Coronation Smaller Companies comment - Sep 06 - Fund Manager Comment15 Nov 2006
The Fund had a good quarter, returning 9.8%. This compared favourably with the mid and small-cap indices which both returned 9.7%, and the Top 40 index which returned 5.9%. The sell-off of shares which occurred in the second quarter as a result of emerging market jitters and interest rate hikes was reversed in the third quarter, with the Fund now in positive territory (up 3%) for the past 6 months.
Some of the new counters in the Fund include Foschini, Coronation Fund Managers and Woolworths.
Foschini was one of the worst affected counters in the interest rate sensitive sell-off. We bought in during the quarter at around R42, some 35% off its mid-May peak of R65. We are of the firm opinion that this sell-off was overdone, despite the rising interest rate environment.
Woolworths was another casualty of the sell-off, down some 28% from its May peak. This is despite the fact that half of its profits are generated by its growing and defensive food business. In addition, its clothing business is less exposed to fashion risk and is consequently more defensive than other clothing retailers. We therefore took the opportunity to buy Woolworths as it dropped out of the Top 40 index during the quarter.
Our purchase of Coronation Fund Managers during the quarter was motivated by several factors. The company continues to generate significant cash flows, allowing it to pay approximately 75% of its earnings in dividends (an after tax yield of over 7%). It has also been buying back its own shares, which is not only value enhancing to remaining shareholders, but also displays the confidence that management has in the business.
Some of the more significant sales during the quarter include Omnia Holdings and Pick 'n Pay Holdings.
Omnia has been a fantastic performer for the Fund in the past while, being up some 65% since November 2005. A year ago, when pessimism surrounding the stock abounded, we accumulated a healthy position. Now that optimism has replaced that pessimism, we have been reducing our holding. While we fully expect the company to perform very well for the next 2 years, we believe that this is reflected in the current share price and that better opportunities can be found elsewhere.
The Fund is not expensive, trading on a weighted 1-year forward PE multiple of 9.6 times. We will continue to adopt the same strategy of buying what we consider to be undervalued companies, and selling fair to overvalued companies. This often means that we buy shares in out-of-favour counters and sell shares in favoured counters in the belief that this sentiment will turn. Omnia Holdings was a good example of this strategy. There are a few other holdings in the Fund currently which have been out of favour with investors, but which we expect to turn around in the next year. We believe the Fund will benefit from these holdings going forward.
Alistair Lea
Portfolio Manager
Coronation Smaller Companies comment - Jun 06 - Fund Manager Comment12 Sep 2006
The past quarter saw a remarkable turnaround in investor sentiment in equity markets from one of unwavering optimism to mildly panicked. The fund began the quarter up by close to 4% until 11 May. Then the sell-off began, triggered by changing views on global inflation from the equity-friendly low inflation and high growth view, to one of higher inflation and lower growth. Stock markets the world over were affected, with particular emphasis on emerging. To add insult to injury, the Reserve Bank unexpectedly raised the repo rate by 50 basis points on 8 June, and on 22 June the current account deficit reflected levels far higher than expected. Fears of a rising interest rate environment caused a mass sell-off in interest rate sensitive stocks and a long awaited depreciation of the rand. The general retail sector, the most negatively affected by rising interest rates, fell 21% in the quarter while most rand hedges gained ground on the back of the weakening currency.
Considering these events, it was heartening to see that the fund only fell by approximately 6.1%, outperforming the mid and small cap indices which were down some 10%.
The market's reaction to the events of the quarter has in our opinion, been overdone. Quality companies such as Massmart were at one stage down 30% in the space of six weeks. Even if interest rates were to rise further, we do not see the logic in a business being worth 30% less in the face of a potential 200 basis point hike in interest rates. As such, we took the opportunity to buy shares, with Spar, Nu-Clicks, Adcorp and Discovery amongst our larger purchases.
During the quarter we sold out of our remaining holdings in Tanzanite One, the London AIM-listed Tanzanite miner and marketer. The timing was not ideal from a currency perspective, but was very good from a price perspective, being down 38% from our selling price. We also reduced positions in various counters which held up well in the sell-off, investing the proceeds in better opportunities. Some of our selling included positions in Invicta, AG Industries and Johnnic Communications.
The fund is not expensive, trading on a weighted 1-year forward PE multiple of just over 9 times. While we are wary of the possible effect of interest rate hikes on the consumer, many of the retailers (such as Cashbuild) in which we are invested sell for cash to consumers who do not have debt, and so long as jobs are not lost, the effect of interest rate hikes on these businesses should be muted. In addition, we have positions in several companies (Tiger Wheels, Oceana, Omnia, AECI, Trencor) which will benefit from rand weakness, one of the factors which will increase the chances of interest rate hikes.
Alistair Lea
Portfolio Manager
Coronation Smaller Companies comment - Mar 06 - Fund Manager Comment25 May 2006
"Our feeling is that while 2006 might not be as good as 2005 (the Coronation Smaller Companies Fund returned approximately 30%), the fund should continue to deliver real returns."
This was what we said in the December 2005 fund commentary. In the first quarter of 2006, the fund returned 16.67%, certainly exceeding our return expectations. Part of what seems to be driving this growth is foreign buying which seems to have spilled over into non-Top 40 shares. This is both encouraging and worrisome as foreign emerging market investors seem willing to divest as quickly as they invested.
The fund trades on a one-year forward PE multiple of 10.3, higher than it has been for about five years, but still significantly lower than our estimate of the overall market's forward PE of 13. Consequently we remain confident that the fund should outperform the overall market, except in the event of a sharp depreciation of the rand which would benefit the Top 40 shares to a larger degree than small and mid cap shares.
During the quarter, our more significant purchases included Distell, Astral Foods and Pick 'n Pay Holdings.
Distell is a tightly held company with a free float of only 10%. We believe that this is the primary reason why this company has not attracted much investor attention and hence, a correct rating. The defensive nature of alcoholic beverage sales together with a strong portfolio of brands, in our view, justifies a premium rating relative to the market. However, Distell currently trades at a discount. The JSE requires a minimum 20% free float and we therefore believe that Distell will ultimately need to review its shareholding structure in order to improve liquidity in the stock. This could be a catalyst for a re-rating of this company.
While our purchase of Astral Foods is probably late in the cycle, we could no longer ignore the fantastic earnings growth that this company looks set to produce, driven by strong demand for chicken and maize prices below normal levels. Even if we normalise earnings by assuming a higher maize price, we still believe we have not paid more than eight or nine times earnings to acquire our position.
Pick 'n Pay Holdings is the investment holding company of Pick 'n Pay Stores, arguably one of the top five companies in South Africa in terms of the stability of its earnings stream, high returns on equity and its ability to generate cash (and pay it out to shareholders). It is a company that normally trades at approximately a 30% premium to the average listed company, but currently trades at a much lower premium. At this stage of the equity bull run we are happy to invest in superior quality companies with defensive earnings. Pick 'n Pay Holdings provides this entry point.
Our more significant sales during the quarter included Tanzanite One, New Clicks and Enaleni Pharmaceuticals.
Tanzanite One has been a phenomenal holding for the fund, increasing some five-fold in a year and a half. It is a fantastic story - the business owns 60% of the worlds only known source of Tanzanite, a gem 1 000 times rarer than diamonds. We have done well from our investment in Tanzanite, but on a PE multiple of approximately 30, we cannot justify holding it any longer.
New Clicks is a business that we believe will continue to struggle for the next few years, but whose share price has performed well in the past six months. We think that the margin of safety that existed is no longer there and we have sold our position.
We participated in the placing of Enaleni shares at R3.00 when it acquired Cipla Medpro. The share price was very strong post the share issue, rising to R4.50 in a very short space of time, and above our assessment of fair value. Consequently we have sold our holding in the company.
Alistair Lea
Portfolio Manager
Coronation Smaller Companies comment - Dec 05 - Fund Manager Comment13 Mar 2006
It has been another profitable year for investors in mid and small cap shares. The Coronation Smaller Companies Fund has now delivered positive returns for the past five years. The fund bottomed out at a unit price of around 900c in April 2001 and ended 2005 some three times that level at 2690c. Faced with this kind of performance, investors are probably wondering whether this good thing must also come to an end. My feeling is that while 2006 might not be as good as 2005 (the fund returned approximately 30%), the fund should continue to deliver real returns. This feeling is premised on a couple of factors:
- The South African economy is expected to remain strong, which means corporate earnings growth should be decent.
- In general, shares are not yet overpriced. The fund trades on a one-year forward PE of 9.5. (An indication of the extent of upside we see in the fund is measured by the price to fair value ratio. At current share prices, the fund has a total value of approximately R135 million. If we value each share held by the fund at our estimate of fair value, the fund would be worth R153 million, 14% higher than the current level. To this, one would need to add the expected forward dividend yield on the fund of about 4% to arrive at an expected total return).
- The lack of more attractive returns from other asset classes. We still believe that equities are more attractive than bonds, cash or property.
During the quarter, our more significant purchases included new positions in Cashbuild, Invicta, Enaleni Pharmaceuticals and Dorbyl.
We regret not having bought Cashbuild shares sooner than we have done. This is a share that has gone from R3 back in 2001, to around R43 today, having peaked at R47 in September 2005. Despite the run that we have missed out on, we still believe that in the long term this company will continue to perform. Cashbuild sells basic building materials for cash (cement, bricks, timber, roofing, etc.) from very low cost, basic stores, located mainly in less affluent areas of the country. The stores are open seven days a week, will deliver for free within a certain radius of the store and are growing their sales volumes significantly. The store base is set to grow from the current 150 stores to around 300 stores in the next six years.
Invicta is a distribution business (Bearing Man is the main business) which we were fortunate to get a line of shares in at R13. Having peaked at R18 in July 2005, the share price responded negatively to a weak set of interim results caused mainly by poor agricultural equipment sales from their agricultural equipment distribution business. This presented longer term investors with an opportunity to invest in a very well managed company at a forward PE of just over 7.
We participated in the share placing which resulted in the previously ALTX listed Enaleni Pharmaceuticals buying the unlisted generic drug distributor, Cipla Medpro, and then transferring its listing to the main board of the JSE. Cipla Medpro is the third largest distributor of generics in South Africa behind Adcock Ingram and Aspen Pharmacare. Generic drug growth in SA has been and is forecast to remain very strong at the expense of ethical drugs. At the share placing price of R3, Enaleni was priced at a significant discount to Aspen, its listed competitor, and we were happy to participate.
Dorbyl is an interesting situation in that we have effectively bought into a two asset portfolio comprising of an automotive component manufacturing business and cash, at a large discount. Should this cash be distributed to shareholders, this discount becomes bigger. We consider the investment to offer an excellent risk/reward profile.
Our more significant sales during the quarter included Mr Price, Wilson Bayly, Illiad Africa and Dawn.
Mr Price has been one of the largest holdings in the fund for some time now, but after a 50% price move in 2005, we do not like it as much as we did at the start of the year. This sale merely reduces our weighting to reflect the lower expected upside from here on out.
Wilson Bayly has been a remarkably consistent performer in the past 10 years, quite phenomenal considering they are involved in construction which is risky business. Currently there seems to be a state of euphoria surrounding any construction-related stock, so much so that Wilson Bayly now trades at a 20% premium to mid and small cap shares on a PE basis, when traditionally it, and all construction stocks, have traded at significant discounts. Despite good prospects for fixed investment spend in South Africa in the next five years, construction remains a tough and risky business with very little margin for error and, for this reason, we believe construction stocks are discount stocks. As such we have sold our position in Wilson Bayly.
We sold out of our position in Illiad during the quarter, preferring exposure to building material retailers via Cashbuild, mainly because of Cashbuild's much higher exposure to the lower-end residential building market which seems much more buoyant than the top-end.
We also sold out of our position in Dawn, the building materials distribution business which recently bought the bathroom fittings manufacturer Cobra. We did well from this investment but at above R7 the margin of safety no longer exists and it seems that more value accretive acquisitions are now being priced in - not a healthy risk/reward profile in our opinion.
Alistair Lea
Portfolio Manager