CONSIDER THIS VALUING COAL IN A DE-CARBONISING FUTURE - QUARTER 03 2021 - Prudential Investment Managers
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QUARTER 03 2021
Consistency is the only currency that matters.
CONSIDER THIS
VALUING COAL IN A
DE-CARBONISING FUTURE
page 15
ALTRON: HOLDING ONTO A TOP
PERFORMER pg 29
LISTED PROPERTY ATTRACTIVE,
BUT BEWARE pg 24
PEACE OF MIND THROUGH
POPIA pg 37
Contents Consider this Q3 2021
10 37
TABLE TALK Investing with safety in mind
Pieter Hugo unpacks why investors The proliferation of cyber-attacks
may be disappointed by their offshore and leaks means data safety is more
returns since moving offshore last year. important than ever. Learn more about
POPIA and Prudential’s approach from
Lebona Khabo.
15
Exxaro: What is coal worth now in 42
a de-carbonising future? For love of the game: (Re)Thinking
Is it rewarding to invest in Exxaro’s Sustainability
Aadil Omar takes a broader look at
transition away from coal? Ayesha
sustainability, and why it should be
Samsodien sheds some light on
regarded not as something “won” like
Prudential’s perspective.
a game, but something that prevails
over time.
24
Despite tough times, Listed 50
Book Review: Why all your small
Property still a sound investment
decisions do matter
Listed Property stocks are still cheap
Miranda Van Rensburg reviews
for investors, but best stick to
“Atomic Habits”, which argues that
higher-quality companies, says Yusuf
building up small, positive habits can
Mowlana lead to compound benefits and help
you achieve your goals.
29
Altron: A small cap delivering
big value
Rahgib Davids explains why we’re
keen to hold onto outperformer
Altron.
Letter from
03 the CEO
Consistency is the only currency that matters.
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LETTER FROM THE CEO
iStock-1271787791
Letter from the CEO
Benard Fick
CHIEF EXECUTIVE
D uring the second quarter (Q2) of
2021, more progress in Covid-19
vaccine rollouts worldwide, as well
reassurances from central banks that
easy monetary policies would not
be halted any time soon. Cheaper,
as positive corporate earnings reports previously out-of-favour equities like
and economic news, continued to Listed Property and Financials were
lift returns, particularly in developed among the strongest performers,
market equities, even as concerns while more expensive sectors like
emerged over high valuations Resources took a breather.
and breakouts of more infectious
Coronavirus variants in some In the US, the approval of even more
Prudential Investment Managers ©
countries. Bonds – both government US government spending – this time
and corporate credit – also recorded on infrastructure - helped support
solid performances, retracing some the global growth outlook, as did
of their Q1 losses and buoyed by improving conditions in the UK and
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LETTER FROM THE CEO
Europe. However, emerging market quarter, with emerging market returns
equities lagged those of developed of 5.0% lagging developed markets’
markets. South African equities broadly 7.7%. For SA investors, the rand’s 3.3%
underperformed their emerging appreciation against the US dollar
market peers due largely to the local would have dented global investment
market’s higher Resources exposure, returns. Global bonds delivered 1.3%
after outperforming in Q1. In contrast, for the quarter, regaining some of the
South African nominal government
losses recorded in Q1 as inflation fears
bonds posted strong returns compared
receded somewhat. And finally, global
to those of many other countries over
property posted another quarter of
the three months.
good gains with a 9.7% return. As in
As shown in the table, in US$ terms, previous quarters, central banks kept
global equities (the MSCI All Country interest rates broadly unchanged at
World Index) returned 7.4% for the very low, accommodative levels –
Total return
Asset class Q2 2021
(Rand and US$)
SA equity – FTSE/JSE All Share Index (Rand) 0.05%
SA equity – FTSE/JSE Capped SWIX All Share (Rand) 0.6%
SA listed property – FTSE/JSE All Property Index (Rand) 11.1%
SA bonds – FTSE/JSE All Bond Index (Rand) 6.9%
SA inflation-linked bonds – JSE CILI Index (Rand) 3.0%
SA cash - STeFI Composite Index (Rand) 0.9%
Global equity – MSCI All Country World (Total) (US$ net) 7.4%
Global equity – MSCI World (Developed) (US$ net) 7.7%
Global equity – MSCI Emerging Markets (US$ net) 5.0%
Global bonds – Bloomberg Barclays Global
1.3%
Aggregate Bond Index (US$ net)
Prudential Investment Managers ©
Global property – FTSE EPRA/NAREIT Global Property
9.7%
REIT Index (US$ net)
SOURCE: Prudential, Bloomberg, data to 30 June 2021
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LETTER FROM THE CEO
less concerned about inflation than 4.4% y/y in April and 5.2% in May,
investors – and some governments attributed largely to coming off a
continued to enact fresh fiscal support low base. The central bank raised its
packages for consumers and businesses. growth forecasts for 2021 from 3.8%
to 4.2%, but lowered its projections
For South African investors, some for 2022 and 2023 to 2.3% and 2.4%
positive developments for the quarter respectively. It is also projecting two
included Q1 2021 economic growth 25bps interest rate hikes in 2021.
surprising to the upside at 4.6% q/q
annualised, notably higher than The FTSE/JSE All Share Index was
the 2.5% market forecast. Covid-19 basically flat for the second quarter,
vaccine supplies also continued to make returning 0.05%, while the FTSE/JSE
their way into the country and the Capped SWIX All Share Index, which
government’s vaccination programme we use as the equity benchmark for
made headway. However, this was most of our client mandates, returned
hindered in June as the third wave of 0.6%. The standout sector was Listed
Covid-19 infections forced President Property (the All Property Index) with
Cyril Ramaphosa to reintroduce Level an 11.1% total return. Financials
4 lockdown measures. Post quarter- delivered 7.5% and Industrials eked
end, the social unrest and rioting that out 0.8%, but the Resources Index
broke out in Durban, and spread to returned -5.0%. This performance
Gauteng, has set back the vaccination reflected the value still seen in “SA Inc”
programme in these provinces, in counters, which have lagged during
addition to causing terrible damage the recovery, and the growing view
to property and livelihoods. that Resources shares may be reaching
the end of their bull run.
Meanwhile, the South African Reserve
Bank kept its benchmark interest rate SA bonds posted a strong 6.9% return
unchanged at a record low of 3.5% at (as measured by the FTSE/JSE All
its 20 May MPC meeting, warning that Bond Index), remaining sought-after
slow progress on vaccinations, limited sources of yield for global investors
energy supply and policy uncertainty compared to many other sovereign
continue to pose downside risks to the bonds. The yield curve between 10-
economic outlook. This was despite year and 20-year bonds also flattened
Prudential Investment Managers ©
the jump in consumer inflation to by 34bps, with the spread now down
Consider this QUARTER 03 2021 Page 3
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LETTER FROM THE CEO
at 120bps from its peak of 216bps followed closely by the Prudential
during the Coronavirus crisis in May Dividend Maximiser Fund, which has
2020 and highlighting lower investor also ranked in the top quartile over
risk perceptions. Meanwhile, SA this long term (apart from three-
inflation-linked bonds produced 3.0% and four-year annual returns). This
(Composite ILB Index) on the back of represents excellent results from our
somewhat softer demand for inflation equity team, throughout these truly
protection, and cash (STeFI Composite) unprecedented conditions.
delivered 0.9%.
Clients would also have enjoyed
Finally, the rand appreciated against pleasing relative performance from
the major global currencies over our range of global funds, with the
the quarter, rising strongly from its Prudential Global Equity, Prudential
oversold position in April and May Global Balanced and Prudential Global
before retracing some gains in June. Inflation Plus Feeder Funds all posting
It gained 3.3% against the US dollar, top-quartile returns for both the
3.1% versus the pound sterling and quarter and the year to 30 June 2021.
2.4% against the euro over the three
months. However, post quarter-end, Our investment team’s asset class
following from the social unrest, the positioning and stock selection both
rand weakened and gave back most added relative value to client portfolios
of these recent gains. over the three- and 12-month periods.
Our preference for SA nominal bonds,
Most Prudential funds outperform and for longer-dated bonds within
The quarter proved to be another this asset class, continued to add to
strong one for Prudential’s client and our clients’ returns over the quarter.
fund performance, with most of our Our overweight exposure to local
funds recording top-quartile returns equities also remained a significant
in their ASISA categories (according to contributor.
Morningstar). The Prudential Equity
Fund, in particular, continues to For investors who ignored valuations
demonstrate consistently competitive and switched out of SA equities into
first-quartile returns over every rolling offshore assets amid the worst of the
(and annual) period out to 20 years Coronavirus market crisis in 2020,
Prudential Investment Managers ©
(measured to 30 June 2021). It is subsequent market performance has
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LETTER FROM THE CEO
shown that this decision has come at a some substantial returns. See Pieter
cost. Over the 12 months to end-May, Hugo’s article for more details on this.
the combination of subsequent rand
appreciation and local (equity) assets’ The table below shows the annualised
outperformance of global assets has returns of our Prudential Unit Trust
resulted in these investors foregoing funds for periods up to 10 years.
Prudential Fund Performance to 30 June 2021 (Rands)
1-year 3-year 5-year 10-year
Prudential Unit Trust Fund
Return % Return p.a. % Return p.a. % Return p.a.%
Equity Fund 36.9 8.6 9.1 11.4
Benchmark 25.0 5.5 3.2 8.1
Dividend Maximiser Fund 30.1 7.2 7.5 10.5
Benchmark 25.0 5.5 3.2 8.1
SA Equity Fund* 30.5 9.8 6.2* 10.3*
Benchmark 25.0 5.5 4.8 9.2
Enhanced SA Property Tracker Fund 25.3 -10.1 -7.8 4.6
Benchmark 25.2 -8.9 -6.9 5.1
Balanced Fund 20.4 5.8 6.4 10.1
Benchmark 17.3 6.8 5.8 8.6
Inflation Plus Fund 15.3 3.6 3.8 8.4
Benchmark 10.2 8.9 9.3 10.1
Enhanced Income Fund 7.5 5.4 6.1 7.1
Benchmark 4.0 6.1 6.6 6.8
Income Fund 6.7 6.7 N/A N/A
Benchmark 4.0 6.1 N/A N/A
Global Equity Feeder Fund 25.8 16.0 13.8 16.7
Benchmark 14.5 16.1 14.0 18.4
Global Balanced Feeder Fund 6.4 9.1 N/A N/A
Benchmark 4.4 12.8 N/A N/A
Global Inflation Plus Feeder Fund -3.2 7.9 5.3 10.5
Benchmark -14.9 2.1 1.3 8.6
Global Bond Feeder Fund -13.1 6.2 2.2 10.2
Prudential Investment Managers ©
Benchmark -15.6 5.7 1.8 10.0
SOURCE: Morningstar
*SA Equity Fund 5- and 10-year data reflect zero-fee B Class fund and benchmark returns. All other funds are A class returns
(returns after all fund management fees and other charges).
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LETTER FROM THE CEO
Protecting your personal Where possible we have tried not to
information affect the client experience onerously.
This quarter has been a busy one with Our article in this edition of Consider
the finalisation of our personal data this provides more clarity on these
protection project, which was brought changes and how they may affect
about by the implementation of the you as a client.
Protection of Personal Information
Act (POPIA) on 1 July 2021. POPIA Looking ahead
is the primary law that governs the Although the emergence of the third
protection of personal information wave of Covid-19 infections has been
for both people and juristic persons discouraging over the shorter term,
(e.g. companies), and all South African I would like to emphasise that our
companies must comply with POPIA. focus remains on a longer-term three-
We have accordingly reviewed how we to- five-year view, and that this has
communicate with our clients while not changed materially during the
also ensuring that we have the best quarter. Corporate earnings prospects,
possible operational and technical apart from local Listed Property,
processes in place to safeguard your continued to improve during the
data and to meet the other POPIA quarter even as share prices moved
obligations. sideways, creating better value in the
equity market and more attractive
Some of our Q2 priorities related investment opportunities. Many SA
to POPIA included staff training, companies have emerged stronger
implementing a new Privacy Policy, and from the Coronavirus crisis than when it
amending our agreements with clients first began, with better cash flows and
and service providers where necessary stronger balance sheets, and investors
to ensure all are fully compliant with are able to take advantage of this.
the POPIA requirements. Among More broadly, progress also continues
the changes, for example, you may to be made on the vaccinations rollout
have noticed that from 18 June we and anti-corruption measures. So it
started to password protect all our remains for clients to look through the
email correspondence that contains short-term disappointments, and stay
information relating to your Prudential patient and exposed to risk assets as
Prudential Investment Managers ©
investments, which includes your appropriate. For our part, we believe
investment statements and tax the bigger-picture trend remains
certificates. positive and are confident that our
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LETTER FROM THE CEO
portfolios are positioned appropriately
to continue to perform strongly, given
current asset valuations, with clients
set to reap the benefits over the next
three to five years.
The social unrest, looting and rioting
that erupted in Durban and Gauteng
around the time of writing is a truly low
point in our country’s post-apartheid
history. We are monitoring these
events closely. Having consulted with
management of those companies
affected, we have not altered our
views on any of our current investment
positions. However, at this time
our thoughts are with the people,
communities and businesses that are
directly affected.
We hope you enjoy this latest edition
of Consider this, and as always welcome
any feedback you may have.
Sincerely,
Bernard joined Prudential in 2008 as Head of Institutional Business and was appointed as Chief
Executive Officer in 2010. With more than 28 years of industry experience, Bernard previously
worked at Alexander Forbes in a range of leadership roles, including Managing Director of the
Namibian business as well as Head of the Asset Consulting Division. Bernard holds a Bachelor of
Commerce degree in Maths and Actuarial Science from Stellenbosch University and is a Fellow of
Prudential Investment Managers ©
the Institute and Faculty of Actuaries and the Actuarial Society of SA.
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TA B L E TA L K
TABLE
iStock 1064562764
TALK
PIETER HUGO
CHIEF CLIENT AND
DISTRIBUTION OFFICER
i KEY TAKE-AWAYS
Data subsequent to the March 2020 Investors ignored the prevailing relative
Coronavirus market crisis shows that asset valuations and bought offshore
South African investors have been adding assets when the rand was weak, and
offshore assets were also relatively
to or moving high volumes of their assets
more expensively valued than SA
offshore in a quest for safety and/or
assets. However, Prudential bought
higher returns. local assets and sold offshore assets
To date this has proved to be a costly at the time and our portfolio returns
have benefited subsequently.
decision, due to a combination of rand
Prudential Investment Managers ©
appreciation and strong SA equity and
bond returns over the period.
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TA B L E TA L K
Q
In May last year, after the Coronavirus market
crash, I moved about 20% of my portfolio offshore
because I thought it was safer and would give me
better returns. But so far I’ve been disappointed
by the performance – it seems like even though
offshore equity markets have been strong and
reaching record highs, I’m not seeing the same
results in my own rand portfolio. Can you help
explain this?
A
You’re not alone in this opt for perceived safer havens overseas.
experience. After the Yet was this really a well-considered
Coronavirus market crash move to safety? Now that more than
we’ve seen a lot of money a full year has passed, we can see
in the unit trust industry moving out that the answer is definitely “no”.
of South African assets – via both new To date this has, yet again, proved to
investments and switches. In fact, an be a sub-optimal investment decision
astounding R41.4 billion moved into based on historical returns rather
the ASISA Global funds category for than the valuations on offer from the
the year to end March 2021 (the latest assets. Investors may have obtained
available data), which is more than some extra diversification, but it has
the entire previous five years’ total certainly come at a significant cost.
of R40.8 billion (March 2015 to March
2020). Note that this is only the sum Why is this? First of all, we think you
that went into locally-domiciled global need to make investment decisions
funds – even more would have been based on the current valuations
sent directly offshore into myriad on offer, rather than on the most
foreign-domiciled investments. recent historic returns of those same
assets. Investors like yourself were
The severity of the JSE’s drop and the selling rands at low prices and buying
Prudential Investment Managers ©
rand’s depreciation in last year’s crisis foreign currency at highs, not usually
caused many to react emotionally and a profitable strategy. Over the 12
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TA B L E TA L K
months to 31 May 2021, the rand has impressive “V-shaped” recovery in
rebounded strongly from its historic global equity markets. Yet in rand
lows, appreciating substantially against terms investors received only a 10.2%
all three major global currencies, return from the same Index due to
especially the US dollar, which has rand appreciation. Investing in the
weakened for its own fundamental local FTSE/JSE All Share Index in rands
reasons: the rand was up some 22% over the same period would have
against the greenback, more than 10% yielded a total 38% return in rand
against the pound sterling and nearly terms. Meanwhile, the Bloomberg
15% versus the euro. This would have Barclays Global Bond Index produced
necessarily undermined any gains in around 4% in US$ terms, but lost
offshore portfolio assets. nearly 19% in rands. By comparison,
a South African bond investment (in
Given the rand’s extreme undervaluation
the All Bond Index) delivered 11%
a year ago (versus its own history),
for the 12 months.
astute investment managers would
have anticipated the improved odds
Graph 1 illustrates the cost of not
of some rand appreciation going
sticking with a longer-term investment
forward – albeit not the timing or
plan, by selling a rand investment in
extent – and seen this as an excellent
SA equities around the height of the
opportunity to buy more rands and
Coronavirus crisis at 31 March 2020,
sell offshore assets, which is exactly
and then buying a rand-denominated
what we did. There was far more
global equity investment. The red
upside than downside risk for the
line shows the result if you had sold
local currency.
R100,000 on 31 March 2020 and
Then, apart from the rand, South switched it into global equities, while
African equities and bonds have the grey line depicts the impact of
recorded strong gains along with sticking with local equities: the result
the rest of the world since the crash. is the difference between R124,824
The MSCI All Country World Index has and R152,070 – R27,228 or 18% less
returned nearly 42% in US$ terms in due to moving to offshore investments
Prudential Investment Managers ©
the past 12 months, representing an during the past 14 months.
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TA B L E TA L K
Graph 1: Cost of moving into global equities
Graph 1: Cost of moving into global equities after the Coronavirus crash
(R100,000 invested 31 March 2020 - 30 May 2021)
R100,000 invested 31 March 2020 - 30 May 2021
R160 000
R152 070
R150 000
R140 000
R130 000
R124 824
R120 000
R110 000
R100 000
Mar-20
Apri-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
(ASISA) South African EQ General (ASISA Global EQ General)
Source: Morningstar, Prudential Investment Managers
SOURCE: Morningstar, Prudential Investment Managers
Instead of selling South African assets against their natural instinct to avoid
at lows during the crisis it would have losses and instead take the perceived
been much more lucrative for you to risk of doing nothing, or even better,
have instead sold developed market buying the very instruments that have
equities, which were valued more plummeted in value.
expensively, and used the proceeds to
Although this is obviously a fairly
add SA equity and SA bond exposure
short-term example, the point here is
when others were selling. These local that investors can act very emotionally
assets had higher prospective returns, with their investments, especially
and this is what some active managers during times of financial stress. What
like Prudential did. Yet we know that you should rather do is base your
when markets are crashing, it is very investment decisions on the current
Prudential Investment Managers ©
difficult for individual investors to go asset valuations on offer. This way you
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TA B L E TA L K
would have subsequently reaped the
rewards of their relatively stronger
returns and added significant market
returns (beta) and alpha to your
portfolio.
Pieter joined Prudential in 2015 as Managing Director of Prudential Unit Trusts and Head of Retail
Business. In November 2019 he was appointed as Chief Client and Distribution Officer. He is also
a director of Prudential Portfolio Managers (South Africa), PGF Management Company (Ireland)
and Prudential Global Funds ICAV. With 23 years of industry experience, Pieter was previously
employed at one of South Africa’s largest financial services groups, spending most of his time
in various senior management positions in the asset management and wealth management
businesses. He holds a B.Comm (Maths) degree from Stellenbosch University, and is a Fellow of the
Institute of Actuaries (UK) and the Actuarial Society of South Africa. He completed the General
Management Program at Harvard Business School in 2010 and a course in Behavioral Finance from
Prudential Investment Managers ©
Duke University during 2020.
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A N A LY S I S
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Exxaro: What is coal worth now
in a de-carbonising future?
Aeysha Samsodien
EQUITY ANALYST
i KEY TAKE-AWAYS
Exxaro’s growth strategy is to move In Exxaro’s current valuation, investors
away from coal production to become are getting its coal and energy assets for
a cleaner alternative energy supplier. free, making it an attractive investment.
As long as it remains a key player in There should ideally be a balance
between investing in falling coal vs rising
South Africa’s energy supply chain, it is
renewables so that energy is never too
obliged to continue coal production to
expensive.
support the country’s living conditions
Prudential Investment Managers ©
during the economy’s transition away
from coal dependency.
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
A s the pace and importance of
de-carbonisation accelerates
around the world and reaches ever-
rewarding investment alternatives.
Coal companies, meanwhile, have
become much less attractive from an
further into the daily lives of people Environmental, Social and Governance
and business operations, coal has (ESG) perspective.
become a more complex investment
choice, and renewable energy sources In Exxaro, the listed coal producer, we
important investments of the future. can see a microcosm of this transition
But what about now - the transition away from coal playing out, and
investors may be wondering whether
period between the two? Energy
it could still be worthwhile to invest in
supplies need to be readily accessible
the group. Here we offer an overview
and relatively cheap in order to
of the company and its latest plans
avoid significant disruptions in living
for growth, while also assessing its
conditions, especially in countries
investment prospects going forward.
like South Africa that are heavily
dependent on coal as an energy About Exxaro
source. There should ideally be an Exxaro is predominately a coal company
ever-evolving balance between the with most of its sales going to Eskom,
phasing out of coal and the growth as well as a growing export business.
of renewables. The group also has an equity stake in
the unlisted Sishen Iron Ore company
Investors have a role to play in ensuring
(SIOC), and owns Cennergi, a renewable
that this transition unfolds as smoothly
energy business, and smaller non-core
as possible. In a free market, capital
assets.
would generally go to those companies
offering the biggest returns, which in Over the last few years, Exxaro has been
the past has not included renewable simplifying its portfolio and strategy.
energy producers due to their high Earlier this year it completed the sale
cost of production. But as the need of its holding in Tronox (a Minerals
for their cleaner energy has become Sands business), and it is currently in the
increasingly important, they have process of disposing of other non-core
Prudential Investment Managers ©
received government subsidies and coal assets including the Leeuwpan
improved their technology such that mine and Exxaro Central Coal (ECC)
they have evolved into legitimately Complex of mines in Mpumalanga, as
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
well as its equity stake in the Black Sishen Iron Ore (SIOC)
Mountain zinc mining business. It has As a South African iron ore business,
also implemented an “early value” SIOC is differentiated from other iron
strategy, in which it extracts value ore companies due to its higher-quality
from its operations earlier by growing product. It delivers a higher iron-
the share of its export business (where content “lump” versus its peers (who
profit margins are higher) and by predominately produce iron fine), and
reducing “stranded” assets (those a higher grade versus the 62% Iron
that have devalued prematurely or Content benchmark. Consequently, it
unexpectedly) through its sale of receives a premium for its ore relative
non-core assets. to other miners. In addition, most of
the iron ore SIOC produces is exported,
and about 50% of these export sales
Some terminology:
go to China. These factors give the
Iron ore has differing physical forms:
company a level of defensiveness for
fines, lump and pellets.
investors in the sector.
Lower-grade sources of iron ore generally
require beneficiation, using techniques like As environmental restrictions tighten,
crushing, milling, gravity or heavy media our view is that SIOC will benefit given
separation, screening, and silica froth that it produces higher iron-content
flotation to improve the concentration and lump products that do not require
of the ore and remove impurities. The sintering. The risk to SIOC is that it
results, high-quality fine ore powders, has a relatively low life-of-mine, and
are known as fines. therefore over the next decade the
company will need to consider life-
Fines require sintering, which is a thermal extension work; however, there are
process where iron fines are agglomerated options for it to pursue both within
to get the product suitable for blast and outside its portfolio.
furnaces. The lump and pellet forms
are of higher-quality iron content and We are also cognisant of the fact
do not need to go through this process; that iron ore prices are elevated at
they therefore attract a premium price the current levels relative to long-
Prudential Investment Managers ©
above fines. term expectations, which is mainly
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
being driven by supply side disruption mentioned, the majority of its coal sales
from Brazilian production and strong go to Eskom, although the company
Chinese demand. Over the short-to- does have a growing export business.
medium term we do expect there to
be supply normalisation, which will One of the key risks that faces its South
place downward pressure on prices. African coal business is its dependence
on Eskom as a customer. On this front
Like its peers, the current elevated it has few outlets for growth due to
iron ore prices globally are allowing existing competition and the continued
SIOC to generate high cash flows opening of the local market to new
which - beyond covering its capital energy suppliers, largely in the form
spending - will be supportive of paying of renewables. A mitigating factor
a strong dividend for its 2021 reporting to this risk is the high standards of
period, and for as long as iron ore its Grootegeluk mine, a world-class
prices remain high. Exxaro’s current operation based in the Waterberg that
policy is to provide 100% flow-through produces more than 50% of Exxaro’s
of SIOC’s dividends directly to its coal (this includes assets the company
shareholders. Because Kumba’s share is selling).
price is not discounting the elevated
spot price of iron ore, and we use it Grootegeluk supplies 20% of Eskom’s
as a proxy to value SIOC, we would required coal and it provides coal to
note that SIOC shares would also the export market. Grootegeluk coal is
not be discounting it. And we are used by Matimba and Medupi power
receiving the SIOC dividend cheaper plants, with the latter being one of
via Exxaro than if we were to receive Eskom’s newer power plants, thereby
it from Kumba directly. making it an integral part of the SA
energy complex. Medupi has a life
Exxaro’s coal business: Looking expectation beyond 2040.
offshore for growth
Exxaro’s coal business trades on a Part of Exxaro’s current growth strategy
very low valuation multiple due to is to mitigate its dependence on Eskom
the numerous headwinds facing coal by diversifying its customers. The focus
Prudential Investment Managers ©
from an environmental aspect. As of this plan is to improve the quantity
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
Graph 1: Grootegeluk: Largest asset in Exxaro’s coal portfolio
Graph 1: Grootegeluk: Largest asset in Exxaro’s coal portfolio
50000 70%
45000
60%
Percentage of production
40000
Coal production (tonnes)
35000 50%
30000
40%
25000
30%
20000
15000 20%
10000
10%
5000
0 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Grootegeluk Belfast Matla ECC and Leeupan Other mines Buyins Grootegeluk % of Production
Source: Company data and production forecasts
SOURCE: Company data and production forecasts
and quality of its export coal product. A de-carbonised future
This will increase the realised prices Another obvious challenge for Exxaro’s
it receives, in turn widening its profit future growth is the global coal market,
margin. which is facing increased pressure
from an environmental aspect as the
However, one of the challenges to the
world moves toward de-carbonisation.
company’s export sales is the issue of
But while many developed nations
domestic transport, which relates to
are moving fairly quickly to curb
the problems being experienced by
their demand for coal, there is still
Transnet. Since the Covid-19 pandemic
good demand from Asian and other
we have seen a decrease in locomotive
train capacity and a rise in cable theft emerging markets that are more
and vandalism on the rail lines. There focused on economic growth at a
is a possibility that locomotive capacity cheaper cost. For South African coal
can improve over the shorter term, producers like Exxaro, China and
but the bigger risk is the increased smaller Asian markets are natural
theft and vandalism, which may export markets where demand is likely
require public-private solutions that to remain firm for years to come. That
Prudential Investment Managers ©
are complex and will likely take time is, until alternative energy technology
to resolve. becomes cheap enough.
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
Exxaro is very aware of the global Nevertheless, the company has made a
energy transition now underway, as clear commitment to no longer spend
well as its own need to embrace and its capital on expanding its coal assets,
participate in a low-carbon world. It and limiting this to “stay-in-business”
is doing so via its “Just Transition” capex to maintain life of mine. Their
strategy, which involves increasing its dividend policy is equally clear: after
diversification into renewable energy paying dividends, the remaining cash
sources by building onto their existing flows will go towards growing their
energy operations,and exploiting renewables business.
opportunities for potential growth
into battery minerals. These minerals An investor ESG perspective
will be vital for the global energy We cannot get away from the fact
transition journey. that Exxaro is a coal business, but at
Prudential we have certainly considered
Exxaro’s renewable energy business, the implications of investing in this
Cennergi, comprises two wind company from an ESG perspective.
farms in South Africa. Signalling its Sustainability has been a key element
commitment to the business, in 2020
of our investment process for over 20
the group bought out its JV partner,
years. Going forward, Exxaro will no
Tata Power. Going forward Exxaro
longer be investing in coal growth
plans to use this renewables expertise
projects, while at the same time they
by focusing on working with mining
are currently divesting from coal
companies to transition to a greater
assets that are no longer core to
use of alternative energy sources, as
their operations. The product they
Exxaro has experience managing large
supply to Eskom is critical for South
capital-intensive projects.
Africa’s energy needs (at least for the
As Exxaro undertakes its Just Transition foreseeable future), and its export
strategy, one of the risks lies around products to Asian markets are destined
capital allocation. Management will for locations where coal remains a
need to decide how much to invest key part of the energy mix. Finally,
in expanding its (arguably relatively the growth strategy for Exxaro is
Prudential Investment Managers ©
new) non-coal operations, which firmly focused on renewables. The
will take time to generate cash. management team is very aware of
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
the path toward de-carbonisation Since the beginning of 2021 to 30 June,
and the disastrous impact of climate its share price has outperformed the
change, and they are actively working equity market, helped by the rising
to implement their strategy despite iron ore price over the period, making
the risks and constraints they face. it a top-10 contributor to the relative
outperformance of both of these funds
Getting Exxaro’s coal and energy versus their benchmark (the average
assets for free of the ASISA general equity category).
We are holding overweight positions Over the past 12 months to 30 June
in Exxaro in our two main equity it has also performed strongly and
unit trusts, the Prudential Equity and added relative value to these unit
Dividend Maximiser Funds. trusts’ returns.
Graph Graph
2: Components
2: Componentsof Exxaro
of Exxaro share
share valuevalue
Exxaro’s share price
Exxaro’s share attributing
price attributingno
no value
value toto
coalcoal assets
assets or Cennergi
or Cennergi
250 1,4
1,2
200
1,0
SIOC % of Exxaro value
150
Rand value per share
0,8
100
0,6
50
0,4
0
0,2
-50 0
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
Jan-18
Apr-18
Jul-18
Oct-18
Jan-19
Apr-19
Jul-19
Oct-19
Jan-20
Apr-20
Jul-20
Oct-20
Jan-21
Apr-21
Jul-21
SIOC per Exxaro Share Rump/Coal per Exxaro Share Tronox per Exxaro Share
Cennergi (Jan20) Exxaro Share Price SIOC % of Exxaro
Prudential Investment Managers ©
Source: Prudential Investment Managers
SOURCE: Prudential Investment Managers
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
As Graph 2 highlights, most of Exxaro’s orebody, we feel that the market is
value is now derived from its 20.6% undervaluing that asset. The mine’s
stake in SIOC, with Kumba Iron Ore supply contract with Medupi power
owning the other 76%. Using Kumba’s station, which has a long operational
share price as a proxy for SIOC, we can life beyond 2040, is another positive
see that Exxaro’s assets other than element in the investment case.
SIOC (i.e. rump assets) are not being
valued in Exxaro’s share price at all. At the same time, the value of its
Essentially, investors are getting the Renewables business (Cennergi) should
company’s still-valuable coal business emerge over time as the ring-fenced
and Cennergi for free. (Note, Cennergi project debt is paid off.
is only separately valued after it became
100% owned.) The other positive for investors is
the group’s attractive dividend yield.
If we focus solely on the Grootegeluk As mentioned above, Exxaro will
mine, which is a large and long-life pass through the full dividend from
Graph
Graph 3: Exxaro’s
3: Exxaro’s coaland
coal andCennergi
Cennergi cash
cashflows onon
flows thethe
riserise
(Excluding SIOC and Tronox dividends, Rand millions)
(Excluding SIOC and Tronox dividends, Rand millions)
8 000,00
6 000,00
4 000,00
2 000,00
R’m
-
-2 000,00
-4 000,00
-6 000,00
-8 000,00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash flow from Operations Capital Expenditure Acquisitions Rump Free Cash Flow
Prudential Investment Managers ©
Source: Company data, Prudential estimates
SOURCE: Company data, Prudential estimates
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A N A LY S I S E X X A R O : W H AT I S C O A L W O R T H N O W ?
SIOC, and that is attractive at current
commodity prices. In addition, over
the last few years the coal business
has been investing into its assets and
the capital spending programme is
winding down. Therefore in 2019 we
have seen the cash flows reaching an
inflection point (as shown in Graph
3), and we expect the business’ coal
assets will soon start contributing
positively to group cash flows (as
shown by the dashed line in Graph
3). This will provide an underpin to
dividend payments going forward.
Aeysha joined Prudential as an Equity Analyst in April 2013 and is currently responsible for
conducting research on the Mining sector. With eight years of industry experience, Aeysha spent
the first three years of her career completing her articles at PwC prior to joining Prudential. She
holds a Bachelor of Commerce degree in Financial Accounting from the University of Cape Town
Prudential Investment Managers ©
and is a qualified Chartered Accountant (SA).
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A N A LY S I S
iStock-157775335
Despite tough times,
Listed Property still a
sound investment
Yusuf Mowlana
PORTFOLIO MANAGER
i KEY TAKE-AWAYS
Despite the shorter-term headwinds due to higher debt levels or exposure
facing SA Listed Property, it remains a to the harder-hit market segments like
sound investment due to its diversification office space, among others.
benefits and the combination of steady
Investors therefore must tread carefully
income and capital growth that it can
and opt for high-quality companies with
Prudential Investment Managers ©
offer over time.
low debt and earnings diversification,
Valuations are attractive now, but some like those held in the Prudential Property
companies carry more risk than others Fund
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A N A LY S I S LISTED PROPERTY STILL A SOUND INVESTMENT
L isted property companies have
experienced a tumultuous past 18
months given the Coronavirus crisis,
As a reminder, over five-year periods
or longer the asset class has the ability
to deliver growing distribution streams
the slow rollout of the country’s that provide regular income under
vaccination programme and, most many conditions, with distributions
recently, the social unrest and looting based on underlying rental contracts
that have impacted severely on usually incorporating inflation-
properties in KwaZulu Natal and linked increases over time. This can
Gauteng. The severity of the resulting make certain Listed Property market
downturn was made worse by the weak segments beneficiaries of higher
fundamentals prior to the onset of the inflation. Capital growth is a bonus
pandemic. However, it is important for investors, and although it comes
for investors to distinguish clearly with volatility, the relative consistency
between longer-term, secular trends of distributions makes property stocks
(such as the growth of online retail), somewhat less risky than other equity
medium-term cyclical trends (such as sectors if the property fundamentals
fluctuating vacancies and rents) and and balance sheets are intact.
events which are hopefully once-off
and non-recurring, such as the recent “Capital growth is a
destruction of property in two of South bonus for investors”
Africa’s main economic hubs and the
Coronavirus pandemic. Property companies structured as
Real Estate Investment Trusts (REITS)
Although we are under no illusion are required to pay out 75% of their
that many short-term events may have distributable income to shareholders,
significant longer-term implications which allows some retention for
for the Listed Property sector, these future growth. For this reason, our
developments should not result in recommended investment horizon for
investors abandoning a focus on investing in Listed Property, including
asset valuations or the diversification the new Prudential Property Fund,
benefits Listed Property offers investor is five years or longer, rather than
Prudential Investment Managers ©
portfolios over the longer-term. seven years for other equity-only
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A N A LY S I S LISTED PROPERTY STILL A SOUND INVESTMENT
funds. However, investors must be As of 20 July 2021, the SA Listed
willing to accept some shorter-term Property Index was trading at a 9.0%
volatility in exchange for longer-term dividend yield for the year ahead and
outperformance. an 11.0% distributable earnings yield,
implying a dividend payout ratio of 82%
Latest valuations remain for the sector. The ability of property
inexpensive companies to strengthen their balance
For Prudential, the last year has sheets by de-levering organically (via
proved to be a rewarding time to asset sales and dividends withheld,
invest in the sector due some of the as opposed to equity raised) over
attractive valuations that have been the past year has no doubt surprised
available for careful investors. Listed the market positively, as has the fact
Property has been the best-performing that vacancies have held somewhat
sector (and asset class) on the JSE steady during the course of 2020 and
so far this year, recording a 20.1% 2021, with the exception of the office
return over the six months to end- sector. Coupled with attractive income
June. Although investment risks are yields, we are therefore constructive
high for some property companies on the sector’s valuation in absolute
due to either large exposure to the terms, given reducing risks.
weakest segments of the property
market, unsustainable levels of debt Currently, the mixed fortunes of
or insufficient diversification in their property companies can be evidenced
underlying holdings, certain other by stable vacancies with lower rents
companies with strong fundamentals and ongoing rent relief to affected
have been offering good value. For tenants in the local retail space, and
example, we have been able to add a some evidence of tenant failures
high-quality company like Growthpoint and downsizing in the industrial
to our client portfolios at very cheap market segment. Unfortunately, the
valuations. In addition, companies office market has demonstrated weak
with favourable long-term tailwinds demand and little pricing power. In
like Stor-Age (self-storage) and Equites contrast, the self-storage segment
(logistics) are priced attractively relative as represented by Stor-age had an
Prudential Investment Managers ©
to their ability to produce growing exceptionally robust year as they
cash flows and development profits. managed to both grow rental rates
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A N A LY S I S LISTED PROPERTY STILL A SOUND INVESTMENT
and also occupancy by ‘letting up’ • Not all tenants within affected
space. properties were necessarily looted;
and
One sign of cheap valuations is that the • The majority of retail rents are paid
sector has been attracting significant by large national tenants.
interest from private buyers as well as
corporate activity in recent months. Of greater concern to us are the
For example, Growthpoint rebuffed secondary effects, especially the
an offer for its stake in Globalworth; likelihood that small businesses
Arrowhead and Fairvest announced a may not be able to restock given
likely merger; and the iGroup made a underinsurance or a lack of insurance.
compulsory offer to minorities of Emira. The likely loss of confidence in the
Tower also announced an expression of country and associated higher cost
interest from RDC Properties, based in of capital and of doing business due
Botswana, for its entire share capital, to additional security measures are
while RDI Reit was the subject of a further long-term consequences.
successful bid from Starwood Capital.
Prudential Property Fund has
The current unrest in parts of the attractive active positions
country will no doubt unsettle many We would like to remind investors
Listed Property investors. At the time that in May we added the Prudential
of writing, we assess the immediate Property Fund to our selective range
impact on Prudential Property Fund’s of unit trusts. The new active fund is
holdings as immaterial in the short Prudential’s response to the changing
term. The facts supporting our view fundamentals and greater company
include: divergence in South Africa’s Listed
Property sector.
• Landlords are fully insured for
physical damage and largely insured The globalisation of the sector in
for the resulting loss of income; the past decade, with both foreign
• The properties affected represent property companies choosing to list on
a fraction of companies’ respective the JSE and local property companies
Prudential Investment Managers ©
portfolios; expanding offshore, has introduced
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A N A LY S I S LISTED PROPERTY STILL A SOUND INVESTMENT
greater complexity into what was principles and processes that we have
previously a somewhat homogenous been successfully employing for over
industry. On top of this are the longer- 20 years now – our valuation-based,
term trends of greater competition risk-cognisant approach. Just as with
from online shopping, increasing Prudential’s other equity funds, stock
popularity of work-from-home models selection and portfolio construction are
and changes in consumer behaviour, carried out according to a team-based
all adding pressure to landlords in process. And this active methodology
the sector and leading to different already has a strong track record: it has
company strategies and new investment been used in actively managing the
opportunities. Consequently we are Listed Property exposure within our
observing widely diverging company multi-asset funds like the Prudential
valuations and fundamentals, which Balanced Fund and Prudential Inflation
create opportunities for active Plus Fund since the beginning of
investment managers like ourselves 2019. The fund’s benchmark is the
to take advantage of. This was our All Property Index, so that investors
foundation for offering investors a have access to the largest possible
fund with a more active approach, universe of property stocks available
allowing clients to benefit from the in South Africa.
value now available in Listed Property,
alongside our existing Enhanced SA The Prudential Property Fund is
Listed Property Tracker Fund. available directly to retail investors
for a minimum R500 investment. For
Although this is a new fund, it is more fund details, visit the Prudential
managed based on the same investment website.
Yusuf joined Prudential in October 2018 and is the joint-Portfolio Manager of the Prudential
Equity, Enhanced SA Property Tracker and Property Funds. He is also responsible for the property
allocations within Prudential’s multi-asset funds as well as equities for Namibian clients. Yusuf
joined Prudential from Allan Gray where he spent five years as an investment analyst, covering
companies across various sectors, with a special focus on Listed Property. He currently has eight
years of industry experience. Yusuf holds a B.BusSc from the University of Cape Town, is a qualified
Prudential Investment Managers ©
Chartered Accountant and CFA Charterholder.
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A N A LY S I S
iStock-1179944172
Altron: A small cap
delivering big value
Rahgib Davids
EQUITY ANALYST
i KEY TAKE-AWAYS
Altron’s share price has outperformed the Despite its strong outperformance,
JSE in recent years due to the company’s Prudential is holding onto the share due
value added through restructuring, to its ongoing strong growth potential.
consolidation and debt reduction, plus Altron plans to sell more low-returning
a change in management. businesses and focus on high-growth
Prudential Investment Managers ©
The dual-listing of its Bytes UK subsidiary areas like digital platforms,cloud
on the LSE also unlocked tremendous computing, analytics, automation and
value. cyber security.
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A N A LY S I S A LT R O N : A S M A L L C A P D E L I V E R I N G B I G VA L U E
S mall cap stocks are often neglected
and underappreciated, but that
is what makes the sector the perfect
delivered a tremendous amount of
value for shareholders over the last four
years, as new leadership successfully
hunting ground for the value investor executed on a transformational “value
seeking investment opportunities.
unlock” (added value) strategy. The
Altron was one such opportunity we
company delivered a return of 60%
identified that is an excellent example
p.a. over the last four years, massively
of how Prudential adds outperformance
outperforming the 7% recorded by
(or alpha) to our client portfolios. We
have been holding active positions in the FTSE/JSE Capped SWIX.
Altron in the Prudential Equity Fund
Graph 1 shows the two component
and across our Namibian unit trusts.
parts contributing to this value unlock
Altron is an information, communication – the Altron One Strategy, and the
and technology (ICT) business that has Bytes UK unbundling.
Graph 1: Components of Altron’s value added per share since 2017
Graph 1: Components of Altron’s value added per share since 2017
Annualised Total
Altron: 27% Altron: 200%
Shareholder
JSE Capped SWIX: -16% JSE Capped SWIX: 43%
Return
70 Altron One Strategy Bytes UK unbundling
60
50
40
30
20
10
-
FY2017 share price Dividends Share price FY2020 shareholder Cash proceeds from Value of Bytes UK Ordinary + Special FY2021 shareholder
appreciation value disposal 25% stake shares unbundled to dividends value
retained in Bytes UK Altron shareholders
Prudential Investment Managers ©
Source:
SOURCE: Prudential InvestmentInvestment
Prudential Managers, Company data
Managers, Company data
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A N A LY S I S A LT R O N : A S M A L L C A P D E L I V E R I N G B I G VA L U E
Altron was formed in 1965 and was some much-needed change. For
a family-run business for 51 years, starters, the dual share structure giving
over which time the business grew the founding family absolute voting
into a holding company of many control was collapsed. The founding
separately managed businesses within family father and son stepped down
the electronics manufacturing and ICT from their chairman and CEO positions,
services industries. respectively. VCP appointed two of
their founding members to the board,
The manufacturing businesses produced and a new CEO, Mteto Myati, was
electric cables, power transformers, appointed. Having served as CEO of
automotive batteries and decoders MTN and Microsoft and held various
used for Pay TV. Following some years leadership roles at IBM, he brought a
of weak economic growth, declining wealth of experience to Altron.
state infrastructure spending and
increased competition from cheap For the first time, Altron was now an
imports, the group’s manufacturing independently run business, setting
capacity utilisation fell to a point where
the stage for the Altron One strategy.
the businesses became loss-making.
This entailed disposing of loss-making
By 2016 Altron experienced a drastic
manufacturing businesses and using
decline in group profits, while debt
the proceeds to pay down debt, while
levels remained unsustainably high.
simultaneously cutting head office
Consequently, its share price halved.
costs by centralising corporation
Fortunes began turning in 2017 when functions and consolidating office
Altron formed a strategic partnership space. By 2020 the company’s net debt
with Value Capital Partners (VCP), had halved, and its earnings (earnings
who provided a much-needed equity before interest, tax, depreciation and
injection in return for a 15% stake in amortisation, EBITDA) were back to
the business. VCP is an investment historic levels, as Graph 2 highlights.
group that applies private equity The business was stabilised and the
principles to unlock value in listed balance sheet de-risked, leading to a
companies. Their involvement sparked re-rating in the share price.
Prudential Investment Managers ©
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A N A LY S I S A LT R O N : A S M A L L C A P D E L I V E R I N G B I G VA L U E
Graph 2: Altron’s earnings rebound and debt falls significantly
Graph 2: Altron’s earnings rebound and debt falls significantly
4 000
3 500
3 000
Rand millions
2 500
2 000
1 500
1 000
500
-
2015 2016 2017 2018 2019 2020
Altron EBITDA SA Bytes EBITDA UK Net debt
Source: Prudential Investment Managers, Company data
SOURCE: Prudential Investment Managers
Next step: The UK Bytes unbundling EBITDA. At that time, Bytes UK had
Altron acquired the Bytes UK business a peer group listed on the London
in 1998, a business providing software Stock Exchange (LSE) which traded
and hardware solutions to corporations on a 27x EV*/EBITDA multiple, a
and government organisations, and material premium to Altron which
traded at only 7x EV/EBITDA. This was
the biggest Microsoft product reseller
a clear opportunity for management
in the UK. While its South African
to unlock value.
businesses struggled to deliver real
growth, the UK business boomed and In December 2020 Bytes UK was dual-
by 2020 contributed 45% of group listed on the LSE, with 75% of Altron’s
Prudential Investment Managers ©
*EV (Enterprise Value) = Market capitalisation plus net debt
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