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Bateleur
- 1. Bateleur Capital Presentation tothe Senate Group March 2017
- 2. Bateleur Capital –timeline • Company founded as a hedge fund management company • Strong focus on capital preservation • Apply a consistent investment process across all funds 2 2004 Bateleur Capital was founded by Kevin Williams 2005 Long/short Hedge Fund launched Portfolio Manager: Kevin Williams 2008 Market Neutral Hedge Fund launched Portfolio Manager: Charl Gous 2010 Flexible Unit Trust Fund launched Portfolio Manager: Kevin Williams 2016 Converted hedge fund to CIS structures 2012 Segregated Equity Mandates launched Portfolio Manager: Galen Hossack 2015 Equity Unit Trust launched Portfolio Manager: Galen Hossack
- 3. Independent and ownermanaged 3 Key differentiators Focused: Limited range of equity centric funds Flexible: Not constrained to any specific investment style Nimble: Flat structure, enabling swift portfolio adjustments, if required Independent and 100% owner managed Staff complement of 12 Investment Team 6 Investment Professionals Combined experience of 68 years 4 CFA; 1 CA (SA); 1 B.Econ Operations Team Team of 5 Combined experience of 63 years 1 CA (SA); 1 LLB; 1 CIMA; 1 B.COM Bateleur Academy 1 x B. Bus Sci (Finance) Bursary scheme (2 students)
- 4. 4 Consistent process acrossall investment products Consistent process across all investment products Strategies we manage Long/ short Fund •A regulated flexible hedge fund suitable for high net worth individuals, institutions, family offices and HFoF’s •Investment objective is to generate returns in excess of inflation (CPI +4%) over time, while placing a premium on protecting investor capital Market Neutral Fund •A regulated relative value hedge fund suitable for high net worth individuals, institutions, family offices and HFoF’s •Investment objective is to generate returns in excess of cash (STeFI) on an annual basis, while placing a premium on protecting investor capital Flexible Fund •An actively managed South African multi-asset class fund formed under the Collective Investment Schemes Control Act (2002) •Investment objective is to generate a return in excess of inflation over time, while placing a premium on protecting investor capital Equity Fund •An actively managed South African general equity fund formed under the Collective Investment Schemes Control Act (2002) •Investment objective is to generate returns in excess of the JSE Shareholder weighted index (SWIX) over the medium to long term*
- 5. Feeder Fund R140m Assets under management MarketNeutral R1.1bn Source: Bateleur Equity Only R3.1bn Unit Trusts R1.8bn Long/Short R2.5bn Assets by fund strategy (R8.5bn) Consistent measured growth in AUM (Rbn) 5 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 R8.5bn
- 6. Investment philosophy Achieving theinvestment objective will lead to outperformance of equity markets over the medium to long term 6 Philosophy Objective Practically Fundamental, bottom up investing combined with a top down macro overlay To generate returns in excess of inflation whilst placing a premium on protecting investor capital Keep pace with equity markets in good times and protect capital in periods of market stress
- 7. 1 000 2 000 3000 4 000 5 000 6 000 7 000 8 000 9 000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2015/16 Bateleur +15.2% JSE All Share +7.9% 2008 Bateleur -4.8% JSE All Share -23.2% Investment philosophy – Capital preservation a key objective 2011 Bateleur +12.0% JSE All Share +2.6% Source: Bloomberg Returns to 28 February 2017 7 Unit price Bateleur L/S fund (net) 17.9% CPI+4% Index 10.1% JSE All Share(TR) 15.4% The Bateleur investment process has historically led to outperformance when markets are weak
- 8. Process includes • Fiscaland monetary policy analysis (interest rates, inflation, QE) • Macro economic drivers & outlook (GDP growth) • Long term capital market valuations vs. trend Impacts asset allocation decisions • Bonds/equities/cash/property/commodities/currencies Which equity sectors to focus on/avoid • Defensive/cyclical/interest rate sensitive/high yield/Rand hedge/resources Investment process – bottom up stock picking dominates Top down macro focus 30% Bottom up stock picking 70% Process includes • Identify securities that trade at a discount to underlying value • Initial screen using conventional valuation measures (PE, DY, ROE and EPS growth) • Financial modelling incorporating through the cycle and long term margin analysis • Focus on qualitative factors (business sustainability, barriers to entry) • Emphasis placed on established management teams with proven track record • Focus on earnings predictability and cashflow generation 8
- 9. 9 Risk management • Sellwhen prices exceed fair value • Prudent cash weighting • Wary of overleveraged, cyclical and highly capital intensive businesses • Wary of acquisitive (roll-up) companies • Analyse cash vs. accounting earnings • Monitor portfolio liquidity risk closely
- 10. Flexible Fund -historical performance JSE All Share (TR) 13.8% Bateleur (net) 17.1% CPI+4% Index 9.5% CAGR since inception 10Source: Bloomberg, Bateleur All performance numbers to 28 February 2017 Returns YTD 1 Year 3 Year 5 Year Bateleur Flexible Fund 1.2% 2.2% 10.6% 15.9% CPI+4% (benchmark) 1.7% 10.6% 9.7% 9.7% JSE All Share (TR) 1.1% 6.3% 5.7% 11.6% Unit price * 2016 Morningstar and Raging Bull award winning fund – best flexible fund over 5 years on a risk adjusted basis. 100 140 180 220 260 300 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16
- 11. 11 Flexible Fund –returns vs. 30 day volatility Bateleur Flexible Fund vs. JSE All Share: returns vs. 30 day volatility Source: Bloomberg, Bateleur 0 5 10 15 20 25 30 -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 30Dvolatility Monthly return Bateleur Flexible Prescient Fund JSE All Share
- 12. 2017 outlook -current macro backdrop 12 Sustainability of commodity prices Rand vs. major trading partners Growth vs. Value Global capital market valuations Portfolio Construction
- 13. -50 -30 -10 10 30 50 70 0 5 10 15 20 25 30 35 40 45 1996 1998 20002002 2004 2006 2008 2010 2012 2014 2016 China Money Supply YoY% (LHS) CRB commodity index YoY% (RHS) 13 2017 outlook – sustainability of commodity prices China Money Supply vs. CRB Commodity Index • Commodity prices rallied in 2016, driven by Chinese monetary & fiscal stimulus, which has peaked • China remains a far more important driver of commodity prices than the US • Should China prioritise structural reform ahead of growth, bulk commodity prices are at risk Source: Bloomberg, Bateleur, RMB Morgan Stanley China and the US share of commodity demand (%) 0% 10% 20% 30% 40% 50% 60% 70% 80% Oil Copper Steel Th coal Met coal Iron ore US share of commodity demand Chinese share of commodity demand
- 14. 40 60 80 100 120 140 160 2004 2006 20082010 2012 2014 2016 SA real ex rate vs USD SA real ex rate vs GBP SA real ex rate vs EUR 14 2017 outlook – Rand SA real exchange rates vs. major trading partners • Rand is marginally under-valued vs major trading partners, but a sharp appreciation in 2017 is unlikely • An improving trade and fiscal deficit from increased commodity exports and taxes will be supportive of the Rand • Risk of a sovereign downgrade, while dissipating, would be negative for the Rand Source: Bloomberg, Bateleur, RMB Morgan Stanley Rand undervalued Rand overvalued SA budget balance as % of GDP -10 -8 -6 -4 -2 0 2 1993 1997 2000 2003 2006 2009 2012 2016 SA Budget Balance (% of GDP) SA Budget Balance (% of GDP) forecast
- 15. 15 2017 outlook –Growth vs. value -10% 0% 10% 20% 30% 40% 50% 60% 2014 2015 2016 Naspers share price growth (%) Naspers core EPS growth (%) -5% 10% 25% 40% 55% 70% 85% 100% Barloworld Imperial 2016 share price return 2016 EPS growth 2017 EPS growth Naspers price vs. EPS growthBarloworld/ Imperial price vs. EPS growth • In 2016 value outperformed growth, although not through earnings growth • Value P/E multiples expanded (re-rated) while growth P/E multiples contracted (de-rated) • Comfortable paying a fair multiple for a high quality company with good growth prospects & earnings visibility Source: Bloomberg, Bateleur Note: Naspers core EPS growth is calculated on a calendar year basis.
- 16. 0 2 4 6 8 10 12 14 1985 1989 19931997 2001 2005 2009 2013 2017 S&P 500 Forward Earnings Yield US 10 yr Bond Yield 0 5 10 15 20 25 30 1985 1989 1993 1997 2001 2005 2009 2013 2017 S&P 500 12M FWD P/E (times) average 16 2017 outlook – Global and domestic capital markets S&P 500 long run forward P/E multiple since 1985 S&P 500 12M forward EY vs. US 10Y bond yield (%) • Equity markets valuations are above trend, but unlike bonds not in bubble territory • Strong preference for global equities vs. global bonds, given rising GDP, low interest rates and inflation trending higher Source: Global Financial Data, Bloomberg, RMB Morgan Stanley US equity markets are above long term average US equity/ bond yield gap is 3.2%
- 17. 4 6 8 10 12 14 16 18 2003 2005 20072008 2010 2011 2013 2015 2016 JSE P/E ex Naspers average 17 2017 outlook – Global and domestic capital markets JSE All Share P/E (trailing) JSE 12M forward P/E ex Naspers JSE 12M forward EY vs. SA 10Y bond yield (%) 0 2 4 6 8 10 12 14 16 2003 2005 2007 2009 2011 2013 2014 2016 SA 10Y Bond Yield JSE Earnings Yield (ex Naspers) JSE 12M forward P/E ex Naspers currently 12.8 timesJSE 12M trailing P/E as at 31 December 2016 : 20.6 times times • JSE appears expensive over the long term • Includes depressed resource earnings • Inflated by heavy weighting of Naspers • On a forward P/E basis, appears more palatable • Includes expected resource earnings growth • Excludes Naspers Source: Bloomberg, Bateleur, Global Financial Data, RMB Morgan Stanley 0 5 10 15 20 25 1960 1968 1976 1984 1992 2000 2008 2016 JSE All Share P/E (trailing) average
- 18. 18 2017 outlook –in summary • Equity valuations are above trend globally and in SA, return expectations need to be tempered • Equities offer superior risk/return vs. bonds and cash given inflation and US rate hikes • SA GDP improving off a low base, could assist corporate earnings especially: • Agriculture and mining companies (as well as those providing services & product into these sectors) • GDP trend growth (3%) still some way off, requires broad corporate investment • Rand close to fair value, no obvious preference for local vs. offshore equities based on currency • No specific theme in the portfolio i.e. cyclicals, interest rate sensitive stocks • Fund holdings dominated by stock specific opportunities, as opposed to top down themes • Lack of “dripping roast” opportunities, leads to a higher no. of individual stock positions
- 19. Flexible Fund –current fund positioning Source: Bateleur 19 SA Industrial KAP, Mpact, AECI & Hudaco Direct offshore Google, PayPal, Wells Fargo & S&P 500 IT Naspers & EOH Rand hedge Bidcorp, BTI & Reinet Financials Old Mutual & Barclays Group Africa Retail and food producer Shoprite, Oceana & Italtile Resources Sasol & Mondi Healthcare Adcock & Spire Healthcare Offshore property Capital & Regional, Stenprop & Sirius Other small holdings Various Cash - Rand Sector Select Holdings
- 20. Adcock – improvingexecution supports investment case 20Source: Bloomberg, Bateleur Adcock operating margin improving and below trend Strong balance sheet – moving into a net cash position (Rm) -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e2018e Operating profit margin (%) average Bidvest acquires initial stake (34.5%) in Adcock • Sharp turnaround evident over the past two years, following the Bidvest acquisition (currently own 38.4%) • Strong balance sheet – moving to a net cash position • Excellent portfolio of over the counter (OTC) brands - Corenza C, Panado, Citro-soda, Allergex, Bioplus -1500 -1000 -500 0 500 1000 1500 2013 2014 2015 2016 2017e 2018e 2019e
- 21. -30% -20% -10% 0% 10% 20% 30% 40% 50% 2007 2008 20092010 2011 2012 2013 2014 2015 2016 2017 SEP price increase (%) ZAR vs USD (%) Adcock – improving execution supports investment case 21Source: Bloomberg, Bateleur Margin supported by stronger ZAR and pricing Forward P/E (times) valuation attractive, result of organic growth Margin support from lower API input cost from a stronger ZAR and price recovery form SEP increase • Will benefit in 2017/18 from a stronger Rand and single exit pricing (SEP) increases • High quality cash generation with low capex requirements – having already invested meaningfully in facilities • Attractive valuation and potential acquisition target Rand weakness Rand strength 16.3 12.8 14.2 18.5 45.0 31.5 19.6 17.1 14.5 12.6 0 5 10 15 20 25 30 35 40 45 50 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e PE forecast to unwind through improved operational focus, input cost benefits and a deleveraged balance sheet
- 22. 0 100 200 300 400 500 600 700 800 900 1000 2007 2008 20092010 2011 2012 2013 2014 2015 2016 Shoprite HEPS (cents) Shoprite DPS (cents) Source: Bateleur 22 Shoprite – Africa becoming meaningful Consistent earnings and dividend growthAfrican operations expansion continues • African operations contribution finally becoming meaningful • Sustained investment despite macro backdrop created a strong leadership position • Contributed 19% of group profits in 1H 2017 vs. 14% in 1H 2016 • Investment in operations (existing and expansion) a strong driver of earnings and dividend growth Shoprite has grown HEPS and DPS at 18% CAGR since 2007 December 2015 368 stores in Africa 2016 added 49 stores in Africa December 2016 417 stores in Africa 2017/18 will add 66 stores in Africa June 2018 483 stores in Africa
- 23. 0 500 1 000 1 500 2000 2 500 3 000 3 500 4 000 4 500 5 000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Pick n Pay capex (Rm) Spar capex (Rm) Shoprite capex (Rm) 0 5 10 15 20 25 30 35 40 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Shoprite trailing P/E Shoprite FWD P/E Average trailing PE Source: RMB Morgan Stanley 23 Shoprite – Africa becoming meaningful Shoprite has invested in growth ahead of its competition Shoprite forward P/E (times) attractive relative to history Since 2006 Shoprite has invested a cumulative R30.8bn in capex vs. Pick n Pay’s R13.2bn and Spar R3.8bn. • Shoprite has invested significantly ahead of peers, positioning the group for future growth • Business is strongly cash generative with a favourable working capital cycle • Steinhoff transaction overhang lifted, management can focus on growth initiatives • We were strongly opposed to the potential transaction Shoprite P/E unwinds to 18.7x to June 2017 and 16.1x to June 2018.
- 24. • Foodservice asan industry has attractive and growing dynamics • Steadily growing consumption of food away from home drives growth in a fragmented market • Translates into predictable and strong earnings growth prospects for Bidcorp • Bidcorp operates in 20 countries, has 260 distribution centers and employs 24 500 people • 2016 turnover reported at R140.5bn and trading profit of R5.2bn (trading margin of 3.7%) 30% 35% 40% 45% 50% 55% 60% 65% 70% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Food at home Food away from home Share of total expenditure on food away from home increased from 36% in 1975 to 50% in 2014 Source: USDA, Bateleur 24 Bidcorp – well positioned in an attractive growth industry Cash earnings consistently ahead of headline earningsUS market as a proxy - structural growth in foodservice 0 1 000 2 000 3 000 4 000 5 000 6 000 2013 2014 2015 2016 2017e Headline earnings (Rm) Cash earnings before dividends and capex (Rm)
- 25. Source: Bateleur 25 Bidcorp –well positioned in an attractive growth industry Cash generative business with little debt Bidcorp 12M forward P/E (times) stacks up well vs peers • Bidcorp is highly cash generative (negative working capital cycle) • Strong balance sheet (underutilised) with little debt • Attractively valued vs. global peers at an estimated 19.2x 12M forward P/E • Highly regarded management team in place led by Bernard Berson 19.2 18.4 22.9 16.5 18.5 19.3 19.2 0 5 10 15 20 25 Sysco PFG Booker US Food Sodexho Compass Bidcorp -3 000 -2 500 -2 000 -1 500 -1 000 -500 0 500 1 000 -7 -6 -5 -4 -3 -2 -1 0 2013 2014 2015 2016 2017e 2018e Net Debt Rm (RHS) Net working capital days (LHS)
- 26. Source: RMB MorganStanley 26 Hudaco – improving fundamentals and low earnings base Operating margins below trend, set to improve with growth • Provides predominantly imported products into the SA manufacturing, mining and consumer industries • Earnings base is low and margins are below trend • Seeing signs of improvement in economy, from mining in particular Global mining capex ($ billions) 0 10 20 30 40 50 60 70 80 90 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $bln Total global mining capex 10% 11% 12% 13% 14% 15% 16% 17% 18% 0 100 200 300 400 500 600 700 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Operating profit Rm (LHS) Operating profit margin % Average operating margin
- 27. Source: RMB MorganStanley 27 Hudaco – improving fundamentals and low earnings base P/E (times) is attractive given low earnings base and improving outlook • Low capex distribution business, highly cash generative • Experienced and respected management team led by Graham Dunford • Attractively valued at an estimated 10x P/E to November 2017 and a potential acquisition target Consistent cash generation and good capital allocation 0 100 200 300 400 500 600 700 800 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cash Generated (Rm) Capex (Rm) Acquisitions (Rm) 0 2 4 6 8 10 12 14 16 18 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Hudaco trailing P/E Hudaco forward P/E Average trailing P/E
- 28. Conclusion We remain confidentin delivering on the investment objectives of the funds that we manage 28
- 29. Caveat and disclaimer Thispresentation is confidential, is not for circulation or publication and is for the information of the addressee only. This presentation may not be disclosed to any third party without the written consent of Bateleur Capital (Pty) Ltd (“Bateleur”). This presentation has been prepared for the benefit and information of the addressee to whom this presentation is submitted in good faith and who is deemed by Bateleur to have accepted that the confidentiality of this presentation will be maintained at all times. This presentation has been prepared by Bateleur. Whilst every care has been taken by Bateleur in compiling the information contained in this presentation neither Bateleur nor its director give any warranties, express or implied, as to the accuracy, reliability or completeness of this presentation or any other information of whatever kind whether in oral or written form, made available to any interested party and any liability therefore is hereby expressly disclaimed. Bateleur is an authorised financial services provider. FSP no. 18123. 29