long-term holding in the fund for almost two years. It is a branded consumer goods company that has a unique portfolio of dominant brands that spans as many as 30 FMCG categories. Despite consistently achieving growth in excess of the market over the preceding two decades, that trend broke down in the late 90s. This provided an excellent investment opportunity. The share has performed well since then as the growth in the underlying business has reverted to the long-term trend. Furthermore, management has unlocked value for shareholders by unbundling Spar and committing to return more of the company's exceptional cash flows to shareholders. Tiger Brands is an above-average company that trades at an average rating. It therefore remains one of the fund's core holdings.
Coronation Industrial comment - Jun 04 - Fund Manager Comment20 Aug 2004
The Fund had a good quarter in a down market, taking the rolling one year performance to 38%. For the rolling three years to 30 June 2004, the fund delivered a pleasing 19%, when compared to only 8% from the All Share Industrial Index.
As long term bottom-up investors we spend most of our time trying to understand and value the companies in our market. These valuations are based on what a company will earn, and how much free cash it will generate in a normal operating environment. Whilst we do not consider ourselves to be better than average forecasters, we do feel comfortable making the following macro observations:
- Industrial valuations remain low. Despite good returns over the last year, the prospects of above-average returns remain good, with the average local industrial share trading at 8 times earnings one year out and a 4.6% forward dividend yield. This compares favourably to the long term average PE of 10, especially when one considers that interest rates (the cost of money) are at 20 year lows.
- These valuations become even more compelling when one considers the abnormally strong rand environment in which these earnings are being achieved.
- The valuation gap between large and small companies has largely closed, with the fund's 52% weighting in ALSI 40 stocks reflecting an even balance between the two.
- Growth prospects are good, with domestic companies benefiting from a robust consumer and the pain of a strengthening rand now largely in the base.
We continue to take advantage of the long term investment opportunity provided by poor news flow in rand hedge and healthcare stocks:
- We have increased our positions in AECI, Delta and Barloworld. This positions the fund well to preserve dollar capital, should the rand depreciate from current levels (as we expect).
- We have increased our position in Nuclicks, which we believe offers upside even in the most negative of outcomes for the impending Healthcare Regulations.
The two stocks we would like to profile in this commentary are Mr. Price and Delta.
Mr. Price is one of those rare stocks that has both an undemanding rating and excellent growth prospects. It is a quality company, because in clothing it is the dominant value retailer and in housewares it owns the middle-market space. It trades at seven times next year's earnings and offers nearly a 6% forward dividend yield. Despite operating in an above-average trading environment it has good growth prospects, particularly in the Mr. Price Home business, which has the opportunity to improve margins and increase space. As a value retailer it is also the most defensive of the clothing retailers and should therefore do well even if the tide does go out and the consumer cycle turns.
Delta is the world's low-cost producer of Electro Manganese Dioxide (EMD). Despite being one of the best performing shares on the JSE over the last 20 years (delivering a compound return of 21% p.a.), it has recently been hit by a strong rand and now trades 45% below its 2001 peak. It currently trades at 10 times its currently depressed earnings. While the market has stopped short of putting a depressed rating on depressed earnings, we do believe that returns over the long term should be good as earnings recover. This recovery should come from brown-field expansion projects that will drive good volume growth, a recovery in the dollar EMD price (which we consider to be depressed) and some depreciation in the rand.
Coronation Ind - Cautious stance hits ranking - Media Comment29 Jul 2004
The industrial sector's performance has been second only to small caps, but offers the added comfort of a wider choice of "sleep well" companies such as SABMiller, Barloworld and Richemont.
Coronation Industrial underperformed its counterparts at Old Mutual, RMB and Stanlib as it had a more defensive stance. It held no shares in MTN or any of the credit-based furniture retailers.
Coronation prefers the higher margins and consistently higher market share of Vodacom, in which it invests indirectly through Telkom (5,8% of the fund) and Venfin (2,6%). Telkom, because of its dollar-based costs, is benefiti ng from the stronger rand, as is Naspers (3,9%).
Joint fund manager Dirk Kotze says he considers current rand strength to be abnormal, so he is comfortable holding exporters such as Delta and Seardel, as well as Aveng and transport business Trencor.
Kotze says Delta is trading at 45% below its 2001 peak and at 10 times its currently depressed earnings. He expects a recovery through good volume growth, a recovery in the dollar price of Delta's main product, electro manganese dioxide, and some rand depreciation.
In the retail sector Kotze favours Mr Price, which he believes has an undemanding rating and excellent growth prospects. He expects it to do well as a low-price retailer even when the consumer cycle turns. He argues that industrial valuations remain low as the average local industrial share trades on a forward p:e of eight and offers a forward dividend yield of 4,6%.
The fund is evenly balanced between large and smaller caps, with 52% of the assets in Alsi 40 shares.
It has acquired a stake, equivalent to 5,3% of the fund, in Global Resorts, which is due to list next month. Kotze says Coronation likes the business model in gaming businesses, and that Global Resorts is at least a third cheaper than Sun International (SA), based on free cash flows.
The fund has less than R50m under management as there is limited demand for sector-specific funds.
Coronation Ind - Strategy with bit of originality - Media Comment17 May 2004
Coronation Industrial (CI) became a pure industrial fund in August 2002. Since then, good share-picking has produced 55% capital growth. The industrial index has risen 31%. A focus on value and recovery potential remains the strategy of managers Dirk Kotze and Karl Leinberger. CI's SA shares on an average forward p:e of 8 and 4,5% dividend yield (Coronation's estimates) have a solid chance of keeping the fund up with the sector leaders.
Coronation Industrial - Taking on some big bets - Media Comment01 Mar 2004
At 35% of equity exposure the top four holdings dominate the portfolio. Fund manager Gavin Joubert justifies this on their solid value appeal with Telkom, Remgro and Tiger Brands at low ratings and offering high dividend yields. Naspers' attractions are benefits of a strong rand on costs and a discount to assets that, he says, leaves the share up to 40% under priced. Well reasoned but it may make those not in favour of big bets a tad hesitant.
Coronation Industrial comment - Dec 03 - Fund Manager Comment21 Jan 2004
The Coronation Industrial Fund had a very good fourth quarter, appreciating by 17.9% to end the year with a return of 32.3%. This is well ahead of the performance produced by the JSE Industrial 25 index, which was up 20% for the year.
The fund's largest holding, Telkom, was a major contributor to performance, appreciating by 60% over the quarter. Although this share has performed very strongly since listing in March 2003 (up 150% March -December 2003), it remains the top holding in the fund as the fund manager's still view it to be very attractively priced, trading on a one year forward Price/Free Cash Flow multiple of only 5.5. Remgro and VenFin also contributed to performance, with both shares appreciating by over 20%. With the continual strengthening in the rand, the biggest detractor from performance was the funds offshore exposure, which makes up almost 20% of the total fund.
There were very few changes to the portfolio over the quarter, with the addition of only two new positions: Netcare and Naspers.
The fund has held a position in Naspers for some time now through the ADR in New York, and during the quarter acquired more shares locally. The combined ADR and JSE held units make Naspers one of the biggest holdings in the fund at 9.5% of the portfolio. The strengthening rand is very positive for Naspers as film content, satellite leases, capital equipment, paper and ink costs are all priced in US dollars. These reductions in costs will contribute towards margin expansion in both the Pay-TV and Print businesses over the next few years.
Whilst important, this is not the key reason for the fund's increased position in the stock. The fund manager's have been buying more Naspers because, in the fund manager's view, it owns some of the best businesses in South Africa, and as important, the fund manager's believe that the current valuation of the group is very attractive.
Naspers owns stakes in several businesses, the two most important of which are the South African & African Pay-TV businesses (DSTV) and Media24, which is the newspaper, magazine and printing business which owns titles such as Die Burger, Beeld, Huisgenoot/You and Fair Lady. Besides owning great brands, DSTV and Media24 either hold monopoly positions or are dominant in their respective markets. For example, there is no other Pay TV business in South Africa to compete with DSTV, and within Afrikaans newspapers Media24 holds a market share of 98%. This combination of great brands and dominant market positions provides pricing power which in turn produces high margins. These two core businesses are also great free cash flow generators. The fund manager's valuation of these two assets comes to around R40, which is the current share price of Naspers.
However, what makes Naspers attractive is that these two assets are not the only assets owned by the group. Naspers also own stakes in Pay-TV businesses in Greece, Cyprus and Thailand; 44% of Mnet Supersport, and 100% of Mweb and 50% in a Chinese instant messaging business, amongst others. It is the fund manager's view that these assets are worth substantially more than the level at which the market is currently pricing them, with the result that at R40 Naspers is still trading 30% -40% below its fair value.
Although 2003 was another year of good returns, the fund manager's continue to believe that SA industrial shares in broad terms offer good value, both on an absolute basis and when compared with the JSE, which is dominated by resources. Most of the fund's large holdings, including Telkom, Remgro, Tiger Brands and Woolworths are all still trading on single digit P:E multiples and offering dividend yields of 4% -5%, which the fund manager's consider to be very attractive.