WEBVTT 1 00:00:00.392 --> 00:00:04.536 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.557 --> 00:00:11.461 With me today is Rohana Khan, who is SA Equity and Multi-Asset at 91 in Cape Town. 3 00:00:11.962 --> 00:00:17.707 Now, Rohana, there's several sort of enduring themes that I've been commenting 4 00:00:17.707 --> 00:00:19.707 upon over my 5 00:00:19.707 --> 00:00:20.149 couple of decades as a broadcaster. 6 00:00:20.289 --> 00:00:25.573 One is active versus passive investing, another growth versus value, but there's 7 00:00:25.573 --> 00:00:27.573 another one as well. 8 00:00:27.573 --> 00:00:28.776 SA, South Africa versus offshore. 9 00:00:29.096 --> 00:00:35.741 And that seems to be particularly pertinent at the moment because it's been 10 00:00:35.741 --> 00:00:37.741 very much skewed towards offshore of 11 00:00:37.741 --> 00:00:39.741 late. 12 00:00:39.741 --> 00:00:41.741 And when I say of late, I mean many, many years. 13 00:00:41.741 --> 00:00:43.741 But suddenly, people liking SA. 14 00:00:43.741 --> 00:00:43.847 Is that the view from you and your team at 91? 15 00:00:44.748 --> 00:00:48.331 Yes, thanks, Lindsay, and thanks for having me. 16 00:00:48.391 --> 00:00:54.916 South Africa has been through a massive earnings reset, derating, negative 17 00:00:54.916 --> 00:00:56.916 sentiment, as you mentioned. 18 00:00:56.916 --> 00:00:59.393 when the rest of the world, especially the U.S., has had opposite fortunes. 19 00:01:00.254 --> 00:01:05.715 So where we stand today, you know, is it enduring from here is the question we're 20 00:01:05.715 --> 00:01:05.735 getting asked. 21 00:01:05.735 --> 00:01:11.477 We've had this little uptick in South African equities in the last few months 22 00:01:11.477 --> 00:01:13.477 post the government of national unity. 23 00:01:13.477 --> 00:01:13.978 And is this another one of those false dawns? 24 00:01:14.038 --> 00:01:17.999 And, you know, we're going to revert back to the South Africa of old. 25 00:01:18.579 --> 00:01:20.280 We do think something's changed here. 26 00:01:21.040 --> 00:01:22.781 and that we are set up for something better. 27 00:01:22.961 --> 00:01:28.562 So while the stocks have moved quite aggressively in a short space of time, 28 00:01:28.562 --> 00:01:30.562 you've got to realize where they've moved from. 29 00:01:30.562 --> 00:01:34.044 So you've just gone from below, way below average valuations to neutral valuations. 30 00:01:35.024 --> 00:01:41.666 And the next leg, we believe, is where you get the earnings growth and those earnings 31 00:01:41.666 --> 00:01:43.666 expectations improving for 32 00:01:43.666 --> 00:01:44.887 the South African companies on a go-forward basis, 33 00:01:45.287 --> 00:01:48.808 which will then drive a further re-rating of the names as they grow. 34 00:01:49.144 --> 00:01:50.825 for the first time in a long time. 35 00:01:51.765 --> 00:01:54.306 And why can they grow, I guess, is the question. 36 00:01:54.646 --> 00:01:55.346 Yes, it is. 37 00:01:55.346 --> 00:02:01.869 And before you go on to why they should go and why the earnings should get a 38 00:02:01.869 --> 00:02:03.869 re-rating, I think we've got to distinguish between SA Inc. 39 00:02:03.869 --> 00:02:09.092 and the JSC Securities Exchange, because there are companies that apply their trade 40 00:02:09.092 --> 00:02:11.092 outside of the borders of South Africa, 41 00:02:11.092 --> 00:02:12.374 whether it be a resources company or whatever it is, 42 00:02:13.114 --> 00:02:17.656 to the ones that really break within the borders of the Republic. 43 00:02:17.736 --> 00:02:18.436 So... 44 00:02:18.576 --> 00:02:19.657 Maybe we could have a look at that. 45 00:02:19.717 --> 00:02:21.417 It's not a blanket buy, is it? 46 00:02:22.097 --> 00:02:22.797 Yes, no, no. 47 00:02:23.138 --> 00:02:24.318 So you're spot on. 48 00:02:24.498 --> 00:02:25.619 There are three buckets. 49 00:02:25.639 --> 00:02:26.879 We look at the South African market. 50 00:02:26.919 --> 00:02:28.100 You've got your pure SA Inc. 51 00:02:28.140 --> 00:02:30.441 companies, your banks, retailers, insurers, etc. 52 00:02:31.201 --> 00:02:37.304 Then you've got your resources bucket, which is the China and global commodity 53 00:02:37.304 --> 00:02:39.304 demand angle. 54 00:02:39.304 --> 00:02:40.465 And then you have your normal and hedge industrial companies. 55 00:02:40.885 --> 00:02:45.227 So where we are excited about, and what I was mentioning earlier, is that SA Inc. 56 00:02:45.307 --> 00:02:46.007 bucket. 57 00:02:46.007 --> 00:02:47.928 So the stuff that, you know, the companies that are... 58 00:02:48.108 --> 00:02:55.033 are listed in South Africa that make the majority of their revenue and profits in 59 00:02:55.033 --> 00:02:57.033 South Africa that will benefit from an improving GDP environment. 60 00:02:57.033 --> 00:02:59.516 On the resources side, it's not all doom and gloom, but it still is early days. 61 00:02:59.956 --> 00:03:05.200 I think the China angle for iron ore in particular in that resources space is, you 62 00:03:05.200 --> 00:03:05.640 know, 63 00:03:05.640 --> 00:03:10.324 a lot of that card has been played and now you need the rest of the world to come in 64 00:03:10.324 --> 00:03:12.324 with regards to commodity demand. 65 00:03:12.324 --> 00:03:13.907 So China is trying to stimulate in a stop-start sort of way. 66 00:03:14.247 --> 00:03:16.309 Everybody's waiting for a big bazooka to come. 67 00:03:16.369 --> 00:03:18.310 They keep doing it in a more measured manner. 68 00:03:18.731 --> 00:03:22.794 But what that does mean is that there's a kind of flaw for some of these 69 00:03:22.794 --> 00:03:24.794 commodities. 70 00:03:24.794 --> 00:03:27.218 And going forward, as we get the interest rate cuts and the new business cycle takes 71 00:03:27.218 --> 00:03:27.437 off, 72 00:03:27.918 --> 00:03:34.123 an improving demand globally for, you know, a lot of these things, increasing 73 00:03:34.123 --> 00:03:36.123 grid spend, electric vehicles, 74 00:03:36.123 --> 00:03:39.368 renewables, all these things are very capex-intensive and commodity-intensive, 75 00:03:39.368 --> 00:03:41.368 which will support those. 76 00:03:41.368 --> 00:03:41.429 over the medium term. 77 00:03:41.809 --> 00:03:45.070 So we're becoming cautiously optimistic in that resources bucket. 78 00:03:45.530 --> 00:03:47.371 And then you get the ran-edge industrials. 79 00:03:47.531 --> 00:03:51.112 And I must say, in our funds, where we're allowed to hold offshore stocks, 80 00:03:51.492 --> 00:03:57.594 we tend to use our offshore allowance versus holding some of the ran-edge 81 00:03:57.594 --> 00:03:59.594 industrials in South Africa. 82 00:03:59.594 --> 00:04:00.295 Now, sparse and processed, though, we do hold. 83 00:04:00.635 --> 00:04:02.716 But the rest of them, like British American Tobacco. 84 00:04:03.712 --> 00:04:05.613 and Hauser Busch, those kind of names. 85 00:04:05.713 --> 00:04:11.577 I think when we look offshore, we find better opportunities in that particular 86 00:04:11.577 --> 00:04:13.577 area versus buying those in the 87 00:04:13.577 --> 00:04:15.577 South African equity market. 88 00:04:15.577 --> 00:04:19.122 The South African macro environment has improved, whether it be political with the 89 00:04:19.122 --> 00:04:21.122 government of national unity, 90 00:04:21.122 --> 00:04:24.625 whether it be inflation, which is coming down, and also therefore interest rates. 91 00:04:24.905 --> 00:04:29.308 It does provide rather a nice base for what you've just been talking about. 92 00:04:30.569 --> 00:04:37.260 Yes it does and all our own goals we just scored as well right, the transit issues, 93 00:04:37.260 --> 00:04:39.260 the electricity issues. 94 00:04:39.260 --> 00:04:41.800 And then also like the backdrop of interest rate cuts, right? 95 00:04:41.880 --> 00:04:47.525 So we had the Federal Reserve start to cut rates, which allowed out the South African 96 00:04:47.525 --> 00:04:49.525 Reserve Bank to also cut rates as well. 97 00:04:49.525 --> 00:04:54.451 You know, declining rate environments really important for that South African 98 00:04:54.451 --> 00:04:56.451 consumer because there's a lot of leverage sitting in the system in that consumer, 99 00:04:56.451 --> 00:04:58.451 right? 100 00:04:58.451 --> 00:05:00.451 So less on interest, more on goods and services, etc. 101 00:05:00.451 --> 00:05:02.451 So that's also positive. 102 00:05:02.451 --> 00:05:07.945 But what it has done, because we've scored so many own goals and the growth in South 103 00:05:07.945 --> 00:05:09.945 Africa has been so lackluster from a GDP perspective, 104 00:05:09.945 --> 00:05:12.869 creating very limited amount of jobs, et cetera, over the last while, you know, 105 00:05:12.929 --> 00:05:19.673 companies have been in conservation mode in terms of managing costs to try and just 106 00:05:19.673 --> 00:05:21.673 keep the cash flows 107 00:05:21.673 --> 00:05:23.673 going and trying to protect margin. 108 00:05:23.673 --> 00:05:25.673 But margins have really fallen back a long way. 109 00:05:25.673 --> 00:05:29.020 So when I talk about the earnings reset in a lot of these South African companies 110 00:05:29.020 --> 00:05:31.020 that's taken place. 111 00:05:31.020 --> 00:05:32.463 You're starting off a very low base from an earnings perspective. 112 00:05:33.003 --> 00:05:37.927 What that means is if GDP growth ticks up from the current sub 1% to 2%, 113 00:05:37.927 --> 00:05:43.092 the multiplier effect on the earnings basis of an apparel retailer is quite 114 00:05:43.092 --> 00:05:45.092 material, right? 115 00:05:45.092 --> 00:05:47.295 Because you get an extra 1% to 3% on the top line, 116 00:05:47.655 --> 00:05:52.239 given the fact that the costs have been managed so well and the margins are coming 117 00:05:52.239 --> 00:05:54.239 off such a low base, 118 00:05:54.239 --> 00:05:55.022 that leads with a multiplier effect to your bottom line. 119 00:05:55.462 --> 00:05:58.004 So, for example, with some of these apparel retailers, is... 120 00:05:58.180 --> 00:06:02.483 Our analysts'forecasts, if we do a base or a bull case scenario, 121 00:06:02.884 --> 00:06:07.788 we are getting like at least 10% upside to market forecasts for some of these apparel 122 00:06:07.788 --> 00:06:09.788 retailers. 123 00:06:09.788 --> 00:06:10.810 If you spoke to me a year ago, that was not the case. 124 00:06:10.810 --> 00:06:15.073 We had downgrades across the sphere of South African companies. 125 00:06:15.734 --> 00:06:19.236 Yes, one of the unique selling points, if I can use that phrase, 126 00:06:19.717 --> 00:06:23.680 of 91 is your very close attention to earnings up. 127 00:06:23.780 --> 00:06:25.101 upgrades or downgrades? 128 00:06:25.141 --> 00:06:29.802 In other words, if someone says, well, the earnings per share look as though they're 129 00:06:29.802 --> 00:06:31.802 going to be this, 130 00:06:31.802 --> 00:06:35.705 but then they come up with an upgrade and it looks as though it's going to be this, 131 00:06:35.705 --> 00:06:37.705 which is plus 15% from our original forecast. 132 00:06:37.705 --> 00:06:39.086 That's what you focus on or one of the things that you focus on. 133 00:06:39.326 --> 00:06:40.927 Are you starting to see that at all? 134 00:06:41.607 --> 00:06:42.308 Very much so. 135 00:06:42.568 --> 00:06:49.390 So this actually started, we started to see green shoots towards the end of last 136 00:06:49.390 --> 00:06:51.390 year, where, you know, 137 00:06:51.390 --> 00:06:52.972 our analysts were struggling, you know, they have to rank their stocks from... 138 00:06:53.332 --> 00:06:58.014 from most to least preferred, depending on the earnings divisions profile, at a 139 00:06:58.014 --> 00:07:00.014 reasonable valuation. 140 00:07:00.014 --> 00:07:04.136 And they were struggling to find the stocks they wanted to put at the top of 141 00:07:04.136 --> 00:07:06.136 that ranking table because they were just downgrades. 142 00:07:06.136 --> 00:07:09.779 And you were kind of trying to find the one with the least downgrades or the one 143 00:07:09.779 --> 00:07:11.779 that's not just going to meet expectations. 144 00:07:11.779 --> 00:07:16.802 And that started to turn towards the end of last year coming into this year because 145 00:07:16.802 --> 00:07:18.802 I think things just got so bad in the country that that final 146 00:07:18.802 --> 00:07:22.424 earnings division cut from a lot of the south side or the market forecasters kind 147 00:07:22.424 --> 00:07:24.424 of went too far. 148 00:07:24.424 --> 00:07:29.954 And so we started to see that, you know, because we check it, we could see that our 149 00:07:29.954 --> 00:07:31.954 analyst earnings numbers for certain stocks were now above 150 00:07:31.954 --> 00:07:35.879 market forecast towards the end of last year without the GNU at that point because 151 00:07:35.879 --> 00:07:37.879 it was just self-help, right? 152 00:07:37.879 --> 00:07:41.664 And then coming into this year with the government of national unity, 153 00:07:41.664 --> 00:07:43.664 understanding that from a top-line perspective, 154 00:07:43.664 --> 00:07:47.769 you could get some benefits there and employment growth, et cetera, that just 155 00:07:47.769 --> 00:07:49.769 amplifies the ability for those earnings to come through. 156 00:07:49.769 --> 00:07:51.769 I'll give you an example. 157 00:07:51.769 --> 00:07:55.233 So Discovery is a stock we… like Serene, our insurance analyst, does really good 158 00:07:55.233 --> 00:07:57.233 work on the insurance space. 159 00:07:57.233 --> 00:07:58.734 And it's a stock she's had on her cell for a very long time. 160 00:07:58.914 --> 00:08:03.396 And at the beginning of this year, Discovery got sold off so aggressively 161 00:08:03.396 --> 00:08:05.396 with a negative sentiment. 162 00:08:05.396 --> 00:08:06.777 There was a change in accounting standards for insurance companies. 163 00:08:07.177 --> 00:08:12.458 And Serene did the work and realized that, you know, the market is completely 164 00:08:12.458 --> 00:08:14.458 mispricing the company. 165 00:08:14.458 --> 00:08:17.660 The sentiment on the NHI and all those things because of the Discovery health 166 00:08:17.660 --> 00:08:19.660 business was being overblown. 167 00:08:19.660 --> 00:08:23.903 Given the fact that this new accounting standard is coming in, the way that that 168 00:08:23.903 --> 00:08:25.903 income statement was going to look and the growth prospects for 169 00:08:25.903 --> 00:08:27.903 the business were going to look a lot better. 170 00:08:27.903 --> 00:08:30.147 And so we piled into Discovery into that negative sentiment. 171 00:08:30.447 --> 00:08:35.069 And subsequently, Discovery's numbers have come out and the management have given a 172 00:08:35.069 --> 00:08:37.069 guided outlook 173 00:08:37.069 --> 00:08:39.572 that was way above market forecasts and even Serene's forecasts, which were above 174 00:08:39.572 --> 00:08:41.572 the market. 175 00:08:41.572 --> 00:08:43.572 And the shares done quite nicely. 176 00:08:43.572 --> 00:08:43.634 So we are finding those opportunities. 177 00:08:43.814 --> 00:08:47.356 And some of it is self-help and some of it is, you know. 178 00:08:49.217 --> 00:08:56.002 actually a lot of it at the moment is the self-help part of it and then going into 179 00:08:56.002 --> 00:08:58.002 2025 as the rate cuts come through etc 180 00:08:58.002 --> 00:09:01.625 and and the GDP growth starts to pick up the top line should should be the next 181 00:09:01.625 --> 00:09:03.625 surprise we think. 182 00:09:03.625 --> 00:09:08.710 You've given us a discovery you've spoken about the retailers which have gone from 183 00:09:08.710 --> 00:09:10.710 being in the doldrums to being on your 184 00:09:10.710 --> 00:09:11.412 radar is there anything else that you like in SA Inc? 185 00:09:12.728 --> 00:09:13.428 Yes, we do. 186 00:09:13.768 --> 00:09:17.210 We quite like the South African banks, not all of them. 187 00:09:17.890 --> 00:09:22.172 Our LNS Chris Stewart is way above market forecast for Capitec in particular. 188 00:09:22.952 --> 00:09:26.334 So Capitec's been one we keep topping up every time we get an opportunity. 189 00:09:26.414 --> 00:09:33.396 But now I think the market's caught on to the fact that, you know, the growth 190 00:09:33.396 --> 00:09:35.396 vectors for this business are coming through and continue to come through. 191 00:09:35.396 --> 00:09:36.658 And that they are, you know, they're growing in insurance. 192 00:09:36.998 --> 00:09:42.260 The business banking, while it's been a little bit slower of late, it is an option 193 00:09:42.260 --> 00:09:44.260 for them to increase over time. 194 00:09:44.260 --> 00:09:46.002 But the more important part is that when they released the results recently, 195 00:09:46.402 --> 00:09:53.246 there was confidence from the management team around affordability and the customer 196 00:09:53.246 --> 00:09:55.246 base and a willingness to now lend again into 197 00:09:55.246 --> 00:09:58.129 that customer base after very mediocre growth in the credit space. 198 00:09:58.549 --> 00:09:59.789 And that's quite telling, right? 199 00:09:59.789 --> 00:10:01.911 Because now you start growing your advances book. 200 00:10:02.631 --> 00:10:08.674 It's the credit cycle in South Africa, which, you know, we haven't had a proper 201 00:10:08.674 --> 00:10:10.674 credit cycle and growth from that perspective, 202 00:10:10.674 --> 00:10:11.716 which then feeds into some of our apparel names that we like. 203 00:10:11.816 --> 00:10:12.516 etc. 204 00:10:12.657 --> 00:10:18.881 So quite like banks, our Capitec and Firstrand being our topics in terms of 205 00:10:18.881 --> 00:10:20.881 where we are versus market forecasts, 206 00:10:20.881 --> 00:10:25.986 the likes of a Firstrand is interesting because this management team has a habit 207 00:10:25.986 --> 00:10:27.986 of under-promising and over-delivering and they 208 00:10:27.986 --> 00:10:32.271 came out with results and the share came under a little bit of pressure because the 209 00:10:32.271 --> 00:10:34.271 guide of the earnings number was like 210 00:10:34.271 --> 00:10:39.136 an upper single digit kind of number, was the feeling that the market was getting 211 00:10:39.136 --> 00:10:41.136 and so the analysts were downgrading their forecasts. 212 00:10:41.136 --> 00:10:46.200 Chris Stewart, our banks analyst, kind of did the work, kicked the tires with the 213 00:10:46.200 --> 00:10:48.200 management team, and he's got double-digit earnings growth. 214 00:10:48.200 --> 00:10:51.242 So above-market forecasts that have, you know, just kind of taken what management 215 00:10:51.242 --> 00:10:53.242 have said, 216 00:10:53.242 --> 00:10:58.787 with Chris realizing through his interactions with the management team that 217 00:10:58.787 --> 00:11:00.787 there's a lot of conservatism baked into their guide 218 00:11:00.787 --> 00:11:02.969 as they try to over-deliver on, you know, on expectations. 219 00:11:03.189 --> 00:11:05.170 So, yeah, quite like the bank space as well. 220 00:11:05.650 --> 00:11:08.632 And then dipped our toe into a few of the property names as well. 221 00:11:08.792 --> 00:11:15.338 because, I mean, the property companies have reached a point, a lot of them 222 00:11:15.338 --> 00:11:17.338 outside a growth point, where, you know, 223 00:11:17.338 --> 00:11:21.363 a lot of the pain's been taken on dental reversions and those kind of things and 224 00:11:21.363 --> 00:11:23.363 occupancies are starting to improve. 225 00:11:23.363 --> 00:11:27.148 They've also reset their balance sheets for the most part, so the dividend 226 00:11:27.148 --> 00:11:29.148 policies now that have been set are more sustainable. 227 00:11:29.148 --> 00:11:32.552 So you're getting a nice dividend yield with, like, 3% to 5% growth depending on 228 00:11:32.552 --> 00:11:34.552 which company you look at. 229 00:11:34.552 --> 00:11:36.876 So it gives you a nice little, you know, angle in your portfolio to have them 230 00:11:36.876 --> 00:11:38.876 because I've... 231 00:11:38.876 --> 00:11:40.797 bonds plus growth kind of holdings in an equity portfolio. 232 00:11:40.797 --> 00:11:43.038 Rihanna, that is such an encouraging chat we've just had. 233 00:11:43.078 --> 00:11:44.598 Thank you very much for your analysis. 234 00:11:44.718 --> 00:11:48.719 Rihanna Khan is SA Equity and Multi-Asset at 91 in Cape Town. 235 00:11:50.240 --> 00:11:57.182 The views and opinions expressed in these podcasts are those of Lindsay Williams and 236 00:11:57.182 --> 00:11:59.182 various contributors and do not reflect the policy, 237 00:11:59.182 --> 00:12:01.723 position, or opinion of any other agency, organization, employer, 238 00:12:02.043 --> 00:12:05.904 or company associated with StrictlyBusinessPodcast.com. 239 00:12:06.364 --> 00:12:13.331 Assumptions made on the analyses are not reflective of the position of any other 240 00:12:13.331 --> 00:12:15.331 entity other than the speaker or the author. 241 00:12:15.331 --> 00:12:18.816 And since we are critically thinking human beings, these views are always subject to 242 00:12:18.816 --> 00:12:18.915 change, 243 00:12:19.096 --> 00:12:21.659 revision and rethinking at any time. 244 00:12:21.959 --> 00:12:24.381 Please do not hold us to them in perpetuity.