In a football league, the team that becomes the champion at the end of the season is the team with the most points¹. Three points are awarded for winning a game, one for a draw and zero for losing. A game is won by scoring more goals or conceding less than the opponents.
Recent irregularities, scandals, rumours, and negative reports on various companies have created lots of angst amongst investors. In this article, we dwell on some of the companies that have been caught up in these events and how it impacted the Lunar BCI Worldwide Flexible Fund (Lunar), if at all.
Did we concede any goals that we could have prevented?
Did we save any goals that would surely have been scored if we didn’t defend well?
Did we miss goals that we should have scored?
Did we score goals because we were well-positioned?
It started in December 2017, firstly with the sudden resignation of Marcus Jooste, CEO Steinhoff. This was followed a day later with Viceroy Research’s report on Steinhoff. Steinhoff’s shares drop by approximately 90%.
Since then, we had rumours of negative reports on Aspen, a published report on Capitec by Viceroy, a published report by 360One on the Resilient group of companies and a scandal involving DSTV, a subsidiary of Naspers.
How was Lunar affected?
- Steinhoff (SHF): Lunar was not invested in Steinhoff. Our main reasons for not investing in Steinhoff were 1) as a group, it did not fit in with our investment themes; 2) we also viewed the company too complex to understand; 3) we were uneasy with the company’s strategic direction. Steinhoff had large holdings of PSG and Shoprite in its portfolio, and Lunar was invested in both of these. So, tactically, we decided to reduce our holdings in these 2 businesses even though we liked them. Our view was that Steinhoff (and management who were highly leveraged) would be forced sellers of their holdings to repay bondholders and lenders. We would thus be able to acquire both PSG and Shoprite at better prices later. As it turned out, this was correct for PSG but not for Shoprite, as PSG’s shares dropped, but Shoprite’s in fact rose. We avoided the Steinhoff issue but were marginally caught in the waves that it created. The net result was no significant impact to our fund. We view this as a goal saved.
- Capitec (CPI): When Viceroy did come out with its second report, it was a surprise that its report was on Capitec. Lunar was not invested directly in Capitec, but we were invested in PSG. Approximately 50% of PSG’s net asset value was and still is made up Capitec. This report came at an inopportune time for us, as we had started rebuilding our holdings in PSG. We successfully bid in the Steinhoff sale of PSG shares. PSG, in our opinion has excellent underlying businesses, a very strong management team, and it was trading at a discount of approximately 17% of its net asset value. Their businesses fit in well with our investment themes. We were of the opinion that Capitec was overvalued because the share price was implying much higher growth than what it could likely achieve. But, our view was that the discount was a sufficient cushion. Once the Viceroy report came out, we stopped building up our position and again reduced our stake in PSG. We do not agree with most of Viceroy’s allegations and would most likely add to our holdings in PSG once the dust settles and Capitec is trading at a better price. This has impacted the fund marginally and we view it as a goal conceded. The question we ask ourselves is: Could we have avoided it?
- Aspen (APN): Before Viceroy’s report on Capitec came out, the market speculated that one of the companies that Viceroy is targeting is Aspen. This put some pressure on the Aspen share price. Lunar was and still is invested in Aspen. In fact, we increased our stake somewhat when the share price came down. The business fits in well with our investment themes and whilst in the past valuation was an issue, it is trading at much better value now. There is no impact on the fund holding Aspen, in fact it allowed us to buy increase our holdings at better prices. We view this as a goal scored.
- Resilient (RES) and related companies NEPI, Fortress, and GreenBay: We have generally been quite negative on the property sector, especially those with large shopping centre holdings. We were and are still not invested in any of these. In the property sector, we prefer the logistics warehouse plays, those leased to logistics and internet retail businesses like DHL and Amazon. Goals saved.