Don’t overlook SA’s corporate gems | Fin24
 
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Don’t overlook SA’s corporate gems

Sep 22 2017 14:07
Leon Kok

Herman van Velze is head of Stanlib Equities and a member of Stanlib’s executive. (Picture: Supplied)

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An equity management team that really goes to great lengths in seeking out quality growth in South African equities over the long term is Stanlib Equities, headed by formidable equity portfolio manager and member of Stanlib’s executive Herman van Velze.
  
This has long been reflected in its two SA-centric equity funds, namely the R3.4bn Stanlib Equity Fund and the R1.9bn Stanlib SA Equity Fund. 

Despite tough market conditions, they’ve returned an impressive annualised 11.22% and 10.6% respectively during the past five years.   

The Stanlib SA Equity Fund, established in 1970 and with 50 000 investors, is one of SA’s oldest. The Stanlib Equity Fund is more diversified with a 30% offshore exposure and 3% Africa weighting.  

Stanlib Equities’ attention is not only on what’s happening now, but five years and longer in the future, Van Velze explains. 

“It’s not our style to be distracted by every macroeconomic change but to focus rather on what’s paramount. And that’s to find the hidden opportunities in companies that will drive growth.
   
“We review published reports extensively, meet CEOs and management teams of companies that we invest in regularly, as these meetings can steer the research agenda to considerably enhance our views of a company – sometimes for better, sometimes for worse.”
  
Creating outperforming equity portfolios entails having considerable insights into what’s happening in the real world, he adds. 

It requires making the connections between a company’s earnings data, and identifying unique differentiators and areas of competitive advantage that will lead to enhanced share price growth in the long term.
  
While cognisant of key obstacles confronting SA such as political uncertainty, rising populism and policy divergence, Van Velze believes that they aren’t entirely paralysing. 

In fact, many are potentially empowering. They create scope for leadership, creativity and experimentation in both politics and business.

Besides, extraordinary opportunities are being created by technology, globalisation and social change across the globe.  

Contrary to the teachings of modern economic history, no immutable laws govern the behaviour of a capitalist economy. Instead, capitalism is an adaptive social system that mutates and evolves in response to a changing environment.
  
Says Van Velze: “True, SA is enduring a serious malaise and indeed while it’s logical for investors to ensure exposure to the massive opportunity set offshore, one shouldn’t overlook the gems in this country. 

There are several SA-African champions that are set to enjoy massive international demand in the long term.”

Domestic controlled, home-grown business solutions that he considers world-class, or potentially so, are:
 
Naspers*: A spectacular global champion. Its subsidiary Tencent, worth over R1.5tr, is the second-largest listed Chinese company after Alibaba, and the 10th-largest global company by market capitalisation. 

It’s unique, and we are not swayed by its size and believe that it is set to remain a major driver in the SA market. It is by far the largest share in our portfolios and matches the index weighting. 

We believe that several of Tencent’s other investments will become meaningful contributors over time.  

Kumba Iron Ore: It is most likely to surprise investors from an equity growth perspective. From being a high-cost producer, it has an opportunity to reduce costs and increase mine lifespan by its use of modern technology. 

Its product is in high demand because of its excellent physical strength and high iron content. It has also changed Anglo American’s thinking on retaining control.
  
Curro: With a market capitalisation of R18.5bn, it’s the fastest-growing private education specialist in the country based on excellent management. 

Its growth is evidence that many learners in state schools are not getting a quality education. At around R40 000 a learner a year, it provides the infrastructure, facilities and educational levels on par with private schools.
 
Capitec: Formed in 1997, it’s arguably the most expensive bank in the world and perhaps with good reason. It has brilliantly overcome the barriers to entry in SA through its partnership with PSG, a diversified business model, and providing a simple, affordable, transparent product that is easily understood by the market.
  
Discovery: This is another established and well-managed business with a proven record that’s expanding its operations globally and also wants to challenge the domestic banking sector in future. 

It serves more than 5m clients across SA, the UK, US, China, Singapore and Australia.  

Shoprite: Probably the most valuable retailer of its kind in the world. It is Africa’s biggest food retailer with operations in 16 countries, has forced itself into top spot in SA by market share, and has the best position in the lower to bottom end of the market.

AVI: This is a world-class fast-moving consumer goods company with over 50 brands. It has created competitive advantage through having a clear understanding and strategy of the economics between volume and quality. 

It maintains quality across the manufacturing, distribution and packaging process and finds the right mix.  

Also worth noting are other select food companies, such as Pioneer, Tiger Brands, Tongaat, Rhodes and Clover: Though not necessarily set to become global scale successes, most can be expected to outperform as the cyclic decline recedes. 

Several are globally competitive in certain areas; growth promises to be enhanced by technology and by-products, and some markets are more than 90% dependent on food products. 

The challenges tend to be political in the form of government inefficiencies as well as high energy, water and waste removal costs.

*finweek is a publication of Media24, a subsidiary of Naspers.

This article is from the September 2017 edition of FundFocus, which appeared in the 21 September edition of finweek. Buy and download the magazine here.

investment  |  portfolio  |  shoprite  |  kumba iron ore  |  avi  |  capitec  |  curro  |  naspers  |  discovery
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