Podcast: Level 2 winners

Simon Shares

Day 160 of lockdown.

Northam (JSE code: NHM) results had two comments that caught my attention. They are aggressively buying back their Zambezi pref shares (JSE code: ZPLP). The second was that the amount of rhodium used in a single catalytic converter was 0.3g in 2015 and will be 0.45g in 2025. A 50% increase that supports the price increase.
Hammerson (JSE code: HMN) have consolidated their shares 5:1 ahead of a massive rights issue which either you follow or exit because if you don’t follow you’ll be diluted out of existence.

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Level 2 winners?

We’re now able to travel between provinces, visit friends and family, go out for dinner and even back to the office. Leisure is back, but is it investable yet?

So who are the first winners as we ease out of hard lockdown?

On the one hand, pent up demand is real. I was at a bush lodge over the weekend and it was full and trying to find somewhere for the September long weekend is proving tricky. So people are out spending. Reports from restaurants in late August are they were packed but then I was at dinner on a wet and cold Tuesday evening and things were quiet.

So the current surge is likely very much just pent up demand and money saved. But what’s important is how long this pent up demand lasts and what’s real?

Easy wins are the prepared food space, quick service and sit down dining. But we’re off a very low base and I think we’ll start seeing discounting as the initial surge dies out and increased costs in terms of PPE and social distancing reducing capacity.
Hotels are harder, especially those that cater to conferences and business travel. Personally, the idea of a hotel still doesn’t sit easily with me. Whereas an Airbnb is something I am happy to do.
Banks are cheap and the three reported so far all expressed cautious confidence about the second half. But I am less certain, payment holidays will start expiring and the broader economy is hurting.
That said asset managers and stockbrokers are going to report record results. My preferred is Coronation* (JSE code: CML), Purple* (JSE code: PPE) and Sygnia (JSE code: SYG).
Miners are certainly in a sweet spot. Pan African Resources* (JSE code: PAN) trading update for the year ending June 2020 had average R15.67 exchange rate and the average gold price was US$1,574. So lots more upside in the current period if the levels hold where they are now.
Food retail should be doing fine with lower LSM the easy winner as people shop down.
Food producers are under pressure with increased PPE costs and maize price increases hurting margins in those sectors in which maize is an input.
Homebuilders, we’re seeing massive demand in lower-priced units under R1.5million in large part due to low rates and to a smaller degree in work-from-home. Balwin (JSE code: BWN) is well placed but it a long road home even as they sit with solid land banks and low debt.
Infrastructure spending is all the rage globally and here we have one clear stand out – Afrimat (JSE code: AFT).
DIY gets real interesting and Cashbuiild (JSE code: CSB) noted in their results that “group revenue for the six weeks after year-end has increased by 22% on the comparable six week period.”. We’ve seen this in the US with Home Depot and Lowes both having knock out results.
Pharma, preferred over hospital groups but I do think likely the later has seen the worst of bed nights and should start seeing that increase.
Property, no thanks.

* I hold ungeared positions.

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