In his Business Day column reproduced below, Michel Pireu reports on a recent discussion we had around some of the opportunities for investors in South African companies. In the article Michel focuses on Metair Investments Ltd, which subsequent to our discussion has allocated a substantial part of its cash to acquire the Romanian battery business, Rombat, for around R500 million. Whilst our investment team generally dislikes acquisitive growth, we favour the Rombat transaction for at least three reasons: payment is dominated by cash with no equity issuance; the transaction has been concluded on an attractive price multiple relative to earnings; and there is no diffusion in focus or expertise.


In a series of recent video interviews Adrian Saville, Chief Investment Officer at Cannon Asset Managers. reiterated the belief that we are in a two speed world - the one containing the slow growing countries ofEurope, North America and Japan, the other comprising dynamic markets like Brazil, Russia and India - in which we should be looking for exposure to “the fast growth drivers at prices shaped by poor sentiment”.

“We hold two stocks that really stand out in terms of this argument,” says Saville, “the first is Anglo American, with a superb commodity basket whose prices and volumes are driven by the fast growth countries; The other, perhaps an even more global story, BMW.”

“Bulk commodities and base metals make up 70% of Anglo’s revenue, and it’s not the advanced world that’s demanding those commodities but the fast growing, dynamic world. That informs us that the drivers of Anglo’s revenue are, in fact, in very good shape. Despite that it’s trading at depressed multiples. On a price to Net Asset Value basis, for instance, Anglo is at its lowest multiple in 40 years. If you look at the components that make up market capitalisation, you’re able to get some pretty good pricing direction. So that Kumba, Anglo Platinum and the recent transaction in Latin America with Mitsubishi, for example, explain almost all of Anglo’s capitalisation, and yet only represent 60% of their revenue. What we see here is a big discrepancy between intrinsic value and price.”

“BMW needs no introduction, it’s an extraordinary quality business, with a very strong balance sheet that is now priced on poor sentiment. During the course of last year investors became despondent about the firm’s prospects, in part because it’s listed in Germany, thinking it is in a dull landscape without great prospects. As a result BMW fell to a price earnings multiple of about 6 in August and at that level was trading at net asset value - meaning it would probably be easier to buy it off the stock exchange than rebuild it from scratch. The remarkable thing, however, is that in the last twelve months BMW produced its best results ever. It sold its greatest number of vehicles ever and it sold those at its highest profit per unit ever achieved shape. In China alone, demand for luxury vehicles rose 23% last year, while the demand for BMWs rose 40%.”

But the company that gets Adrian Saville really excited in terms of investment opportunity is local company Metair, which he describes as “an exceptional investment opportunity in the current landscape where investors should be looking to put into their portfolios businesses that have two attributes: The first, as always, being good valuation multiples; The second, given the complexity of the current global and domestic investment setting, being quality.”

“Metair,” says Saville, “has both these attributes, in bucket loads.”

“The company has a sixty year history, initially focussed on original equipment, but in recent years expanding into the ‘after-market’ and other parts of the industrial landscape - including alternative energy supply.

“Over the last decade, Metair has grown earnings at about 15% per annum, which might not sound particularly exciting, but has some attractive elements. The first of these is the strength and status of the balance sheet. Then there’s the stability of earnings and cash flows. On each of these elements Metair really stands out,” says Saville. “We draw together the income statement, cash flow, balance sheet by using what we call a fundamental score where we assess a business on nine criteria. Metair comes out with an exceptionally high fundamental score, in fact it scores a perfect nine out of nine. We supplement this fundamental score with a tool called the H score which compares the company with its peers rather than the broad market. The maximum score is one hundred, Metair scores 92 out of 100, firmly putting it in the top draw in terms of quality. Of the last 120 Directors’ share transactions, 106 represented directors buying their own stock. The company’s earnings are consistently underpinned by cash and in recent times they have rewarded shareholders not just with ordinary dividends but with special dividends. The balance sheets contains a few hidden gems: About R400 million in cash- on a R3 billion Rand market capitalisation. And alongside that a property portfolio that is shown to be worth around R250m , but produces income of just under R70m and that we estimate to be worth around R750m. So what you’re actually getting is a beautiful blend of equity, property and cash in a single basket at very good prices.”

Other investment opportunities that emerge from the current “sentiment versus reality disconnect”: Aveng, Basil Reed, ELB, Group 5 and Stefanutti in the construction sector, and Hudaco in the broader engineering sector.