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These valuations are crazy’: The potential unlock in SA shares

ClucasGray sees significant potential to realise value in locally-listed companies.

CO-MANAGER of the R1.1bn ClucasGray Equity Prescient fund, Andrew Vintcent, believes that the thesis for holding depressed South African shares is as compelling as it’s ever been.

‘These valuations are crazy,’ Vintcent told Citywire South Africa in an interview. ‘Not all the shares we own are trading on a six or seven P/E, but that are a lot of shares on the JSE that do.’

He added that while last year and the first quarter of 2024 were particularly difficult for local equity managers, he believes that the potential for patient investors to earn outsized rewards by staying invested is significant.

‘You can get lost in the clouds in terms of macro analysis, but we do think there have been some seismic one-offs in South Africa that have hampered growth over the last 18 months,’ Citywire + rated Vintcent said. ‘We warned that growth in 2023 was going to be low because we had some aberrations, most notably around the lack of access to stable power. And just on that count, this year will be better than last year.

Andrew Vintcent

‘A year ago, we were in stage six load-shedding, so base effects will start working in our favour to some extent. With our view that we are through the hiking cycle, interest rates will also get less punitive from these levels. Those are two massive headwinds that disappear.’

Vincent (pictured right) said that even in the absence of compelling tailwinds, just these headwinds falling away creates room for better returns from local stocks.

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‘That’s because the earnings bases of many companies are low, and elevated bond yields have suppressed ratings,’ he said. ‘Are we talking our book? I suppose we are, but we put the book together for reasons that include those two.’

In light of BHP’s proposed takeover of Anglo American, Vintcent added that every cycle provides reminders of why being patient as an investor is so important.

‘At a behavioural level, it is an under-emphasised part of what active managers have to do,’ Vintcent said. ‘We need to have a view and believe in that view, and in time three things can happen for that view to play out, assuming we are right in our fundamental investment case.

‘The first is that companies will continue to grow their earnings, and by virtue of that playing out, share prices will ultimately react. Secondly, companies can force some kind of a rerating. Most boards, I would like to think, are discussing ways to enhance shareholder returns through things like special dividends or share buybacks.

‘And the third is that a good business at the wrong price will attract interest – either public capital or private capital. I don’t know where the Anglo deal ends up, but it’s a case in point that good businesses trading at the wrong price can attract capital.’

Delistings

This has become a meaningful theme in the South African market. In his latest quarterly commentary, Vintcent noted how Canal+’s increased offer for Multichoice in March had been indicative of the value available on the JSE.

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‘MultiChoice now joins a growing list of companies that our funds have been invested in that have been the subject of a buy-out in the last few years,’ Vintcent wrote. ‘Recent examples of these include Clover, Long4Life, Distell, Massmart and RB Plats.

‘Well-managed larger companies and private capital will always seek out opportunities to deploy capital accretively. With the valuations on offer across numerous companies and sectors on the JSE, it is hard to believe that MultiChoice will be the last takeover target.’

The ClucasGray Equity Prescient fund is also invested in Anglo American.

Nevertheless, he said that the underperformance of the JSE over the past five years had been ‘frustrating’ for both asset managers and investors. The performance of the shares in local banks being a case in point.

Prospects

‘The banks have just derated to valuation multiples that we wouldn’t have expected,’ Vintcent said. ‘They are well-capitalised, have built up significant provisions, and their ROEs (return on equity) are good. But their valuation multiples keep contracting.

‘That has been frustrating, and I think is very much down to the elevated bond yield environment, which has a dampening effect on multiples generally.’

Even though patient investors are being rewarded with high dividend yields from these stocks in the interim, Vintcent said that this is not the ideal scenario.

‘I’d far rather they had lower dividend yields and high share prices,’ he said. ‘The pain of getting to these high yields has not been pleasant. Absa in particular has come back a very long way, partly due to disappointing results, but mostly due to a significant derating.

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‘But as they stand today, the prospects to grow earnings off what we think was quite a subdued base in 2023 for many of them is good. So, we see an improving earnings backdrop and potential for rerating, which we think is compelling.’

The ClucasGray Equity Prescient fund has returned 7.4% per annum over the past five years, and an annualised 10.4% over the past three years. That is ahead of its Capped Swix benchmark, which is up 7.0% over the five year period and 5.3% over three years.

By BRETT SILBERG

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