It’s a terribly tricky time on the JSE. Exasperated investors might default to buying the 10 biggest "global" stocks on the JSE and leave alone the multitude of SA Inc stocks, being battered by the government’s sometimes illogical economic response to the Covid-19 crisis.
Yet smart and patient investors can make good money by backing good companies and good (read: reduced) prices. The sudden feeding frenzy at Quantum Foods this month was a prime example.
But even good companies can fall victim to wayward pandemic policies, effectively snatching the fate of a business from management’s hands.
This month IM looks at two entrepreneurial stories — one that has vastly enriched investors over two decades and a younger venture that has now bulked up enough to warrant wider market attention.
Some readers might argue that IM has this backwards, but we are going LONG on specialist property business Stor-Age and SHORT on Capitec Bank.
When the world went crazy in March, Stor-Age was the Reit baby thrown out with the Covid-19 bathwater. As everyone (quite rightly) panicked about malls and their owners with highly leveraged balance sheets, they seemed to forget that Stor-Age has absolutely nothing to do with malls. Or offices. Or residential developments.
Stor-Age is unique on the JSE, focused exclusively on storage units for short-term rental. The thesis is great: people continue to squeeze themselves into urban shoeboxes with less space, driving a need for storage for the extra stuff that nobody ever seems to have the time to get rid of.
As mall owners struggle to collect even half the rents due to them, Stor-Age collected 93% and 98% of rentals due in SA and the UK respectively in April and May. The R250m bookbuild capital raising in May was oversubscribed, which isn’t surprising. Stor-Age seems like a pretty safe place (relatively speaking, these days) to put your money in, with an attractive dividend yield and hard currency look-through exposure in the UK.
The portfolio is nicely balanced (R4.1bn SA and R2.9bn UK) and the business model is simple but executed extremely well. Hearteningly, executive management (in terms of incentives) are in the same boat and rowing in the same direction as ordinary shareholders.
Stor-Age is trading at a premium to book value, so it certainly isn’t cheap. But quality is sometimes worth paying for and that’s especially true in times of uncertainty.
Stor-Age has the look and feel of one of those stocks you could consider buying and putting in the drawer for the long term.
Unfortunately, the word "retrenchment" has become as synonymous with 2020 as inconsistent government policies and the ongoing assault on sin taxes. If JSE-listed corporates with huge balance sheets and deep banking relationships are cutting their workforces by 20% to 30%, what do you think is happening in the embattled small to medium-size enterprise space? Government assistance has been woefully inadequate and stories on the ground are horrifying.
It’s a perfect storm for SA-focused banking groups. Credit loss ratios are blowing out, resulting in higher impairments. Lending criteria have been tightened, affecting growth in gross loans and advances. Stubbornly low interest rates drive lower endowment income (the interest income that banks earn on their equity vs the money borrowed from depositors and the broader market). Ongoing downgrades by rating agencies are resulting in higher costs of borrowing, putting pressure on net interest margins.
Against this backdrop, Capitec would logically be the worst-affected among the major banks, servicing a lower-LSM client base that can ill-afford any salary drops, let alone the Covid-19 carnage now taking place. Capitec may have built a strong transactional banking business (R7.4bn transaction fees), but it remains a deposit-taking and lending institution (R13.2bn net interest income) at its core.
Capitec published a trading update noting a loss of R404m for the first three months of the financial year (March to May). The company indicated that headline earnings would decrease by 70% for the six months ending August 2020. IM wonders if it will actually be much worse? Capitec, inexplicably, reckons things will "normalise" in the second half of the financial year.
With practically everyone worried about their jobs or taking salary cuts, prudent investors would have sold their Capitec shares after Tito Mboweni told us just how bad the budget deficit would be.
Capitec has been an inspirational local business venture — and would certainly be one of the great success stories of the past two decades. But IM would want nothing further to do with this space in SA in the medium term.
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