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SIMON BROWN: I’m chatting to Vanessa van Vuuren, portfolio manager and equity analyst at Sanlam Investments. Vanessa, I appreciate the time. If we look at SA Inc – which is mostly small and mid-cap with the small and mid-cap mostly SA Inc – it’s easy to get caught up in the negative narrative. But there are opportunities, there are attractive investments and some of them are quite starkly mispriced.
VANESSA VAN VUUREN: Yes, a hundred percent. You are spot on. I think the general narrative out there is really dire. It’s probably the worst I’ve ever felt in my career and I’ve been in this game for 15/16 years. People are really, really just down and out about the SA Inc environment in general, and that in itself is creating massive opportunities because one gets a sense that there is a sort of broad-scale capitulation out of the space, and we’re seeing it in the valuations of the companies.
So if you have more of a through-the-cycle type of bias and you’ve got a longer-term investment horizon, I think you can get some great gems at the moment. But you also do need to be very cognisant of risk management and just making sure that you are not going to hit any of the …
SIMON BROWN: You make a great point on risk management there. In your note you emphasise on scenario analysis – understanding what a worst-case scenario could be.
VANESSA VAN VUUREN: Yes, a hundred percent. So what we do is we actually say, look, if these are the current conditions and they were to continue into perpetuity, what would this business be worth? We run pretty strict scenarios on that, pretty bearish scenarios, and if we’re still getting upside on that scenario for us it’s easy to buy the stock and be patient. We know that this business is going to survive and we are going to make money in a few years’ time. We do know it might go down further from here, but it’s about having that stomach to hold out when you actually put the worst-case scenario through the fundamental numbers and you’re still getting upside.
SIMON BROWN: The key point – and you’ve kind of mentioned it twice now – is this is through the cycle. This is not going to happen in a hurry. It’s going to be a process as inflation comes down, rates come down and other things sort of play into its favour.
VANESSA VAN VUUREN: Exactly. Take something like load shedding. We’re not unrealistic about that. We think it’s sort of a 12- to 18-month, up to a 24-month drama, and we are actually building that into our expectations as best as we can. But it’s an example of something that’s a lingering downward pressure point on the sentiment towards the broader SA Inc complex. But when it comes out of the system and some of the power comes back on, and load shedding reduces, if you think about that those costs fall out of the cost basis of the companies that are most affected. So one needs to also look at that scenario into the future as well where that recovery comes through.
SIMON BROWN: Of course, I hadn’t thought of that. The costs are horrific, but at some point they exit the process; particularly if you’ve put solar in you’ve got a cheaper base.
Two of the stocks that meet it, Famous Brands and Sun International – respectively hospitality and leisure – in part are benefiting from sort of coming out of the pandemic. These are also just generally well-run companies with great potential.
VANESSA VAN VUUREN: One hundred percent. Another very important part of our strategy is to say we have this SA Inc backdrop in this macro that’s very challenging, so how can we look at ideas and invest in ideas that are more insulated from that? Take for example, the hotel and leisure industry. That’s a classic example which is still recovering off two or three years of damage from Covid, and so is, again, somewhat insulated from what’s happening in the broader macro. For example, eating out is actually something that benefits from load shedding because people don’t have lights on when they get home from work and they’re hungry and need to feed their families. So you’ve seen in Famous Brands’ numbers some very strong demand around almost a contra-cyclical type of response to this doomsday scenario that load shedding is putting out there in the market.
SIMON BROWN: Of course that six to eight-hour load shedding in the evening is an absolute killer for people, particularly for families. Reunert is a stock with a fan base around it, certainly, but a stock that’s often overlooked because it’s considered boring, it’s considered sort of SA-focused. But they’ve got robust demand for some of their products.
VANESSA VAN VUUREN: Exactly. Another one that speaks to that sort of self-help theme or insulation theme that I referred to earlier. If you think about it, you’re a hundred percent spot on. It’s been a dead-beat, boring company for multiple years. It’s industrial and people aren’t really interested in a low rating. But it’s coming to its own in this environment because, if you think about its end markets, defence is related to geopolitical concern issues globally, and the electrical cable side has huge demand for transmission. There’s a big pickup from municipalities, from Eskom, etc. And then just the renewables exposure that they have in their portfolio – think about that as well. Here is an old, dull, SA Inc business that’s actually got the right products in the right spaces in this exact type of market. So that’s how we’ve tried to risk-manage our portfolio and pick these types of ideas.
SIMON BROWN: You say industrial and my immediate thought is ‘boring’, but boring is not always the worst thing. Boring can absolutely work.
Vanessa van Vuuren, portfolio manager and equity analyst at Sanlam Investments, I appreciate the time.
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