The Ingham Analytics Weekly Letter on Sunday - 1 November 2020

Sunday, 1 November 2020

Welcome to another Ingham Analytics Weekly Letter on Sunday in which we aim, inter alia, to take a step back to see wood for trees, in South Africa and around the world. Whilst we try not to take things too seriously this wasn't much of a week for humour locally and the pandemic lingers on with new lockdowns on the go elsewhere. Stock markets internationally remain jittery; valuation disconnects are often irrational, particularly in the US. We're in November, the world in February was a different place and time.

MultiChoice has been attracting the attention of Canal+ SA which we learned this week has so far acquired 12% of the company. The percentage foreigners can own in the local video entertainment provider is capped at 20% for voting purposes to comply with statutory requirements. The stock has performed well in a moribund market. Interim results are due 12 November, and we'd expect a respectable outcome, with the lockdown likely to be a net positive. Vivendi owned Canal + offers strategic synergies for both parties we believe.

The ShowMax offering of MultiChoice isn't bad at all and a welcome complement to DSTV which has features that a Netflix doesn't have. As an investor why not own both?

A few horror movies we see have been added to the latest suite of newcomers to the ShowMax streaming screen. Just in time for Halloween. However, the most terrifying horror movie this week starred one Tito Mboweni.

The medium-term policy statement on Wednesday begged lots of questions and gave few answers. Viewers were bewildered as to the plot. What we do know is that there is no ending, we're in a real-life Hammer House of Horror series, each episode more terrifying than the last.

Such is the fiscal situation in South Africa that even the World Bank is pushing back on granting a loan and the IMF will have taken account of the fact that the $4.3bn granted under the euphemistic Rapid Financing Instrument will be used for consumption, including supporting government salaries.

Foreign investors have been getting out of South Africa, maybe checking out the Make Benefit Glorious Nation of Kazakhstan for all we know. This week the central Asia country that was once part of the USSR showed that it had a sense of humour by tongue in cheek riding on the release of English actor Sacha Baron Cohen's new Borat movie. Kazakh Tourism has released a terrific 51 second ad that plays simply on two words throughout - "Very nice!"

We pointed out in "Sink or swim?" this week that in March 2018 foreign investors held 42% of South African ZAR bonds and now have 29%. That's a baker's dozen of a drop in percent.

What this number doesn't reveal is that investment grade owners of government debt have long since headed off to the likes Kazakhstan. Indeed, Kazakhstan has an investment grade credit rating with a stable outlook. To quote S&P, "the sustainable fiscal position of the country supports Kazakhstan's rating." Way to go.

Meantime, in the vainglorious not-make-benefit-land of the ANC such overseas buyers of ZAR denominated government debt that remain are probably the buyers we didn't want - vulture funds circling a decaying carcass and masticating on the 10% yield, the second highest in the world.

Local banks over this past year have been picking up some of that exiting vacuum by hording cash in government securities whilst cutting lending. But you can't run a bank sustainably for long on that basis and in fact this has further increased the banks' sensitivity to sovereign risk. With the sovereign, another euphemism in this context, spending one rand in every five on debt servicing with more to come, default is inevitable.

Standard Bank, FirstRand, ABSA, Nedbank and Investec collectively have government exposure, including loans to state entities, at around 200% of their joint capital bases. If you are a customer, let alone a shareholder, that should scare the pants off you. We were bearish on South African banks before COVID-19 and remain so. Banking stocks sold off post the policy statement. 

For the year through 23 October foreigners sold a net R76bn of bonds compared with R26bn for the same period last year. The picture is similar with equities. In the same period, almost ten months, net sales of JSE equities by foreigners was R120bn, up from net sales of R91bn for the same period in 2019.

The local stock exchange has increasingly become a goldfish bowl of a handful of huge dual listed securities or companies which have little or nothing to do with the real economy in South Africa versus a large but shrinking tail of domestic-facing tiddlers in global terms. Private equity investors prefer trade sales as an exit strategy to a listing. An officious stock exchange lords it over a shrinking pool of issuers.

Of the JSE market capitalisation of R16.6 trillion, not adjusted for free float, around half-a-dozen names account for 50% alone. Whilst $1 trillion in gross market cap seems quite impressive for an emerging market (actually, we should rephrase that to submerging market) once you drill down it's a lot less impressive. Prosus and Naspers combined are 25% of the total, and that is after the whopping discounts they are on in relation to the see-through value of the Tencent stake.

When we say that the JSE is uninvestable that is not because we are antipathetic to local listed companies, quite the contrary as we have numerous fine examples. It is, with the odd exception, because most listed companies reflect South Africa's accelerating economic decline. Foreign investors know this and have voted with their wallets.

Several years ago, getting an appointment as an equity analyst with a fund manager in New York to talk South African stocks wasn't a problem. In fact, they were quite enthusiastic and often keen to fly out to visit. That increasingly was replaced with doubt, then disillusionment and finally an absence of interest. The same story can be told in foreign direct investment, that's stuff on the ground investing, in which South Africa attracted a tiny 0.3% of global FDI last year - Brazil attracted 15x as much despite its issues.

Back in Kazakhstan, a couple of weeks ago Kazakh fintech firm Kaspi.kz had an initial public offering on the London Stock Exchange and the Astana International Exchange. It took the markets by storm and on the first day achieved a market capitalization of $6.5bn. It is noteworthy that the stock exchange of Kazakhstan uses international in its name, operating within a constitutionally separate jurisdiction within Kazakhstan based on English common law principles and incorporating the practices and expertise of the UK Listing Authority.

On Friday, Prosus, a wannabe Tencent or Kaspi.kz, announced to our astonishment a share buyback of both Prosus and Naspers shares. A combined share repurchase worth $5bn, $1.4bn of Prosus stock and $3.6bn of Naspers stock. The JSE announcement motivating this read like a script from a Borat movie it was so funny but we then we quickly realised this was meant to be serious, so serious in fact der Kommandanten at the JSE let it fly.

Prosus of course owns 31% of Tencent and Naspers owns 72% of Prosus. There are two holding companies in a related structure. The notional free float is thus a relatively modest 27.5% and even that is not a fair representation as a good chunk is held in institutional hands. And now they want to restrict liquidity further by removing shares from issue?

Prosus absent Tencent loses money and absorbs cash, lots of it. Tencent makes a profit and generates cash, lots of it. In "Ant's away" this week, which followed on from "Ant(icipating) a listing" a month ago, we pointed out that the discount to the see-through value of the Prosus stake in Tencent is over 31%, up from 24% only a month ago, whilst the Naspers discount has widened to 50% from 45%. There is good reason for this. 

Naspers and Prosus shareholders are probably wondering why Naspers bothered to go to the expense of a restructure that listed its internet assets on Euronext Amsterdam with a secondary inward listing on the Johannesburg Stock Exchange. A long-standing value gap has not only remained since Prosus listed on 11 September 2019 on Euronext but has widened.

Investors have stopped believing the Prosus spin even as Naspers shareholders before the restructure became steadily disillusioned that management could create any value. The gap between Naspers and Prosus has widened too over the past few months. 

And to add insult to injury Prosus even underperforms Tencent. Year-to-date, Tencent is up around 57% in Hong Kong whilst Prosus in Amsterdam is up 20%.

Finally, on a ghoulish tone this Halloween weekend, a Dallas, Texas resident has been so realistic in staging his house in a gory way that he's attracted the attention of the Dallas police. But this was no crime scene, and the blood and bodies were fake. As the gentleman said, Halloween is the perfect opportunity to put on a spectacle - indeed, why not, as did Tito. 

Three cheers to Kazakhstan this week.


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