51% of the portfolio is invested across 6 assets – Reinet (BAT & Pension Fund Corps), Berkshire Hathaway, R186’s, Melco, Transaction Capital and RB Plats.
We’re very comfortable with the positioning of the portfolio at the moment. The only thing that’s changed is that the Rand is weaker so it’s a risk-off currency right now given its depreciation. Only 30% of the Nedgroup Investments Bravata Worldwide Flexible Fund is invested in local South Africa.
The company has a taxi finance component and a debt collection component so it makes money with its balance sheet and income statement. From a funding perspective, they can secure funding which is now cheaper given the drop in prime and talks of a third rate cut. On the revenue front, the taxi industry is here to stay and will recover from this crisis. The company has R700-800 million on their balance sheet so are well positioned to take advantage of stressed books that will come up for sale now. What did hurt the fund was the 50% sell off by the founders of their shareholding just before the crisis. This ended up taking out every willing buyer of Transaction Capital in the short term. The timing was perfect for the seller, but as a buyer or holder it was terrible as it was compounded by the downgrade and the virus, taking the share down from R26 to R19. The company has recovered and we still believe it’s a great investment.
RB Plats should reach full state in December, given the crisis, when its new mine will start producing large amounts of ore. When Amplats was not able to refine for them there was some risk to their balance sheet as they had no volume at all. This was compounded by the virus shutdown, so they have been hit particularly hard. We believe the long-term prospects for Platinum Group Metals and a weak Rand bode well for the platinum group of investments. We chose to invest in the smallest of the platinum producers with a strong balance sheet and already we’ve seen the share price recover to R35. As the markets start looking for good businesses, you’ll be able to get more earnings out of a company like RB Plats. It’s not inconceivable that RB Plats will be at full production in 3 years’ time. Energy will be required for the rest of our lives and if we’re using technology such as fuel cell technology, South Africa is the only platinum producer of size in the world so the future bodes well for this industry.
Reinet, which is all offshore, trades at a 40% discount to the sum of its parts. It’s in tobacco, which is defensive, but both subsidiaries are currently valued at extreme lows.
AECI does particularly well with a weak Rand over time. 60% of their customers are miners who use explosives and chemicals, which they supply and are dollar priced. The business is highly cash flow generative and selling off of non-core assets to reduce debt and keep focus has been good for them. Roughly half of the business is dollar revenue. The fund holds just under 3%. It is on the whole a great asset with a strong management team and is a key holding for all of our funds.
Berkshire Hathaway is the second largest holding in the fund, but it’s a big animal so it’s hard to grow. It is, however, a cornerstone of the portfolio and a good proxy for the US economy and cheaper than buying the S&P 500. We’ve taken proceeds from the sale of US assets where we didn’t want to bring the money back and, given that we believe US interest rates will remain low, Berkshire Hathaway was a good alternative. In uncertain times, Berkshire Hathaway is a wonderful business to own although it’s not cheap and has underperformed relative to the S&P over the last 5 years.
Melco International Development
Our exposure to the European and Middle Eastern markets includes Melco and Oriental Watch Holdings. Melco is a casino, which is highly regulated. It’s run by a very capable operator and at HKD12, we think it’s worth closer to HKD30, we added it. We’re hoping the Japanese casinos will kick in and that Melco gets a casino, which will have a big impact on their growth. The company has no debt issues, covenants or restrictions so we’re not paying for any risk.
Oriental Watch Holdings
Oriental Watch Holdings consists of lots of cash, buildings and stock. We suspect this will not be a good year for luxury watches, but it will recover. We must bear in mind that this industry has been challenged for the last 3-4 years resulting from a government policy on gifting watches and high rentals in Hong Kong. This has since changed. As a company that gives us cash back of about 15% in annual dividends and specials and, if people start buying watches again, we’ve got an option on the growth of the business.
We don’t know what the future holds, but believe in our investment philosophy and process and that our assets will be around for the next 5-10 years and continuing to produce good returns. Given that there is a lot of uncertainty in other markets, such as Trump in the US with many policies that will be bad in the long term, Brexit in the UK, which needs a weak dollar and several issues in Europe, Asian and South African assets are starting to look more attractive.
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