Looking at recent market developments, Peter Brooke unpacks the latest results from Bidvest, as well as the implications of Russia’s invasion of Ukraine and what this will mean for local companies such as Mondi.
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Looking at recent market developments, Peter Brooke unpacks the latest results from Bidvest, as well as the implications of Russia’s invasion of Ukraine and what this will mean for local companies such as Mondi.
Thanks for listening! Follow us on Linkedin.
Bruce Whitfield 00:06
He knows more about this than I, Peter Brooke, Portfolio Manager at the Old Mutual Investment Group. Is that why Bidvest outperforms more often than not, Peter, it's about the way it approaches the problem rather than focusing on the problem itself?
Peter Brooke 00:19
I was delighted to hear your interview there, I mean, who wouldn't want them to succeed with such a good talker? So, very good results, we thought, and the market liked them as well. Share price up 3.8% today, but more importantly, up 12% for the month. You can see that's a big chunkier return. I think the standout for me really is, you take that - the turnover, plus 13, operating profit plus 25, headline earnings plus 37. It's the operating leverage as they deliver through the business.
So, you gain a bit of market share, you do your job effectively, you maintain your costs, and then the profits flow to at the other side. So, I'm delighted because we're quite big holders there. But nice to see. It's also, I think, as you mentioned, in terms of an indicator for the South African economy, there is a turnaround, there is… we had a good budget last week. But actually, we've had quite a few results. And generally, they've been quite positive.
Bruce Whitfield 01:20
They have. I mean, you know, again, last week, I think it was Wilson Bayly Holmes or one of the construction companies, getting burned in Australia, and just so many South African companies that are focused elsewhere, they've really become quite unstuck in taking their eye off the South African ball, whether it be Woolworths or whether it be a score of others. And those that tend to focus on their knitting and actually do the job of serving the market that they are domiciled in, do tend to outperform over time.
Peter Brooke 01:48
I think that's right, in terms of focus. Um, it's a tricky one, because we also have some great examples of companies that have gone overseas, SAB Miller, a number of businesses that have actually developed global footprint. But you start to look at it, and that's the successes versus the failures. It's amassment, it's starting to stack up against offshore expansion. Interesting thing, I mean, we just finished the month. But, you know, you've got the EU down six and a half percent, obviously hurt by being next door to Russia. US down three and a half, Japan down a half, South Africa, 2.7. Even in US dollar terms, up 2.2. So, it's not just the company. It's also what the markets been delivering more recently, it's been a lot more palatable here, then over there.
Bruce Whitfield 02:40
We'll see how long that lasts. How worried are you about a protracted conflict in Ukraine and possible spillovers and knock-on effects of that action?
Peter Brooke 02:50
That's an interesting question. I was asked by a paddling mate of mine the other day, what are the key risks? And I was like, nah, Russia is not a problem, that will be my lowest risk. So, it was Covid. So, we get a mutation that's really bad. Inflation, because it's about interest rates and the cost of money. I thought Russia was quite a low risk, obviously, that risk calculus has changed a little bit in the last week. What he's done is, I think, has been surprising. I think it's a mistake. And it becomes very hard to read, because the truth is, we can all read what's going on. I'm not even sure how much of that is the truth. And furthermore, you know, what's good news? What's good news for the Ukrainian? What's good news for the markets? What's good news for Vladimir Putin?
Because once you start moving into this realm of like, this is a big loss in the long run for Russia. The question is, how big a loss is it for the rest of the world? The world has isolated themselves from Russia over time. So, there's a lot less impact. It's a lot smaller economy. The truth is, the Russian market, you've lost half your money there in the month to date. But you've lost a quarter of your money in Prosus month to date. So, its impact - Prosus is much more important to us than Russia. But that political risk is when you starting to go and talk about nuclear weapons, it's very difficult to gauge. So, I've been wrong, I've been surprised by what he's done, so I'm not sure I'm the right person to proffer an opinion on this.
Bruce Whitfield 04:37
It's the knock-on effect. I'll chat to RCL Foods about this after seven o'clock, just in terms of their concerns about grain prices, for example, they're heavily dependent on getting a decent grade - buying grain at a decent price so they can convert it into Bobtail dog food and to maize meal and things like that. And if the raw commodity prices go up, and Ukraine being a breadbasket of Europe, that's significant.
But a company like Mondi, for example, which has got mills in Russia, it's been nailed hard. Another 10% down today to R328, Barloworld's taking a lot of pain as a result of the sanctions that will bite and make it very, very difficult, if not impossible for it to sell Caterpillar equipment in Russia, and a bunch of other companies, actually, with Russian assets and Russian connections.
Peter Brooke 05:22
That's right. But generally, what happens is the market over-discounts that risk in the short term, so something like Mondi, if you wrote off the Russian business, has that been more than priced in and if it has, then there's an opportunity to pick up shares. The trickier part is when you're unsure how much that risk has been priced in.
But I think a) Russia has protected themselves. But that means that the rest of the world has much less linkages to them. So, normally you'd see the pain into European banks with the intent, but since 2014, it's severely reduced. And that means that, basically, one should be looking for opportunities like Mondi, where you can quantify the risk. It's harder when you can't quantify the risk.
Bruce Whitfield 06:13
Peter Brooke, thank you very much indeed. Portfolio Manager at the Old Mutual Investment Group, on the line to us this evening from Cape Town.