Old Mutual Investment Group

Meryl Pick discusses the failed Prosus/BillDesk deal on the Money Show this week

October 04, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Meryl Pick discusses the failed Prosus/BillDesk deal on the Money Show this week
Show Notes Transcript Chapter Markers

Portfolio Manager, Meryl Pick, unpacks her thoughts on the news that Prosus has cancelled its R85 billion deal to buy Indian company, Billdesk, and the role of the current market environment in this decision.

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The Money Show  00:04

On the markets today, a positive start for the JSE, closing up close to a percent backed by retailers, mining shares today. Pick n Pay surging past 6% this afternoon, after the company told the market that it expects a sales growth of 11.5% for the first half of the year. The likes of Anglo and Sasol also up more than 3%, Alphamin up more than 5%. The Rand at 17,98 to the dollar last I checked, R20,18 to the pound and 17,57 to the Euro. Meryl Pick will be doing the market commentary today. She's a Portfolio Manager at Old Mutual Investment Group. Of course, the big story, Meryl, though, after all those I've mentioned, is Prosus having canceled that 85 billion Rand deal to buy Indian payments firm BillDesk. You know, Prosus doing a lot of off-letting in terms of... we saw what they did with Tencent and also not agreeing to one of, what would have been some of the biggest deals and acquisitions for Prosus this year, saying they're not going to that particular deal. Why weren't they, you know, ready to sign on this one?

Meryl Pick  01:07

Good evening, and good evening to your listeners. It's... look, so it's interesting because the CCI - being the Competition Commission of India - had just recently approved the deal. And perhaps that was seen as a positive sign that it would go ahead. However, keep in mind that the deal price was put out there when tech sector valuations were much higher. So, as we've seen interest rates going up, particularly led by the Fed, discount rates for valuations across equities are going up. And the tech sector is particularly sensitive to that, of growth, which is largely tech, because of cash flows from a lot of these subsidiaries and the companies themselves are so long dated when you apply a higher discount rate, there's quite a pronounced impact on valuations. So, it's unclear at this stage whether Prosus is walking away from the deal indefinitely. There's potential that they could come back - but at a more attractive valuation - I wouldn't rule that out. But what it does mean is that there's a lot less pressure on the Prosus balance sheet. A few months ago, they announced quite an aggressive and indefinite share buyback programme funded by selling Tencent. So, I think this adds an underpin to their ability to keep buying back shares. And the way that, you know, Tencent, the biggest asset, has de-rated. It actually is quite an interesting share price entry point into Tencent from here, with the additional underpin of the ongoing share buyback, Prosus that is. So, ja, for South African investors, this is one of the cheapest entry points that you've seen into Tencent in quite some time.

The Money Show  03:12

I guess that's the positive end of it. But Prosus shares going down 27%, then Amsterdam this year, going down 8% on the JSE today. These are the JSE darlings, of course, along with Naspers. But it's been quite a volatile year in the market, then they haven't had much joy. Do you think they are taking a "wait and see" approach before they sign on any other big deals and also letting go some of the exposure in Tencent in China?

Meryl Pick  03:12

So, the exposure in Tencent will be ongoing to fund the buyback. There's sort of a very mechanistic process, very algorithmic process in place at the moment where they will sell a certain amount monthly, weekly, daily, and assess what the impact is on the discount. I expect that to continue quite mechanically for up to 12 months before management reassesses. I think definitely the business recognises that the cost of capital has gone up, which is a pretty thing to recognise. And that, you know, hurdle rates therefore for acquisitions have to be higher. It is going to... I think every deal will be scrutinized more carefully by the market because of the cost of capital. That being said, though, with valuations coming down and the business model that they have, being, you know, acquisitive, almost a venture capitalist mindset. When ratings are low, this should be the time to go looking, to acquire, so, you know, their conservatism... yes, perhaps the more prudent thing would be to be more contrarian and actually go looking for good opportunities now, provided they can fund them.

The Money Show  05:05

And let's have a quick look at Pick n Pay, the retailer seeing its shares go past 6%, saying sales growth will be up 11.5%. But when you read down the statements, right there at the bottom, it says food inflation was up more than 7%. That food inflation, how's it going to affect, you know, retailers and retail shares on the JSE this year, because, of course, inflation not really going down as fast as the SARB would like it to.

Meryl Pick  05:33

Sure. I mean, there are a couple of themes, our philosophy is centered around theme and price at Old Mutual. And there are a couple of themes emerging from this result. I think the one is the food inflation angle. Being that the food inflation is persistently high and was on the rise prior to Russia's invasion of Ukraine because of supply chain disruptions, droughts in various areas, etc. Obviously, the Russia/Ukraine invasion has exacerbated that to an astounding degree. This is a global phenomenon, and South Africa hasn't escaped that. So, what we're seeing consistently is food inflation above that which both food producers or try the soft commodity inflation beyond what food producers can pass through, and beyond what food retailers can pass through to consumers. What that means at a company level, is that we're going to see a theme of margin pressure and negative theme of margin pressure as a result of the consumer not being able to absorb the high food inflation. For Pick n Pay specifically, you know, there was some base effect, so the 11% sales number if you normalise it for the July riots, it's closer to 8%. Still, it's quite strong earnings growth of 20% off a low base. 

Meryl Pick  06:58

I think the other theme for Pick n Pay specifically is at a company level, they have launched a new strategy. So, I think they've taking a look around at the biggest competitor being Shoprite, which has a very well defined customer segmentation with the Checkers brand, the Shoprite brand, the U Save brand, and Pick n Pay's answer to that is the Boxer brand and then their new QualiSave brand which is value, more than value offering, and the traditional Pick n Pay brand targeted at the other end. So, what is going to be key to watch, is how that company specific theme of a new management, new CEO, new strategy, plays out. It's too early to tell but this is yet another turnaround strategy for Pick n Pay, which one needs to watch.

The Money Show  07:50

We'll keep an eye on that, of course. That was Meryl Pick, Portfolio Manager at Old Mutual Investment Group, breaking down the markets today. That news from Prosus, going out of that 85 billion Rand deal with that firm in India, BillDesk, after conditions on the deal weren't met. And also, Prosus shares down 27% this year in Amsterdam and Prosus down 8% on the JSE today

A summary of key highlights on the markets today
Why did Prosus not sign the deal with Indian payments firm BillDesk?
Are Prosus taking a “wait and see” approach before signing other big deal and letting go some of the exposure in Tencent in China?
Food inflation as a theme for Pick n Pay
A new strategy as a theme for Pick n Pay