Since the start of 2024, the JSE All Share has returned 11.7%, predominantly driven by domestically focused stocks, commonly referred to as “SA Inc”. These companies have benefitted from a dramatic improvement in loadshedding, and the establishment of the new Government of National Unity. These positive developments have also driven an improvement in the Rand versus the USD, meaning that local market investors are 16.9% better off in USD terms, year to date.
As active asset managers, our goal is to outperform the market, and we continue to achieve this. Our Steyn Capital Equity Prescient Fund has delivered 26.3% net of all fees over the twelve months ending in August 2024, approximately 9% better than the index (all in Rand). This strong performance has been driven by our significant exposure to select SA Inc names like Southern Sun, Grindrod, Fortress REIT, Premier FMCG, and OUTsurance, amongst others.
These are wonderful businesses, which the market has been horribly mispricing. While they have performed nicely, we still see a lot of upside. These businesses remain undervalued, hold strong earnings growth prospects and likely deserve higher fair value multiples due to SA’s political change and improving economic prospects. Put differently, if a genie had showed up in January of this year, and whispered into my ear that not only would loadshedding be suspended for six months, but that we’d see an ANC/DA coalition, I would have expected the market to be up more. Now, that’s not to say that we haven’t harvested some gains from our winners to redeploy into new ideas, but if we continue to think that a fantastic business is not only undervalued, but will beat forward earnings expectations, we are very happy to hold.
Southern Sun: A case study
Southern Sun is a great example of where we see still see significant value in SA Inc. The company owns or manages 95 hotels, controlling approximately 20% of total hotel room capacity in South Africa, including some real gems like the Westin and Cullinan in Cape Town, and the Beverly Hills in Umhlanga. Importantly, they hold a strong market share in key nodes such as the Cape Town CTICC precinct. A new hotelier would need R30 billion and decades of effort to build a similar portfolio, or they could just buy Southern Sun, for R10 billion. The business generates a free cash flow yield of more than 10%, which the savvy CEO has put to good work, repurchasing approximately 10% of the outstanding shares over the last year or so.
Now, let’s talk about earnings prospects. Between all the noise in the media about the “tourism boom”, readers can be forgiven for assuming that we are trading at the peak of the cycle. The bigger picture, however, is very different. International inbound tourist numbers, despite growing strongly year-over-year, are still running at only around 80% of pre-pandemic levels. International long haul airline capacity, for a variety of reasons I won’t go into here, has been slow to recover. That is not to say it isn’t recovering – new flight announcements indicate that air capacity into the country is set to continue its growth. Other factors slowing down the recovery, such as higher fuel prices driving up ticket prices, are also easing. All this to say, I think we’ll be seeing the term “tourism boom” for quite some time to come.
Another point of pushback is the local perception of unsustainably high room rates in the Western Cape. While room rates in the province might look expensive when compared to the rest of the country, it is important to consider who the customers are. On our estimates, Cape Town room rates, being the most expensive in the country, still represent a 50%-off bargain when compared to other international cities. With rising (or rather, recovering) international demand, and no indication of significant incoming supply in the medium-term, it’s difficult to see why this gap can’t close further.
To keep a closer eye on this recovery, we use algorithmic data-scraping to price check thousands of hotel rooms across South Africa, and pay close attention to incoming airline seat supply and travel interest, affording us an edge into real-time occupancy and pricing power.
Looking at the data we have collected; the direction of travel is clear. We expect rates and occupancies, and therefore earnings, can continue to grow strongly from these levels. In our view, the valuation has much further to run.
Article by André Steyn CA(SA), CFA, Chief Executive Officer and Chief Investment Officer, Steyn Capital Management.
Source of Financial Information: Steyn Capital Management – 31 August 2024
