It’s about quality, not quantity in 2018 | Fin24
 
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It’s about quality, not quantity in 2018

May 17 2018 11:05
Marcia Klein

Compared to the 21 new listings in 2017, 2018 has yielded sparse options for anyone looking for new investment opportunities on the JSE.   

There was only one company listing in the first quarter – the secondary listing, in March, of Kore Potash. With Hosken Passenger Logistics and Rail being the only listing in April, and with Consol and Sagarmatha Technologies shelving their listings, 2018 looked off to a very sluggish start.   

But improved investor sentiment and the coming together of some longer-term mooted listing plans are seeing investment options on the JSE increase.   

“The first quarter definitely showed renewed interest in South African investment generally, which includes increasing queries in relation to listing,” says Christina Pretorius, director at Norton Rose Fulbright South Africa.  

“The approaches that we have received this year have been largely from international players, although that may be more indicative of our client base than general market perception,” she says. 

“Having said that, we have had engagements this year for South African subsidiaries to plan for a listing in the medium term.”

Her experience is that there is still interest in the property sector, which has been a growth area for a few years.   

“Private placements still appear to be more popular than initial public offerings: of the 21 new listings on the JSE in 2017, only five were initial public offerings,” Pretorius says.    

The same applies to 2018, and there are still only a handful of listings in the offing, but it’s about quality rather than quantity this year, with the recent and upcoming listing of some substantial companies.   

LIBSTAR 

Offering an alternative to the likes of AVI, Tiger Brands and Rhodes Foods, Libstar listed on 9 May, but it has been a rocky start.   

Libstar owns brands like Denny and Lancewood while producing prepared meals for Woolworths and private-label brands for supermarkets. 

The company irked shareholders by pitching its share price at R12.50 and raising R1.5bn to repay debt and reward its existing shareholders – including the Abraaj private equity group and the Public Investment Corporation – with a special dividend.   

The shares dropped after listing, and currently trade at 12.37, still on a hefty price-to-earnings (P/E) ratio of 32. 

Libstar’s pre-listing statement indicates revenue of R8.8bn and operating profit of R594m in the year to December, and the company says it has recorded a compound annual growth rate of 23% over the past three years.  

Fairtree Capital portfolio manager Jean Pierre Verster says this is not the best time to list a company like Libstar. “There is still pressure on the consumer, although it has eased somewhat since last year,” he explains.

Libstar has a large exposure to Woolworths Food, and upper-income-bracket sales volumes have been under pressure.  

Libstar does significant business in perishables or ambient products like cheeses, mushrooms and pastas. While it has significant market shares in those categories, they are still very competitive categories. 

Verster says the quality of the Libstar portfolio is not quite the same as Tiger Brands, which dominates various categories. 

Tiger Brands has had its own issues, but it is a higher-quality business.   

Wayne McCurrie, senior portfolio manager at Ashburton Investments, says the two companies differ as Tiger Brands offers more basic commodity items. 

“Libstar is added-value products and is not as exposed to raw agricultural prices as Tiger Brands. A better comparison may be Rhodes or the food business of AVI.   

“It is, nevertheless, a consumer-oriented business. If you believe South Africa is going forward and that things are getting better, it is quite well positioned for that.”  

McCurrie agrees on the risk in its large exposure to Woolworths. “But Woolworths Food is doing reasonably well, so it should not cause them any problem.

“Libstar is not a bad investment, but it is just not terribly exciting.”  

VIVO ENERGY
   

Investors seemed to be more excited about Vivo Energy. It has more than 1 800 Shell petrol stations in 15 African countries, is opening nine more this year, and plans to buy Engen’s 300 petrol stations in Africa (outside SA) by the end of the year.  

The company, which is owned by oil trader Vitol and Helios Investment Partners, and which also distributes fuel and lubricants, reported earnings before interest, tax, depreciation and amortisation of $326m in the year to December – up from $286m previously. 

This kind of growth, and its planned expansion through acquisition, indicate significant upward potential. 

The share price, at R30.88, has hardly moved since its 10 May listing in London and Johannesburg.

Of all the listings, recent or upcoming, Verster is most bullish about Vivo. “This is a high-quality company, distributing fuel, operating the Shell brand in North and West Africa and proposing the acquisition of Engen stations in East Africa.”  

Notwithstanding some regulatory barriers and some disquiet regarding some of its local partners, it is in a strong position with Shell and potentially Engen, he says.   

While companies that retail fuel may have volatile margins and profits linked to oil price, Vivo makes a fixed margin on the fuel it sells, so its growth is more reliant on the volume of fuel sold. 

Verster says demand could grow strongly as economies grow and the middle class expands. It has a good management team with lots of experience.  

McCurrie says Vivo “is geared to the African growth story, but I think it’s too early. I cannot see Africa growth outside South Africa surging ahead, so I am cautious.   

“Vivo is exposed to emerging market and political risk, although its business may be somewhat shielded from volatility.”   

GRINDROD SHIPPING 

The long-mooted separate listing of JSE-listed Grindrod’s shipping division on Nasdaq and the JSE finally comes to fruition once shareholders vote on 4 June.   

The investment case for the shipping business is going to be a hard sell for Grindrod. This listing is an unbundling with no capital raising, so current shareholders will be allocated shares. 

But for potential new investors, Grindrod Shipping is not without a fair amount of risk.  

In the year to December, the headline loss from shipping was R202.6m, an improvement on the prior year’s R569.6m as dry-bulk rates helped it narrow the loss. 

Grindrod incurred an impairment of R620m on specific ships and goodwill ahead of the separate listing.  

The company has estimated the net asset value of the shipping business at $320m and believes the cycle has turned after some years of losses, providing the impetus to unlock shareholder value. 

It says the business remained sustainable while many of its peers have failed. 

“Grindrod Shipping has been around forever and is a well-known and understood business,” says McCurrie. With one or two variables, it is a similar investment decision to buying Billiton or Anglo with their fortunes linked to commodities, he says. 

“I am relatively positive. This is a highly volatile industry, but I think it will do okay. Shipping rates are improving, and the massive oversupply of ships is dissipating, so it might do quite well in the shorter term. However, it is a commodity share – the price can double or triple and then halve and halve again. These are highly geared and highly volatile shares.”   

According to Verster, “It is currently loss-making and has been for at least last three years, with global shipping having been under pressure since 2009. There is a lot of tangible value in ships and it has an equity value of R4bn – but, it is up to the market to determine the price. 

Grindrod may have ascribed a number, but even though that is the book value, it has been loss-making, and one might see it trade at a significant discount to that.”

The rest of the business left in Grindrod (freight and financial services) may be more attractive for an investor, Verster adds. 

“Grindrod could not find a purchaser for the whole of the business, but the rest is attractive for any suitors who do not want exposure to the shipping business.”   
OLD MUTUAL/QUILTER/NEDBANK 

As part of the Old Mutual group’s separation, investors will, over the next few months, be able to invest separately in South African emerging markets business Old Mutual, its UK-based business Quilter, or Nedbank.   

On June 25, Old Mutual will list Quilter on the LSE and JSE and distribute 86.6% of its share capital to shareholders and sell up to 9.6% of Quilter to institutional investors. 

The next day, Old Mutual will re-establish its primary listing in SA since demutualising in 1999 and moving offshore, with secondary listings in London, Malawi, Namibia and Zimbabwe.   

About six months later, Nedbank will be unbundled.   

Current shareholders will remain invested in all three, but the separation opens up investment options for investors. 

In many ways, its return to the JSE is symbolic, and not a new listing at all, although it may result in a renewed focus on its emerging markets business after its patchy expansion offshore.   

Verster says the new listing is actually that of Quilter, the company that houses its wealth management business, which has £114.4bn under management.   

“Quilter is a very good business, growing strongly in the wealth management sector, and with a leading position offering a wealth management platform for advisers to help them direct clients’ money. 

It is attracting flows and seems to have quite good prospects.”   

The Old Mutual listings are likely to attract significant interest. As Verster points out, there are a large number of individual investors who hold shares from its demutualisation, and Old Mutual is the company on the JSE with the single highest number of retail shareholders. 

Following the unbundling, Quilter will be too.   

The majority of retail investors will automatically receive Quilter shares and they may not be interested in holding Quilter, and there is a chance there will be an overhang, and pressure on the Quilter price.  

As Old Mutual has not announced the price at which it is selling a 9.6% stake, Verster says it is difficult to comment yet on whether it offers value. 

But from a qualitative perspective, it is a good business in own right. Old Mutual in SA is also a good business, he says, and current shareholders will have saved ongoing costs of the London head office, which is being closed down. 

McCurrie says the South African operations have been quite successful for many years. “As with all other South African life assurers, the last three years have been tough, and Old Mutual South Africa has coped well in that environment.   

“If you believe South Africa is going to do better, Old Mutual is geared to what the consumer and stock market does.”   

He adds that current shareholders should hold on to their shares as the separation should unlock some value.

This article originally appeared in the 24 May edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.

investment  |  shares  |  jse
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