Bruce Whitfield  00:14

It was good to see on the day that there is... it is possible for the JSE to go up as well as down. Last week was down, today we had a rare up day. We'll celebrate up days any day of the week, Meryl Pick, Portfolio Manager at Old Mutual Investment Group. 

Big dynamics in our market today, of course, platinum shares rebounding strongly, we also had a really good day amongst the banking shares.

Meryl Pick  00:47

Yes, good evening, Bruce, and good evening to your listeners. Watching, I see continued whiplash at this point in time. And what seems to be, you know, we can speculate as to what the reasons are that drive the market on any particular day, I prefer to look at the overall trend, and where things are headed. 

So, you know, last week, there was a lot of concern about countries starting to lock down again, delta variant, you know, starting to spread, some studies emerging or data emerging that the vaccines wear off at some point in time. I think what is key to keep in mind is that the Covid roadmap on a longer-term horizon, we surely cannot stay in the status quo forever. Vaccines have been developed, booster shots are being developed, herd immunity, we are slowly inching towards. 

And, you know, I looked at data again this morning. Since the 1900s, we've not had a pandemic that has lasted for more than three years. And this one is on the go for 12 months and... 1 year and 9 months. So, we are somewhere at least 12 months away, I would say, from seeing the end of it.

Bruce Whitfield  02:13

Well, we hope so, we certainly hope so. But I mean, does your sense of the volatility, are you able to ignore this volatility, able to ignore the noise, able to ignore the discomfort that it brings, and simply focus on the potential upside that you see in segments of the market?

Meryl Pick  02:29

Yes, I think one has to, if you are a long-term investor, you have to do that. And the down day is just to give you an opportunity to pick up shares that are undervalued. You know, and the fascinating thing is that companies on the ground are still seeing opportunities. 

So, if you take this Shoprite and Massmart proposed M&A, where, you know, Massmart is simplifying their portfolio, and they'll get a cash injection. Shoprite is consolidating some of their market share in a new space in food retail. In the midst of you know, a month ago, we had riots, we had unrest, we had a lot of concerns, business confidence, etc. But South African companies are resilient in getting on with it. You know, we happen to hold both of these counters in our fund. And quite pleased that they are so able to suit both of their respective strategies and make moves like this that add value to shareholders.

Bruce Whitfield  03:39

It was so interesting last week, as you mentioned, 1.36 billion rand deal between Massmart and Shoprite. Shoprite will buy the fresh foods businesses of Massmart that it hasn't managed to get right. And then today, Shoprite announcing, last year, it was a bit of a shock that it was withdrawing from Nigeria, which had all of the promise of a great retail future. Today, perhaps less surprising, Madagascar and Uganda on the cut list.

Meryl Pick  03:39

Yes. Ja, so we've been engaging with Shoprite's management team for some time and noticed certainly an increased focus on returns. So, a positive theme for this company is an increased focus actually on return on investments, which they flagged several months ago, maybe a year ago, that they would have to start taking some tough decisions on the non-South African jurisdictions in the rest of Africa, because at the end of the day, they are increasing shareholder money and we need a certain level of return for the risk that's being taken. 

So, it is actually encouraging to see some difficult capital allocation being distinctly taken. And they are reinvesting that money into South Africa to a large degree and in experimenting with innovation. Also last week, they announced kind of a pilot - just for staff store at the moment - very similar to the Amazon Go store in the states, with checkout-less or contactless checkout, you know, so they've had these adventures in Africa, they haven't all worked out. And they are now taking the tough decisions to say, where can we put that capital to work better? And we see that as a long-term theme for the company: better quality management decisions in capital allocation.

Bruce Whitfield  05:34

Okay, yeah, interesting views on Shoprite this evening. Another big announcement, Zyda Rylands has been part of the Woolworths furniture for an awfully long time, announcement that she will be stepping down from the company in about two or three years’ time, that she's going to be coming off the board, that the role of Chief Executive of Woolworths South Africa will no longer exist. Of course, the group CEO is based in South Africa. 

Anyway, what is this telling you about the future structure of Woolworths, which has got, you know, problematic businesses in Australia and a glorious food business in South Africa?

Meryl Pick  06:10

Yes, I mean, Zyda's got a wealth of experience within the food business and used to run it for a long time. And really, that particular business just never seems to put a foot wrong, it's had now more than a decade of almost bullet-proof performance, I'm sure they're knocking wood if they're listening to what I'm saying. So, what I don't... I see this more as a reflection of the overall direction of the group under Roy, um - 

Bruce Whitfield  06:43

Roy Bagattini, the new Chief Executive, we're yet to meet him and get to know him, but he's clearly doing things in the background.

Meryl Pick  06:50

He's coming from Levi, from the Levi group. Even the Australian structure was simplified because there was a Head of Australia, then a Head of David Jones, a Head of Country Road, there was a lot of posts that David Jones acquisition, a lot of layers creeping into management, which all comes with cost. And they've been flagging for a while that South African business probably needs to be shrunken in terms of the number of stores and the amount of space that can be profitable. 

So now, if you are, similar to what Edcon started to do, not that extreme, but if you're starting to shrink your store rates and rationalise space, you then do need to look at your overall cost structure. So, this decision... you know, put into that context, you can see how it makes sense. Looking at overall cost structure, looking at Roy's span of control ,and what he feels comfortable with managing directly, does he really need that little layer between him and the head of clothing and the head of food? So, I actually see it as a positive step, where Roy can get a bit closer to the detail.

Bruce Whitfield  07:59

And then Bidvest's trading update, I suppose we shouldn't be too surprised with the big jump in performance, considering where we were this time last year.

Meryl Pick  08:06

Ja, so I feel as part of the Covid recovery roadmap panning out, after, you know, hard lockdowns in the UK and in South Africa impacting on results. And Bidvest weathered  quite well. They've had a strong balance sheet historically; they came into it with a bit of debt from the UK acquisition of the hygiene businesses required there. but they've weathered that quite well. And, you know, I think they're on - they're back on the path to deliver very reliable results. 

Bruce Whitfield  08:43

Reliable is important. Absolutely, reliability is important. Is Murray & Roberts becoming a bit more reliable with all of its mining activities that it's involved in?

Meryl Pick  08:54

I would hesitate to put reliable and mining activity in the same sentence [laughs]. However, they are at least diversifying, you know, away from single commodity because they were quite over-indexed to LNG at one point. But, you know, they've converted their stripes from a highly cyclical construction company to a perhaps somewhat less cyclical, you know, longer-term contracts, servicing some of these commodity producers, but still, you know, I would expect it to remain volatile.

Bruce Whitfield  09:30

Earlier on, you were saying down days provide opportunities for buyers to come in and achieve better prices for assets. Are we getting close to that point for Naspers? It's been mirroring the decline, as we've seen, Tencent almost perfectly down about 40% from the peak and down again today, if you'd been doubling down every time the share price of Naspers had fallen, you would have spent an awful lot of money. I'm wondering if that time, obviously it's getting closer, but if that time is near. 

Meryl Pick  10:02

It is getting closer; we remain somewhat circumspect. So, it has gotten cheaper, at the same time, some of the facts have changed. So, the regulatory environment in China has intensified, which, you know, we still need to see where the dust actually settles and how this new regulation will affect Tencent, which is really the core and the cash cow of the Naspers holdings. How do these new regulations affect the business model? 

You know, tech as a whole globally has attracted a lot of attention for monopolistic behaviour. But really, that is the whole business model. Is to create an ecosystem, you know, that is dominant and feeds off itself. So, by bringing anti-trust and requiring an opening up of some of those networks to competitors, it does seem like the direction of travel is towards lower profitability. The question will be whether the growth is then still strong enough to offset that and, you know, that it doesn't matter. 

So, there are a few tailwinds. Probably the other one is the rotation from growth stocks into value stocks coming out of the Covid crash, and Tencent had a phenomenal year last year because everything digital and everything online and everything gaming. You know, that was the lockdown trade. So, there are a few things that are pointing in the wrong direction for now. But we are certainly looking with keen interest as it gets cheaper.