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Coronation's view on five global shares they hold or held
Date: 17 April 2019 Category: Stock Market |
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In our continued efforts to give our readers a broad number of views, opinions and information we have decided to share the views of Coronation Fund Managers on five global stocks they either hold or held in the past, as per their newsletter earlier in the year.
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Coronation's view on 5 global stocks they hold, or held in the past
Below the summary of 5 different shares that was held or is currently being held in their Global Emerging Markets Strategy Fund. And from the comments it is clear that Coronation does not have a lot of hope for the future of Tata Motors, but it loves E-commerce and Tobacco companies.
Kroton (the top private education operator in Brazil; 3.1% of strategy).
In our view, the sharp decline in the share price was due to a combination of disappointing earnings, concerns relating to its student base (with government-funded students graduating and being replaced by students funded by Kroton) and an expensive (at face value) acquisition to enter the K-12 market. We would agree that Kroton is experiencing challenges in the short term and faces a tough 2019 after experiencing a difficult 2018. However, we believe the long-term prospects remain very attractive (underpenetration of the tertiary education sector in Brazil, in what is a scale business in which Kroton is the no. 1 player, with an exceptional management team). Kroton trades on less than 10 times 2019 earnings, with a 3.5% dividend yield and c. 80% upside to fair value.
British American Tobacco (the second-largest global tobacco company; 4.0% of strategy).
The sharp share price decline was arguably due to a number of factors, the most important of which was a proposal by the US Food and Drug Administration to ban menthol cigarettes in the US (which make up c. 23% of British American Tobacco’s earnings), as well as general concerns over the transition to alternative nicotine products, including e-cigarettes. In our view, and clearly very different to the consensus market view, the prospects for the global tobacco companies are better than they have been for many years. For the first time, these companies have credible alternative (much lower risk) products, which make these businesses more sustainable over the long term. On the proposed menthol ban in the US, there are still many hurdles to overcome before anything materialises, and this may take a long time. Additionally, in the event of an eventual menthol ban in the US, in our view British American Tobacco will retain a large percentage of its menthol smokers by switching them to alternative products. The share price is now at a seven-year low (and rating near a 20-year low) and trades on less than nine times 2019 earnings, with a dividend yield of 8% and c. 70% upside to our estimate of fair value.
Magnit (the second-largest food retailer in Russia; 3.7% of strategy).
Magnit was beset by poor operational performance (in large part due to underinvestment in its stores), as well as the resignation of its founder and CEO, Sergey Galitsky, who sold his 30% stake in the business at the time of his resignation in February 2018. Under the new CEO, Olga Naumova (who was largely responsible for the turnaround of Magnit’s main competitor, X5 Retail, during her five years there) and a new board, a number of positive changes have taken place, including the accelerated refurbishment of stores, changes in the product mix and the introduction of a management incentive scheme. This has already started to reflect positively on the company’s results, with an improvement in like-for-like sales. The two leaders in the Russian food retail market, Magnit and X5 Retail, both strategy holdings, only have c. 9% market share apiece (with no. 3 having only 3% market share), and we believe that they can roll out stores and grow market share for many years to come. Magnit trades on c. 13 times 2019 earnings, with a 3% dividend yield and over 100% upside to our estimate of fair value.
JD.com (the no. 2 e-commerce company in China, after Alibaba; 3.0% of strategy).
In our view, the share price decline was driven by three factors: an approximately 20% to 30% decline in all Chinese internet stocks, slightly poorer-thanexpected operational performance from JD.com, and an allegation of rape against the CEO in the US (authorities in the US have subsequently decided not to prosecute due to a lack of evidence). In our view, JD.com has created a very strong e-commerce business over the past decade by building its own fulfilment infrastructure (replicating the Amazon model), which is sufficiently differentiated from Alibaba’s to enable both companies to win in the fast-growing Chinese e-commerce market. (Alibaba is also a strategy holding, albeit a smaller position at 1.5%). Over the past five years, JD.com has increased its revenue from $11 billion to $65 billion, and in the process has taken its gross merchandise volume market share from c. 6% to 17%. The market cap of JD.com currently is c. $33 billion, meaning it trades on 0.5 times revenue. From a profitability point of view, the business swings in and out of profitability depending on the level of investment; however, on any normal operating profit (earnings before interest and taxes, EBIT) margin, we believe that the business is cheap. A few reference points underscore this view: Amazon’s (more mature) US retail business delivers EBIT margins of close to 10%, while high street physical retailers achieve margins anywhere between 3% and 12 COROSPONDENT 20% (depending on the product being sold, with food at the low end and clothing at the high end). JD.com management targets a high single-digit EBIT margin. Given its current revenue (assuming no further revenue growth, even though JD.com should be able to grow its topline at c. 15% to 20% for many years) and assuming a 3% EBIT margin, JD.com trades on 20 times historic (2018) earnings. Its core marketplace margins are already 2%, so a 3% margin is very conservative and JD.com is very cheap in our view. Its upside to fair value is c. 150%.
Tata Motors (owner of Jaguar Land Rover; 0% of strategy).
This was a poor investment and a mistake in our view, and we sold out of the position during 2018. A combination of internal factors (including poor cost control measures and mediocre new product launches) and external factors (such as Brexit, EU emissions legislation and US-China trade wars) led to a sharp decline in profits. Given the very thin current margins, combined with high debt levels and an uncertain future, both in terms of alternative vehicles and Brexit (the UK represents 20% of sales, with a large part of the manufacturing base being in the UK), we felt that the risk/reward became unattractive and sold the position.
Kroton (the top private education operator in Brazil; 3.1% of strategy).
In our view, the sharp decline in the share price was due to a combination of disappointing earnings, concerns relating to its student base (with government-funded students graduating and being replaced by students funded by Kroton) and an expensive (at face value) acquisition to enter the K-12 market. We would agree that Kroton is experiencing challenges in the short term and faces a tough 2019 after experiencing a difficult 2018. However, we believe the long-term prospects remain very attractive (underpenetration of the tertiary education sector in Brazil, in what is a scale business in which Kroton is the no. 1 player, with an exceptional management team). Kroton trades on less than 10 times 2019 earnings, with a 3.5% dividend yield and c. 80% upside to fair value.
British American Tobacco (the second-largest global tobacco company; 4.0% of strategy).
The sharp share price decline was arguably due to a number of factors, the most important of which was a proposal by the US Food and Drug Administration to ban menthol cigarettes in the US (which make up c. 23% of British American Tobacco’s earnings), as well as general concerns over the transition to alternative nicotine products, including e-cigarettes. In our view, and clearly very different to the consensus market view, the prospects for the global tobacco companies are better than they have been for many years. For the first time, these companies have credible alternative (much lower risk) products, which make these businesses more sustainable over the long term. On the proposed menthol ban in the US, there are still many hurdles to overcome before anything materialises, and this may take a long time. Additionally, in the event of an eventual menthol ban in the US, in our view British American Tobacco will retain a large percentage of its menthol smokers by switching them to alternative products. The share price is now at a seven-year low (and rating near a 20-year low) and trades on less than nine times 2019 earnings, with a dividend yield of 8% and c. 70% upside to our estimate of fair value.
Magnit (the second-largest food retailer in Russia; 3.7% of strategy).
Magnit was beset by poor operational performance (in large part due to underinvestment in its stores), as well as the resignation of its founder and CEO, Sergey Galitsky, who sold his 30% stake in the business at the time of his resignation in February 2018. Under the new CEO, Olga Naumova (who was largely responsible for the turnaround of Magnit’s main competitor, X5 Retail, during her five years there) and a new board, a number of positive changes have taken place, including the accelerated refurbishment of stores, changes in the product mix and the introduction of a management incentive scheme. This has already started to reflect positively on the company’s results, with an improvement in like-for-like sales. The two leaders in the Russian food retail market, Magnit and X5 Retail, both strategy holdings, only have c. 9% market share apiece (with no. 3 having only 3% market share), and we believe that they can roll out stores and grow market share for many years to come. Magnit trades on c. 13 times 2019 earnings, with a 3% dividend yield and over 100% upside to our estimate of fair value.
JD.com (the no. 2 e-commerce company in China, after Alibaba; 3.0% of strategy).
In our view, the share price decline was driven by three factors: an approximately 20% to 30% decline in all Chinese internet stocks, slightly poorer-thanexpected operational performance from JD.com, and an allegation of rape against the CEO in the US (authorities in the US have subsequently decided not to prosecute due to a lack of evidence). In our view, JD.com has created a very strong e-commerce business over the past decade by building its own fulfilment infrastructure (replicating the Amazon model), which is sufficiently differentiated from Alibaba’s to enable both companies to win in the fast-growing Chinese e-commerce market. (Alibaba is also a strategy holding, albeit a smaller position at 1.5%). Over the past five years, JD.com has increased its revenue from $11 billion to $65 billion, and in the process has taken its gross merchandise volume market share from c. 6% to 17%. The market cap of JD.com currently is c. $33 billion, meaning it trades on 0.5 times revenue. From a profitability point of view, the business swings in and out of profitability depending on the level of investment; however, on any normal operating profit (earnings before interest and taxes, EBIT) margin, we believe that the business is cheap. A few reference points underscore this view: Amazon’s (more mature) US retail business delivers EBIT margins of close to 10%, while high street physical retailers achieve margins anywhere between 3% and 12 COROSPONDENT 20% (depending on the product being sold, with food at the low end and clothing at the high end). JD.com management targets a high single-digit EBIT margin. Given its current revenue (assuming no further revenue growth, even though JD.com should be able to grow its topline at c. 15% to 20% for many years) and assuming a 3% EBIT margin, JD.com trades on 20 times historic (2018) earnings. Its core marketplace margins are already 2%, so a 3% margin is very conservative and JD.com is very cheap in our view. Its upside to fair value is c. 150%.
Tata Motors (owner of Jaguar Land Rover; 0% of strategy).
This was a poor investment and a mistake in our view, and we sold out of the position during 2018. A combination of internal factors (including poor cost control measures and mediocre new product launches) and external factors (such as Brexit, EU emissions legislation and US-China trade wars) led to a sharp decline in profits. Given the very thin current margins, combined with high debt levels and an uncertain future, both in terms of alternative vehicles and Brexit (the UK represents 20% of sales, with a large part of the manufacturing base being in the UK), we felt that the risk/reward became unattractive and sold the position.
For more views presented by asset managers take a look at our daily investment update page in which we provide a daily update from PSG, or follow or weekly market wrap as provided by Peregrine Treasury services.