WHAT IT MEANS: Weaker rand of six months ago made many companies diversify. Now a stronger local currency takes shine off hedges.
The increasingly strong rand, of late, must have a good number of local investors wringing their hands nervously.
Six months ago it was the default option to blindly back stocks with a meaningful offshore presence or with footholds in faster-growing African markets.
The rand looked a one-way bet. Companies were pressing hard to diversify earning streams with hard currency, with firms like Brait, TFG (The Foschini Group), Truworths and Ascendis making game-changing forays internationally. Property pundits were falling over themselves to invest not only in developed markets like the UK and Germany but also in a multitude of Eastern European destinations.
The robust showing of the rand against the dollar, euro and pound since the Brexit event has taken considerable shine off stalwart rand-hedge stocks; the prices of British American Tobacco, Richemont, Anheuser-Busch InBev, Sasol and Reinet all drifting downwards. Obviously there’s no need for panic, and certainly there’s not yet a chorus of voices claiming that the rand is likely to stay stronger for longer.
But it is worth noting that the share prices of some of the best-known beneficiaries of a stronger rand — Imperial Holdings, Invicta, Massmart and Barloworld — have all climbed steadily over the past 90 days.
Nic Norman-Smith, the chief investment officer at Lentus Asset Management, cautions against simply backing a currency trend. He says it remains a key consideration to understand a company’s fundamentals before factoring in what risk (or reward) the swings in a currency may bring to the investment equation.
Norman-Smith says Lentus had favoured Imperial from a valuation point of view before the rand strengthened. The share has since run strongly, helped by the effect that the strong rand will have on the company’s vehicle imports and its new car dealerships. "With Imperial any changes in the currency really meant that we stood to lose a little but gain a lot."
The change in the rand’s trajectory may also mean that the contrarian opinions of deep-value investors may no longer fall on deaf ears.
At last month’s AGM for investment company RECM & Calibre, CEO Piet Viljoen noted rather sarcastically that SA industrial companies were being shunned by investors. "They would rather invest in Polish real estate companies."
Viljoen contends there are great opportunities in SA, and the company, which holds stakes in "tough" businesses like Sentula, ELB Group and Trans Hex, was seeing some value in smaller SA-based listed companies.
Of course, the difficulty in writing a story about listed counters that could benefit from a strong(er) rand is that by the time the story is published the local currency might well have started weakening again.
An obvious place to dig for strong rand opportunities would be among the industrial equipment and service shares.
Companies like Bell Equipment (which imports engines for its iconic earth-moving equipment), Invicta Holdings, Hudaco and Torre Industrial should find some relief on their imported lines now that the rand has strengthened.
However, these are not exactly the economic conditions where suppliers have much pricing power. In addition, some companies have expanded offshore, so what’s gained in rand strength locally is offset by profit flows from global operations.
Retailers of semidurable and durable goods should also benefit from a firmer rand.
Massmart might be a more interesting prospect with the rand/dollar exchange rate at close to R13/$ since a number of its big-box items (especially for Game and Dion) are imported. It would, though, be a more convincing scenario for Massmart if the consumer were not feeling so much pressure. Interestingly, the share prices of TFG and Truworths — which import a good deal of their apparel — have both firmed markedly in the past month. But the benefits of the strong rand are somewhat negated by the companies’ forays into the UK fashion segment.
Pushed to select a bouquet of stocks that could smell a little sweeter if rand strength is sustained, the Financial Mail would go for the following:
• Cartrack: This vehicle-tracking and fleet-management firm does already hold significant offshore exposure. But Cartrack’s high-margin profit engine remains firmly in SA and Africa. The company has indicated its willingness to expand selectively into new global markets, and earlier this year confirmed an intention to break into the US. The stronger rand/dollar exchange rate coincides well with the push into America, which could be a game-changing initiative in the longer term. At the same time the stronger rand suits Cartrack, in that its existing offshore footholds probably require further investment to bring operations up to speed.
It is hoped when these fledgling offshore operations really start revving up revenue, the rand might once again be on the wane.
• EMedia Holdings: Investors have largely tuned out of this television broadcasting conglomerate, even though the business is controlled by astute investment firm Hosken Consolidated Investments (HCI).
Three issues seem to weigh heavily on sentiment: the sudden departure of prime mover Marcel Golding, a slow start to its OpenView satellite television endeavour and the fact that 24-hour news channel eNCA is renegotiating its place on the DStv bouquet.
The shares — particularly the lower-voting N-shares — have trundled to dismal levels in recent months. But investors need to ask themselves whether eNCA and DStv will not see the mutual benefits to finding an amicable solution (and offering a real alternative to SABC news) and whether OpenView will find profitable traction in the next three years.
Meanwhile, the strong rand should help immensely with the cost of bringing down the imported programming of core business e.tv.
• Verimark: This direct retailer imports practically all its weird and wonderful merchandise, and has really needed to take a scalpel to its cost base in order to remain competitive when the rand sagged after Nenegate.
Most notably, the company invested heavily in new warehousing and has made a huge effort to shift product focus to cheaper items that sell in higher volumes.
With sharper efficiencies now built in, Verimark, headed by Mike van Straaten, may be able to fatten its margins as the cost of importing products diminishes. It is hoped the rand strength will extend to Christmas, when Verimark — which is not shy to declare generous dividends in good years — traditionally enjoys its strongest trading period. Gut feel, though, is that the rand might need to firm considerably more for Verimark to really benefit at bottom line. So the share should perhaps be treated more as an option on any further rampaging by the rand.
• Value Group: Sentiment for logistics group Value has been in the ditch for the best part of three years. The share peaked at 680c in late October 2013, and now trades at less than half that value on an earnings multiple of less than eight. The business has, over the years, proved a robust contender capable of generating strong cash flows and operating at decent margins.
Naturally the stagnant economic conditions have put the brakes on the bottom line. What should help enormously in accelerating profit growth again is if Value, which has recently invested in a more efficient truck fleet, can keep its fuel bills down. A stronger rand combined with a weak crude oil price could be just the tonic to restore margins to racier levels.
• Curro/AdvTech: The choice between Curro and AdvTech depends on individual investors’ risk appetites, but the overriding point is that both private education companies are practically printing rands.
Significantly, neither company has ventured outside SA with any vigour yet.
Perhaps the stronger rand and lure of setting up a longer-term hedge of hard-currency earnings will persuade both counters to make a core concerted effort to shift into international markets — especially in Africa, where philanthropic entities seem to be tripping over one another to fund private education nodes.
* The writer holds shares in Verimark