28 February 2018


by Liam Hechter

While the JSE was sharply higher and the rand firmed midFebruary, following the overnight resignation of Jacob Zuma as president, the selloff in global equities also engulfed the local market, resulting in the FTSE JSE All Share Index ending the month 2.0% lower. Market heavyweights, British American Tobacco, Naspers, and BHP Billiton, which together account for c. 33%-plus of the JSE’s total market cap, dropped by 13%, 7% and 3% MoM, respectively, on the back of lower global markets, a stronger rand and weaker commodity prices. Meanwhile, January’s bloodbath in the property sector, led by the Resilient Group of Companies (Greenbay, Fortress -B-, NEPI Rockcastle and Resilient) continued, with Fortress -B- (-46.8% MoM), Resilient (- 43.0% MoM), NEPI Rockcastle (-25.9% MoM) and Greenbay Properties (-22.1% MoM), all closing lower MoM. In February, two reports circulated slamming the Resilient stable’s accounting policies and the use of related parties to trade in the Group’s shares and raising various concerns, including manipulation, complex transactions and unclear governance structures, and asking whether the companies warranted such high premiums to NAVs and how these were created. Added to the negative sentiment, Resilient released a cautionary stating that management were looking closely at its relationship with broad-based black economic empowerment partner Siyakha Education Trust, further weighing on the shares.

A decrease in resources prices also pulled the Resi-10 4.9% down for the month, while Industrials closed 3.5% in the red. On the flipside, Financials, dragged lower in January by the fallout from the Viceroy report on Capitec, ended February 5.1% in the green.

Euphoria over Cyril Ramaphosa’s election as ANC leader in December settled somewhat as the mammoth task facing the new president hit home. The rand ended February 0.5% higher after strengthening to a three-year high of R11.52/$1 leading up to Ramaphosa’s Cabinet reshuffle on 26 February. The reappointment of Nhlanhla Nene as finance minister and Pravin Gordhan as minister of public enterprises was welcomed and seen as assisting Ramaphosa’s government clean-up. However, there were also concerns around some of the appointments, in what is widely seen as a compromise cabinet. The Budget speech was for the most part ratings-agencies positive (Moody’s is expected to maintain its rating on 23 March), although news of the first VAT hike (to 15%) in years drew the ire of consumers.

On the local economic data front, January consumer price inflation (CPI) data showed that inflation dropped to its lowest level since March 2015 – down to 4.4% YoY vs December 2017’s 4.7% print. MoM, inflation eased to 0.3% in January vs December’s 0.5%. Core CPI, which excludes the volatile food, non-alcoholic beverages, and energy price categories, fell to 4.1% YoY in January vs 4.2% in December. Meanwhile, January producer price inflation (PPI) slowed slightly to 5.1% YoY vs December’s 5.2%. January’s trade deficit expanded to the biggest since the early 1990s as imports surged 22% and vehicle exports declined, with the SA Revenue Service (SARS) revealing a R27.7bn ($2.4bn) trade gap. This compares with December’s revised R15.3bn positive balance.


During the month we decided, as a portfolio management exercise, to reduce the portfolios exposure to Old Mutual Plc following a run of strong performance. We maintain our constructive stance on Old Mutual as a stand-alone investment however decided to take profits on the tactical upweighting that happened mid-way through 2017. We decided to upweight when, by our estimates, the business was trading at a 25% discount to the sum of its individual components with a clear catalyst on the horizon to unlock this trapped value in the form of the impending “managed separation”. While Old Mutual still trades at a discount to our assessment of intrinsic value, this discount has narrowed somewhat along with many domestically focussed counters listed on the JSE, with many of them now trading at premiums to our assessment of fair value requiring investors to pay peak multiples for what appears to be trough-of-cycle earnings and margins.

Old Mutual trades at a 12m forward PE multiple of 11x and a 12m forward dividend yield of 3%. Anchor Capitals assessment of fair value remains in excess of R43/share and remains a core of holding of ours in the domestic equity portfolios.



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