What do Peroni beer, Cartier watches and Chinese online games have in common? Very little, except all three are behind the local stock market’s gravity-defying run in recent years.
Since recovering from the 2008 financial crisis, stocks in Africa’s biggest economy have weathered all kinds of bad news – strikes, sputtering growth, credit downgrades and waning consumer demand – to notch up a host of record highs.
The JSE’s benchmark Top40 index has risen nearly 40 percent since the start of last year, outperforming many major developed and emerging markets, including India (28 percent), Mexico (11 percent) and the US (35 percent), though some of those returns have been eroded by the weakening rand.
But here’s the curious part. According to some recent research from Cannon Asset Managers, 25 percentage points of the performance comes from just three stocks: brewer SABMiller, luxury firm Richemont, and media group Naspers.
Since January 2012, JSE-listed shares of SABMiller, known for Castle Lager and Peroni, have risen 80 percent.
Richemont, the Swiss maker of Cartier watches and Mont Blanc pens founded and still run by the Rupert family, has seen its South African shares surge 137 percent.
Naspers, with holdings in e-commerce companies in emerging markets, including a stake in Chinese internet giant Tencent Holdings, has clocked a stunning 166 percent.
Yet investors who owned other shares on the JSE, but not those, would have seen an increase of less than 15 percent, Cannon chief executive Geoff Blount said, a performance more in line with South Africa’s fundamentals.
Blount’s observations are intriguing, particularly from a valuation perspective: “There is no doubt that the stocks that did well over this period are high-quality firms, but – and here’s the issue – many are very expensive,” he said.
At least in Naspers’ case, “very expensive” may be an understatement. The stock, which this month eclipsed telecoms firm MTN Group as the largest firm by market value and is worth $40 billion (R396bn), is trading at 29 times forward earnings, according to Thomson Reuters data, and its share price is 36 percent above its intrinsic value.
And despite the hype about “rising Africa” and South African equities as a gateway to sub-Saharan growth, none of the stocks is a pure Africa play.
Although it has significant pay-TV and print operations, Naspers is seen as a “proxy for Tencent”, as Jefferies analyst David Reynolds remarked in a research report last month.
Tencent, a $98bn company known for its social messaging application WeChat and online games, contributed about 40 percent of Naspers’ revenue in the last financial year.
Richemont, which has its primary listing in Switzerland after being spun off from the predecessor of South Africa’s Remgro in 1988, is increasingly reliant on Asia, given the demand for luxury items by China’s wealthy.
For SABMiller, Africa outside South Africa is an important market, although it is a smaller revenue contributor than Latin America, Europe and North America.
The three companies have something else in common: they show how much investors will continue to pay – or overpay – for high-quality businesses with good growth prospects.
The challenge for investors is to find the next set of companies that can deliver such returns. – Reuters