by Chantal Marx, Pritu Makan, Sithembile Bopela, Jalpa Bhoolia, Zimele Mbanjwa & Hashmeel Suka
Compagnie Financiere Richemont (CFR)
Richemont is a luxury goods group managed with a view to the long-term development of successful international brands. The
company owns several of the world's leading brands in the field of luxury goods, with particular strengths in jewellery, luxury
watches and writing instruments. Brands include Cartier, Alfred Dunhill, Montblanc, Lancel, and Van Cleef & Arpels.
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Thematically, luxury goods is attractive when considering a long-term improvement in spending power of emerging market
consumers. Richemont offers a unique, strong portfolio of brands that are well diversified from a product and geographic
perspective.
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The group's overall growth strategy is based on utilising central and regional support hubs to deepen market penetration in
fast-growing markets while seeking targeted acquisitions.
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Richemont also boasts a solid balance sheet and profitability measures, supported by low gearing levels, high cash generation,
strong ROA, as well as robust ROE.
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The company's cash position remains strong and is key to its defensive investment case. This also allows for large investment,
which will support growth into the future.
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The group delivered a resilient performance in the first quarter (to June 2024), against a demanding base and tough economic
backdrop, with growth being in line with expectations. Growth was seen across all regions (except for Asia Pacific ex-Japan),
driven by Japan and the Americas, with further progress made in direct-to-client sales (notably at the Jewellery Maisons).
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The company's cash position also strengthened y/y and remains key to its defensive investment case. This also allows for large
investment, which will support growth into the future.
It has become clear that there is stronger demand support for "hard luxury" (jewellery and watches) over "soft luxury" (clothing and
leather goods). Richemont is more exposed to hard luxury goods, which could see it outperform peers this year. Following recent
share price pressure, Richemont is trading on a forward PE of ~19.8 times, well below its average rating long term. We believe the
current price offers an attractive entry point into a company we view favourably from a long-term perspective.
Bidcorp (BID)
Bidcorp is a market-leading food service product distributor in several geographies including the United Kingdom, Europe,
Middle East, South America, the Asia-Pacific region, and South Africa. The company's business units operate across the food and
ingredient manufacturing sectors, such as catering, hospitality, leisure, baked products, poultry, meat, seafood, and processing. The
strategy is to grow organically in existing regions and acquisitively in new ones, with improvements in the customer mix and value
add opportunities providing further upside potential.
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The group has a well-diversified client base and businesses at different life cycles across developed and emerging geographies.
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Bidcorp is not overly exposed to any specific client or category, boasting healthy diversification across the portfolio.
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The company's dual strategy of targeting organic (primary focus) and acquisitive growth spreads risk, with the flexible balance
sheet offering room for further bolt-on acquisitions, which are under consideration across the group both in geographic
expansion opportunities, as well as value-add product development.
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The group's market leading position in many countries of operation provides some pricing power in a low-margin industry.
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Towards the end of last month, the group delivered another robust full-year performance against a backdrop of turbulent and
challenging economic conditions - the top line expanded by double digits, with almost every business seeing an improvement
against their previous record achievements of FY23, and after adjusting for estimated weighted food-basket inflation, the
group achieved real organic volume growth of almost 6%. Moderating food inflation throughout the year and difficult economic
conditions resulted in customers becoming more price sensitive as competition increased. However, the group's focus on
improving the mix of sales, particularly in the independent segments, assisted in protecting gross margins.
The company remains financially strong, with relatively low levels of gearing and a robust business model with solid diversification
and defensive characteristics. In addition, investment activity (primarily into new distribution capacity) has continued to cater for
current and future growth, with management maintaining confidence that long-term prospects remain attractive in the global
foodservice industry. Bidcorp is trading on a forward PE of 16.9 times, below its long-term average of 20 times. We maintain a
favourable long-term view on the counter
The Foschini Group (TFG)
The Foschini Group is an investment holding company with a core business focus in retail and financial services. The group
comprises several brands trading throughout southern Africa offering a prominent lifestyle range of household name brands
including Foschini, @Home, Sterns, Totalsports, Sportscene and Jet, among others. The group also owns Phase Eight and Whistles
in the UK, and RAG in Australia.
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Despite prevailing pressure on consumer spending power over the past three years, the group has sustained positive revenue
development supported by the expansion of the brand portfolio, and further growth in online retail turnover in South Africa via
the Bash platform.
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Looking ahead, we expect earnings growth to be underpinned by an improved macro environment and increased consumption
as lower inflation and pending rate cuts should yield higher disposable income, which, coupled with cheaper credit, will likely
spur consumer appetite.
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Lower interest rates should offer lower finance costs for the group going forward, which, together with continued robust cash
generation provides a positive underpin for further deleveraging over time, particularly paying down the debt associated with
the acquisition of Tapestry in 2022.
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Positive tailwinds are expected from the two-pot system as consumption trends will likely reflect, after debt settlements,
pent-up demand for discretionary items like retail apparel, home goods, furniture, etc. TFG's diversified portfolio across LSM
segments, product categories, and geography, better positions the group relative to peers, in this context.
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The company is the market leader locally in "quick response" given its local manufacturing capability, which is a clear
competitive edge for the group.
We see good cyclical and structural support for Motus in the short-to-medium term. Easing interest rates globally will likely lead to
reduced consumer pressure and this is encouraging for vehicle market fundamentals. The conclusion of elections in South Africa
and the UK has led to a more stable policy environment that could be good for consumer confidence. In South Africa (where the
bulk of revenue is generated), the continued acceleration of structural reforms and greater access to savings (via implementation
of the two-pot retirement system) could also prove to be strong tailwinds for vehicle demand.
Continued business investment into key strategic initiatives to further strengthen its differentiated business model, seek out
strategic adjacencies and high-quality acquisitions, and work towards improving its balance sheet and capturing market share,
provide a positive base for the group's longer-term growth prospects.
TFG is trading on a forward PE of 13.1 times, which appears fairly valued. We continue to regard the stock as attractive from a
longer-term perspective.
Naspers (NPN)/ Prosus (PRX)
Naspers is a prominent multinational media group which has, over the last two decades, evolved from a traditional print media
business in just one country to a broad-based e-media company operating across multiple regions and markets. Naspers' most
notable asset is Prosus (PRX), of which it owns ~41.6%. Prosus, in turn, has a significant shareholding (~25.4%) in Chinese internet
giant Tencent (known for its social media, gaming and cloud service offerings). Prosus is essentially the international internet
assets division of Naspers, focused on e-Commerce, Food Delivery, and Classifieds.
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Prosus is the largest consumer-internet company in Europe and among the largest technology investment companies in the
world, operating across a variety of platforms and geographies (i.e. well diversified). In addition to Tencent, some of its largest
investments include Delivery Hero (~28% stake), Swiggy (~33%) and Udemy (~13%), as well as OLX and PayU which are fully
owned.
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Despite persistent regulatory risk and current macroeconomic weakness in China, we remain positive on Tencent's near- and
long-term growth prospects, particularly in spaces like fintech, cloud computing and AI. Growth in advertising should also
remain supportive of the company's valuation.
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We believe there are significant growth opportunities for several of the group's assets, as was the case previously with Tencent
and Delivery Hero, which have since lived up to their potential.
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Recent results have signalled steadying demand and an early improvement in the trading environment, with downside
momentum in revenue having stalled and more recently reversed. In 4Q24 to the end of June, revenue was up 4% y/y (new
stores: +1%, existing stores: +3%). On a full-year basis revenue was up 3% y/y, building momentum from the preceding quarters
(revenue 9M24: +3%).
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Recent acquisitions in the payments space in India could be a catalyst for better diversification and growth in future. The
group's focus on high-growth sectors (such as fintech and edtech) within emerging markets (such as Latin America, Asia, and
Eastern Europe), is particularly encouraging.
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The group has a history of strong financial performance as well as robust balance sheet fundamentals and is managed with a
clear long-term vision. The management team (which boasts a proven track record) is actively taking steps to address the size
of the respective discounts.
At a discount to NAV of ~41% and 35% respectively, both Naspers and Prosus continue to offer good value at current levels. We
expect a continued narrowing of their respective discounts (i.e. significant upside in their share prices), supported by ongoing share
repurchases and further strategies to unlock value from unlisted investments. Apart from this, we view the current valuations of
some of the listed entities and Prosus as compelling - particularly taking a longer-term view.
Mondi (MNP)
Mondi is an international paper and packaging group, with over 100 production sites in over 30 countries. The key operations are
in central Europe, North America, and South Africa. Mondi is a market leader in corrugated packaging in Europe and a global leader
in kraft paper and paper bags as well as a leader in uncoated fine paper in certain regions. Its diversity of products offers optionality
to customers as it provides sustainable packaging in the form of paper, plastic, or hybrid solutions.
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Mondi tends to be more resilient to cyclicality through its focus on corrugated boxes that are primarily used in defensive sectors
such as food, beverages, and fast-growing areas like e-commerce. This works to reduce volatility in Mondi's product basket
price through the cycle. Additionally, paper prices are less volatile than metal or soft commodity prices, allowing for better
margin predictability and control.
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Flexible Packaging is the biggest segment (~54% of revenue), and Mondi is a global leader in the production of kraft paper,
paper bags, plastic and hybrid packaging solutions. Corrugated Packaging (~29% of revenue) is a leading producer of virgin
containerboard in Europe and the largest containerboard producer in emerging Europe. The Uncoated Fine Paper segment
(~18% of revenue) produces a wide range of home, office, converting and professional printing papers in central Europe and
South Africa. From South Africa, Mondi also produces and sells market pulp to customers around the world.
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Mondi's strategy is centred on sustainable value accretive growth underpinned by market leadership positions and scale in
key markets. The group invests in upstream and downstream assets to ensure organic growth, enhance cost competitiveness,
improve environmental performance, and drive synergistic benefits of its integrated business model.
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The group continues to generate good cash flows and maintain a strong financial position, providing a platform for continued
investment in the business and returns to shareholders.
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The current project pipeline is robust, with 80% of the € 1.2 billion organic growth budget expected to be invested this year. The
investments are expected to take up to three years to reach full production and deliver mid-teens returns through the cycle at
full capacity. Meaningful EBITDA contributions are expected by 2025.
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In 1H24, while there was ongoing pressures on the top- and bottom-line figures, it was within management expectations.
The performance was encouraging, supported by better market conditions which resulted in stronger order books and higher
sales volumes, allowing for several price increases across all paper grades. Alongside lower input costs, the full benefit of these
increases are expected to come through in 2H24.
Global packaging demand is estimated at ~$1 trillion a year, with the European market accounting for ~24%, and North America
accounting for ~23%. Indeed, capacity for continued growth remains positive for Mondi given the robust addressable market and
access to the biggest markets for its products. Its exposure to the faster growing packaging segments of corrugated (paper-based)
and flexible (paper, plastic and hybrid-based) packaging puts it in an advantageous position.
Mondi seems to offer fair value on a forward PE of 13.7 times, which still seems reasonable as a long-term entry point.
