When investing, there are two broad strategies for identifying investments – “Top-down” and “Bottom-up”. Top-down investing entails making a call on the macro environment and finding the sectors and companies that have performed well during similar periods in the past. The success of the strategy rests on the accuracy of predicting economic growth, inflation and interest rates. A bottom-up approach is based on identifying companies that can perform well regardless of the prevailing macro environment. In reality, most managers use a combination of both strategies.
When investing in companies listed on the JSE, a top-down approach would render most of the universe of companies uninvestable. However, it is easy to forget the world-class multinationals that are listed on the local bourse, together with domestically-focused companies that can grow regardless of the prevailing headwinds faced by the country as a whole. The JSE is only 3% down from a record high achieved during January, underpinned by the rand hedge properties of some of the largest weighted companies as well as the performance of our banks. In this newsletter, we highlight several of the companies that have reported results recently, demonstrating the benefits of focusing on a company’s fundamentals rather than being distracted by the macro noise.
Aspen 1H-2023 Results:
Aspen’s share price rose the most in 23 years following its interim result announcement. The rally was driven by the announcement that the company was in advanced negotiations to fill the valuable spare sterile manufacturing capacity that has been built over the last 5 years. This follows a tumultuous time for the group’s manufacturing strategy after no orders were made for the company’s COVID vaccine, Aspenovax.
Despite failing to fill the idle capacity, the group’s Aspenovax launch announced to the world that Aspen has high-quality, complex manufacturing capabilities. Specifically, it has capacity to produce highly sought after pre-filled syringes – a common form of vaccine administration.
Africa imports 99% of its vaccines and was left at the back of the queue when COVID vaccines were in short supply in the early stages of the coronavirus pandemic. Aspen is seen to be key to reducing Africa’s reliance on vaccine imports. Aspen recently signed a 10-year agreement with Serum Institute of India to bottle four vaccines used in child immunization programs that it will market and distribute under its own brand in Africa.
Together with the announcement of further impending deals, Aspen increased its guidance for the long-term gross profit contribution from filling the spare capacity from R3 billion to R8 billion annually, of which R2 billion is expected to be contracted in calendar year 2024 and R4 billion in 2025. Depending on the type of contracts signed with these multinational partners, most of the gross profit will fall straight to the bottom-line due to the fixed cost base of the manufacturing facilities.
We have maintained that the next growth leg for the company rested on its ability to fill the spare capacity of its manufacturing facilities on favourable economic terms. With the progression made in this regard, we anticipate robust growth in earnings and the returns on the capital investments made over the last few years.
FirstRand 1H-2023 Results
FirstRand once again reported a high-quality set of results. Earnings growth of 15% allowed it to increase its interim dividend by 20% to R1.89 per share. Strong topline growth was more than sufficient to offset the increase in operating costs and impairments. Management’s continued focus on earnings growth and capital optimization resulted in strong economic profit generated and a superior return on equity. Despite a deteriorating economic environment in SA, the group’s prudent and calculated approach towards lending has ensured the integrity of its loan portfolio remains robust. FirstRand’s judicious and tactical approach to lending has led to a better-than-expected credit performance. We believe that the focus on low-to-medium risk clients positions FirstRand better than its broader peer group – particularly at a time where forward-looking macro assumptions have weakened. Looking ahead, FirstRand has guided for repeated strong underlying earnings growth and expects to maintain its superior returns on equity.
FirstRand included the chart above in its presentation – illustrating how Government could boost South Africa’s potential GDP by unlocking the private sector. The group has noted ever increasing signs that work on improving SA has started and that there are growing expectations that private sector will need to be involved to meaningfully grow our economy. Anecdotally, the BusinessDay included commentary from the current RMB CEO, Emrie Brown, stating that RMB has a pipeline of more than 5 000 MW of private renewable energy projects that she believes will go a long way towards alleviating SA’s chronic power shortages.
Richemont 3Q-2023 Sales Update:
The sudden shift away from China’s COVID-zero policy has catalysed the share prices of luxury goods companies this year. With the United States doing most of the heavy lifting in driving industry sales in 2022, expectations for a swift rebound in purchases by Chinese consumers, both domestically and abroad, is expected to provide a tailwind for sales in 2023.
Richemont’s sales grew by 5% in the final quarter of 2022 – a slowdown from the rapid pace experienced over the last 18 months – as sales in mainland China fell by 24%. The strength of the dollar in the second half of the year led to a shift in sales towards Europe, as American tourists took advantage of lower prices on the continent to snap up luxury products. Despite slowing sales growth in the US in the last two quarters of the year, overall sales to American clientele (at home and abroad) remained up double digits for the period. The release of Richemont’s third quarter sales figures weren’t accompanied by a conference call, however, the other luxury companies that reported results generally struck an upbeat tone regarding 2023. Although still too early to extrapolate trends in Chinese demand from the first two months of the year, the companies were optimistic on store traffic improvements seen as restrictions were eased. The return of Chinese tourists to Europe’s luxury capitals is dependent on the recovery of outbound flights and is likely to be a greater factor in the second half of the year.
Bidcorp 1H-2023 Results
Bidcorp recorded stellar results for the six months ended December 2022. The group reported 40% earnings growth compared to the same period in 2019. This is the first period in which all Bidcorp’s operating regions were absent from lockdowns. The financials were finally able to reflect the positive impact of strategic adjustments made over the last three years. Management have intentionally pivoted towards higher margin independent customers, rightsized underperforming markets such as Germany and Spain, and added capacity to promising markets such as Australia and Latin America.
Global restaurant demand has remained robust due to post-lockdown behaviour change as well as lower menu price inflation relative to grocery inflation. The outlook remains positive with most regions exiting the interim period strongly. In addition, the UK (Bidcorp’s largest market) stands to benefit from pricing renegotiations. The UK customer base comprises primarily QSR chains, whose contracts are typically fixed with longer terms. This reduces flexibility in pricing adjustments, but this is solely a timing issue as future contract renewals are expected to adjust accordingly.
Conclusion:
The outlook for the domestic economy seems dire given the challenges faced by Eskom. It is difficult to envisage a catalyst to alter the direction of the country, particularly when we are living through rolling black outs and crumbling infrastructure. The prices and valuation multiples of domestically-focused companies, however, reflect this reality. With the present level of pessimism, it doesn’t take much good news to drive a sharp improvement in prices.
In the meantime, the JSE is still blessed to have companies that aren’t exposed to the local economy and offer strong bottom-up growth drivers, decoupled from rand weakness alone.