Dylan Bradfield, portfolio manager at Sharenet, provides some excellent investment pointers, basing his view on the strong potential for a rotation of investment from US assets to Emerging Markets – including South Africa. Bradfield highlights the recent popularity of the JSE, driven by the weakening dollar and increased interest in retailers, insurers, and banks. He believes that South African stocks are highly attractive value propositions, with cheap fundamentals and the potential for a significant upward move as global markets allocate more capital to the country. Bradfield also provides the case for buying Telkom and Blue Label. He spoke to Alec Hogg of BizNews from the Latitude Aparthotel studio in Cape Town. – Alec Hogg
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Relevant timestamps from the interview
00:00 – Introductions
00:39 – Dylan Bradfield on Fantasy Fund Manager
01:57 – Bradfield gives his overall view of the South African market
04:18 – On cheap SA stocks and the trajectory of the market
04:49 – On Telkom
07:50 – On Openserve
10:02 – On Blue Label
12:45 – On his approach to investing
14:01 – On the US inflation rate and its impact on US stocks
16:28 – How the US economy may affect the SA market
17:52 – On being patient with your investments
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Edited transcript of the interview
Alec Hogg: Dylan Bradfield, you guys at Sharenet are doing some interesting things. We’re very happy to be part of the Fantasy Fund Manager game with you. How are you doing on that?
Dylan Bradfield: Last week, I was doing quite well. This week, not so well. I didn’t adjust for the strength in certain areas and stuck with a couple of positions that let me down. I think I’ve slipped back a couple of hundred places, but I’m not exactly sure where. I’m not performing as well as I could.
Alec Hogg: It’s great fun though, isn’t it?
Dylan Bradfield: Yeah, absolutely. Also, the arrival of a little baby in our household means I don’t always have the time to keep an eye on it. But there have been some fantastic picks made by other participants. The leaders seem to be doing really well. I think someone was up 11% last time I checked.
Alec Hogg: And there are more than 4,000 people playing the game, so there’s a lot of interest. Last time we spoke, we were talking about Telkom and Blue Label. I’d love to get an update on that in this conversation. But I also want to hear your thoughts on the peaking interest rates in the United States and the impact of inflation, which is now at 3%. The Fed may not need to raise rates anymore. Maybe let’s start with an overall view of how you see the South African markets.
Dylan Bradfield: Yeah, that’s a good question. We were expecting some sort of interest rate update from the US, and we got that. So now we’re thinking there might be a rotation out of US assets into emerging markets. Africa is well-positioned for that. We’ve seen a significant move in the rand over the last six to seven days, around 6%. That has led to a rotation into retailers, increased buying in insurers and banks. Money has moved out of the dual-listed stocks like BTI and AB InBev, but that could be a profit-taking mechanism, with a rotation into underweights. It could be the beginning of a significant move for South Africa as part of the emerging markets rotation. So, looking back at the competition, I wish I had focused more on that last week.
Read more: FFM insight: Sharenet’s Dylan Bradfield – why TKG, BLU better bets than VOD, MTN
Alec Hogg: That’s so interesting, Dylan. People like Andrew Vincent and John Biccard for a long time, have been saying that South African markets are really cheap. The problem is it seems to flatter and deceive continuously. But might this be the big move?
Dylan Bradfield: King Dollar is the overall mechanism for money flow. Money flow is where we’re really paying attention. If we can get China right as well, it’s an even bigger catalyst for us. But as the dollar weakens, we believe that broader portfolio managers will start allocating to different sectors, and that includes South Africa. We have historically and currently very cheap fundamentals relative to the US. So we don’t see any reason why that rotation into South Africa should be stopped, unless there are external factors such as concerns about our relationship with Russia or other issues that still need to be resolved. Once those have calmed down, we expect the money flow to continue coming into South Africa, where stocks are relatively cheap across the spectrum, ranging from 9 to 11 P/E ratios.
Alec Hogg: So it’s not necessarily that we’re going to experience an economic boom in the country, but rather because our stocks are so cheap.
Dylan Bradfield: Yes, I would say it’s a relative trade. And if we have other mechanisms or political tailwinds that come into the economy, then by all means, the global markets are very underweight South Africa. So we could see significant upward moves from here.
Alec Hogg: That is very good news indeed. It’s also good news for our Biznews portfolio, because we have quite a few stocks in there. Let’s start with Telkom and Blue Label. Can you give us an update on those since our last session?
Dylan Bradfield: Sure. So, with Telkom, the thesis was either a potential bid from MTN or a consortium looking to acquire certain assets or pursue an asset sale within the company itself. There was a consortium that attempted to take a strategic stake in Telkom, which would have involved acquiring the government’s position. They intended to structure it in a way that would keep the stake under 35%, thus not triggering a mandatory offer to buy out the remaining shares. However, that plan has fallen through a bit. It seems there are some board issues at play, and price discovery was mentioned as being unsatisfactory to the boards.
Alec Hogg: Just to clarify, the former CEO of Telkom was leading this effort, right? Who was funding him?
Dylan Bradfield: Yes, that’s correct. They had a consortium backing them from Mauritius and some other sources of funding. There’s always a bit of politics involved in these negotiations. I think if the transaction had been accepted, there would have been a significant shake-up within the board, possibly even leading to changes in the CEO position. It seemed to go against the wishes of the current incumbents.
Alec Hogg: So the incumbents didn’t approve of it.
Dylan Bradfield: That’s correct. It never even got a chance to be voted on, which is quite unusual. When it involves such a significant position, the board should have the first say. They decided to shut it down.
Alec Hogg: But surely this means that the board now has to really take action. Do you have an alternative in mind?
Dylan Bradfield: Yes, we do believe that there will be some comments soon regarding the sale of the tower assets. We estimate that it could be in the range of R4bn to R6bn. So it seems like they are moving forward with their plans for the direction they want to take the assets and the asset sales. We’ll have to see how that pans out. The underlying asset value is there. Operationally, there have been some starts and stops. Our thesis was always centered around the unbundling of the assets and creating shareholder value. So it has hit a little speed bump, but we bought at R26 and sold some at R34, so we’ve been trading it and still holding with a focus on the bigger move.
Alec Hogg: What is Openserve worth? I ask this because I’ve had a personal experience with them, which was excellent, better than excellent. When you have a personal interaction that good, you start thinking there must be something more going on here. I remember talking to the people on the ground, and they mentioned that the best people at Telkom had been pushed into Openserve because it’s their crown jewel. Will it be offloaded? And if so, what’s your view of its value?
Dylan Bradfield: We estimate that Openserve is worth about R20bn on its own.
Alec Hogg: And what’s the market cap of Telkom?
Dylan Bradfield: It’s currently around R14 billion.
Read more: Has Telkom’s silver lining been found?
Alec Hogg: So you’re suggesting that Openserve is worth R6 billion more than the current market cap of the entire Telkom group.
Dylan Bradfield: Yes, at its last peak EBIT was around R4.5 billion. So that would be a very reasonable multiple to put on an asset like that. Again, we believe that MTN has a high interest in that specific asset. They may not be interested in the entire Telkom asset base. But given what we’ve seen with the consortium attempting to take a stake, there’s a lot of politics involved. The board is likely seeking a strategic investor to partner with them. If they can successfully sell off those assets, it would provide tremendous upside in terms of shareholder value.
Alec Hogg: We’re on the outside, so we never truly know what’s happening in the boardroom. But the point you just made about bringing in a strategic partner, there could be numerous companies worldwide who, after seeing the interest from the former CEO, are now more attentive.
Dylan Bradfield: Yes, we also had a second thesis regarding the potential direction they could take. We know that the PIC (Public Investment Commissioner) has a strategic interest in the company, currently holding around 15%. They may want to be part of the journey. So there’s a fairly good chance that they might also consider acquiring the government’s stake at a certain price and potentially fund the expansion into specific mobile operations they want to focus on strategically. This could be a turning point where they keep it central and in-house.
Alec Hogg: So if you believe in the thesis, you can put it in the bottom drawer and wake up one day to good news. Now, what about Blue Label?
Dylan Bradfield: Yes, we have two theses regarding Blue Label and its relationship with Telkom. Let me start with Telkom. If we follow our narrative that assets would be strategically sold, the company would focus on its core business, particularly in the mobile sector. They would have cash on the balance sheet and room to grow. The market is somewhat limited to a certain extent, and consolidation within the sector would be a means to achieve growth. We believe that Cell C, which is currently undergoing restructuring and trying to grow out of its slump, could be a target. Telkom has at least 5 million users within Cell C (previously 10 million), so there’s no reason why they can’t regain that market share they once had. Currently, if you look at Blue Label’s share price, the market seems to perceive Cell C as having a negative value within Blue Label’s current market cap. We believe that’s a fair reflection until we see positive signs from the trading statements indicating that the issues have been addressed. We suspect that with the addition of two new hires, including Jorge Mendes, an excellent operator in the MVNO (mobile virtual network operator) space coming from Vodacom, they could be the key to unlocking significant value within Cell C. So, if you buy Blue Label now, you’re essentially getting Cell C for free.
Alec Hogg: I’ve had a long association with Mark and Brett Levy at Blue Label, and I know several people on the board and those behind it. These are smart individuals, and when they bring someone on board, you can be confident that they’ve done their homework. Perhaps this is the key that unlocks Cell C eventually. Would you consider adding it to your portfolio? I think we need to delve into your background as well. You spent 17 years at Foord, a value fund. It’s a certain culture. I’m curious why you left there, hoping it wasn’t due to a disagreement or anything. But is that still the reason why you pick stocks like Telkom and Cell C, aiming to get 50c of value for a dollar’s worth of assets?
Dylan Bradfield: Yes, I believe that when we step back and look at our economy, we have many companies that offer value but simply don’t get re-rated. That’s where the opportunity lies. Typically, we need a catalyst to enter the market, which could be new management or initiated share buybacks. We look for opportunities where we see the potential for unlocking value and where we want to focus. It’s just a matter of time before management recognizes the opportunity. Shareholders will always provide that activism, especially for certain stocks. So, yes, we look for entrenched value and strong underlying management. Then, we hope that the rest of the shareholders or the market see what we see and eventually revalue the stock over time.
Alec Hogg: So, patience is key.
Dylan Bradfield: Patience indeed.
Read more: Heystek: What needs to happen for me to change my mind about investing in SA
Alec Hogg: That’s what investing is all about: patience. Dylan, let’s wrap up with the United States. Earlier this month we received the inflation print at 3% for June. There were those who predicted that inflation would remain high in the US, but it hasn’t. Now that the Federal Reserve is changing, it seems like we’ve reached peak interest rates. What does that mean, particularly for US stocks?
Dylan Bradfield: There are two ways to look at it. Firstly, we believe that the rally in technology stocks and the tech sector has been significant. They have benefited from the high interest rates surprisingly well, given their strong balance sheets. However, with the pullback in inflation and the potential decline in interest rates, we think policies like infrastructure spending and fiscal expansion could come back into focus. This could align with China’s thinking as well, as they have indicated that they would increase fiscal stimulus once interest rates and inflation start to decline. From that perspective, we are looking for a broader rotation or shift in the market. It would no longer be just a tech-oriented rally, but rather a more diversified market where value stocks and sectors such as copper and energy could gain momentum. We have tilted our portfolios towards commodities and value stocks, as we believe they offer attractive opportunities.
Alec Hogg: This could be good news for South Africa as a whole, especially if resources come back into favor. Resources often bail out our country, and if they start performing well, it can have positive effects on tax revenue and the overall economy. This supports your earlier thesis that South African shares are undervalued and could benefit from money flow.
Dylan Bradfield: Exactly, it’s all about that. The biggest catalyst for all of this is the rand. It’s not just the average retail investors who are moving the currency, but rather the big players like the Fed, Chinese money, and European money. When we see significant moves in the rand, such as a 2% strengthening in a single day, it indicates that major investors are recognising the value and long-term opportunities in South Africa. We have weathered some tough storms, particularly with load shedding and other challenges, but I believe in the philosophy of having patience and following the likes of John Biccard.
Alec Hogg: It’s interesting how there’s so much noise and distractions, making it difficult to see through the clutter. However, when the actual developments arrive, it often seems obvious in hindsight. You’re giving us a bit of that hindsight now and indicating that the signals are strong. So, it’s important to ignore the noise and focus on buying good value stocks in South Africa, putting them in the bottom drawer, and being patient. It may take a few years, but it will be rewarding in the end.
Dylan Bradfield: Yeah, it’s the Warren Buffett way of thinking: buy when there’s blood on the streets, when there’s fear. If you had taken a view two months ago when the rand was around R19.80, buying quality stocks, you would probably be up 15% or even 20% on certain stocks that were already undervalued. In times like these, it’s crucial to have a good money manager or wealth manager to help calm the nerves. We have also witnessed a significant outflow of local money moving offshore due to new regulations this year, allowing funds to invest up to 45% internationally. This has put pressure on the rand as there was a lot of selling initially. However, it has created opportunities. John Biccard’s article from two months ago perfectly summed it up: the tide is going out, but it will come back in again. So, sit tight. John has been proven right.
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