There’s no doubt that investors are staring at an unquantifiable crisis as the Covid-19 outbreak infects major economies around the world — most notably the US and key business regions in Europe.
While cash (or gold or silver for those factoring in a more apocalyptic outcome) is king, there is a nagging sense that if this awful pandemic is eventually nullified it might have been prudent to build some equity positions at fire-sale prices to capitalise on a recovery.
A dependable flow of dividends would ease the jitters, and the Satrix Divi Exchange Traded Fund (ETF) might — especially at current levels — be considered a prudent position for anyone determined to play the JSE for a rebound.
Indeed, the Satrix Divi carries a well-diversified portfolio that covers many sectors of the JSE. On paper, this reduces the risk for the investor in terms of total returns and reliable dividend flows.
But IM, which is a fan of the Satrix Divi, would prefer at this delicate juncture to go SHORT on this ETF.
IM would recommend that any punters banking on the local business environment returning to any semblance of normality should look at investment company Long4Life (L4L) as a recovery ticket.
L4L holds investments in specialist retail in the form of the Sportsmans Warehouse and Outdoor Warehouse chains as well as a health and beauty niche through Sorbet and beverages via Chill Beverages and Inhle.
Obviously these "lifestyle" business silos — aside, maybe, from the beverages businesses — would not have thrived during the lockdown period.
But IM reckons South Africans’ sports-mad psyche and love of the outdoors will result in customers making their way back to the two retail brands after being emancipated from the lockdown. Sorbet’s offering will be as relevant as ever once people are out and about again.
But the assets are not the main reason to consider L4L as a LONG.
Arguably the key "asset" at L4L is CEO, founder and major shareholder Brian Joffe, a deal-making doyen who built up two services juggernauts, Bidvest and Bidcorp, from scratch by making smart and value-adding acquisitions.
Joffe has kept a fair bit of his powder dry (and has a fair bit of leverage on his balance sheet) to take advantage of any attractively priced opportunities in the prevailing crisis.
L4L has a sturdy balance sheet, with almost R900m in cash at the end of August last year. Since then some cash has been mobilised for more share buy-backs. But the cash pile might remain static as the buy-back outflows will probably be replaced by cash generated in the six months to end-February. Cash generated in the six months to end-August was a reassuring R117m.
While acquisitions are possible, it is important to realise L4L has already indicated to shareholders that dividends will be on hold while the (weak) share price dictates an ongoing strategy to buy back shares.
The group’s last stated net asset value (NAV) was 558c a share. Even if the effects of the Covid-19 shutdown are taken into consideration, the current share price of under 300c still offers a compelling discount.
Obviously L4L has been precluded from buying back its own shares in the closed period leading up to the close of the full financial year and the release of these results. But IM has little doubt Joffe will be buying back shares as soon as this is allowed. If the discount holds at these wide levels, the buy-back is probably more valuable for shareholders (in the longer term) than a dividend payout.
Joffe has also, with hindsight, made a prudent decision to abandon L4L’s thrust into restaurant franchiser Spur Corp. The market was initially baffled when L4L built a significant minority position in Spur, and then sold off the bulk of this holding.
Should L4L regain an appetite for Spur, the share has become a lot cheaper thanks to the ruling that restaurants must shut their doors. There might be even more mouthwatering opportunities than Spur in the months ahead.
IM, noting the lack of certainty in the economy, prefers the relative flexibility of L4L compared with the Satrix Divi’s assemblage of high-yielding stocks.
At the time of writing the Satrix Divi was heavily weighted towards commodity stocks — with Kumba, African Rainbow Minerals, Exxaro, BHP and Glencore representing roughly 35% of the portfolio. If world economies restart slowly these resource counters could come under pressure.
There is also a leaning to retailers (who certainly will be thinking twice about dividend payments in the short term) and banks. These two sectors will be rethinking business models if the debilitating effects of Covid-19 are not quickly contained.
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