Portfolio Manager, Meryl Pick discusses the latest market news, focusing on Barloworld this week, including their plans for Avis, as well as PPC and its efforts to reduce its debt.
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The Money Show 00:00
Well, time now for the markets with Meryl Pick, a Portfolio Manager at Old Mutual Investment. The JSE listed industrial group Barloworld today saying it will unbundle its car leasing and renting business, Avis Budget, and list on the JSE under its subsidiary Zeda. Now, the unbundling represents a completion of Barloworld's non-core asset sales programmes. We'll be looking at that and other market movers today with Meryl Pick, the Portfolio Manager at Old Mutual. Meryl, welcome again to The Money Show.
Meryl Pick 00:42
Good evening, and good evening to your listeners.
The Money Show 00:45
What do you make of Barloworld's decision to now move its Avis business into Zeda. Of course, Zeda is one of their subsidiaries and it's going to be listing on the 13th of December. What do you make of that move?
Meryl Pick 00:59
Ja, I think the positive thing is it is in keeping with their communicated strategy. Since Dominic took the helm, I think, possibly maybe five years ago, I forget the exact date. He's been quite strongly focused on two things. Number one, improving the capital allocation within the group. And then also changing the level of cyclicality in the group's earnings. So, I think this decision falls in line with - it kind of ticks both of those boxes, number one, the exposure to car sales, leasing, and rental was quite cyclical, and particularly during Covid, saw the worst impacts of the car sales and the car rental path. But also those businesses over time were struggling to keep up with the returns hurdles of the group, and they absorbed a lot of capital, especially the leasing business. So, this has been communicated to investors as a long-term strategy for a number of years now, and it's good to see execution. I think our initial assumption was that these businesses might be sold on. So, I think perhaps they were struggling to execute on sale and have decided to unbundle it as the next step in the decision tree. So, I think it's positive. We think of investment cases in terms of theme and price, for a long time Barloworld has had a scheme of improving returns profile, and I think this takes them further on executing that theme.
The Money Show 02:42
Yeah, it's an interesting mix that they want to focus on the earthmoving equipment and also the consumer industries business. I know in terms of in grain, one of their ubsidiaries in fact, one of the largest makers of starch for food producers, is one of the businesses they want to focus on. Why do you think is that, moving away from cars that are easily investable in?
Meryl Pick 03:07
So again, I think the food exposure brings somewhat less cyclical exposure because consumer goods being more of a staple product. They're still maintaining the Caterpillar business, which is a distributorship model. And I think the car businesses were added on because they had skills within working with original equipment manufacturers within Catepillar, so the same skill set, similar skill set, would apply in distributing cars. But the margins are very different. So, margins in running a car distributorship are below 5%, probably below 3% for that matter, operating margin, whereas distributing Caterpillar equipment and subsequently servicing Caterpillar equipment, it's actually quite healthy, quite a healthy margin and higher return business. Although the business models look similar, their returns profiles are actually quite different. So, I think they've seen similarly strong margins in the starch business. And mining, obviously, Caterpillar derives most of its revenue out of the mining industry, and somewhat the construction industry, that is very cyclical by nature. I think by going into food production where the demand at least is a lot more stable. And the margins move around with the commodity prices. But there is quite a healthy level of underlying demand because food is a staple. So, they're just simply trying to diversify their revenue away from such cyclical industry.
The Money Show 04:50
And in terms of PPC, a company that many have forgotten about on the market, but showing some green shoots during the six months at the end of September. PPC reducing its net debt in South Africa and Botswana by 114 million Rand, some positive signs there for the company.
Meryl Pick 05:07
Yes, I think despite earnings being, you know, under pressure, I think the results were also distorted by hyperinflation accounting as a result of the Zimbabwean operations. The cash flow was still positive, it's reduced versus the prior period, but still positive cash flow and managing to pay off debt. So, I think earnings have declined, but we've seen at least cash generation, and from a very highly geared position that PPC found itself in several years ago, to now, you know, the de-gearing remains a positive theme. I think PPC, really, the industry still has a supply overhang. They themselves are saying they are poised to supply into increasing demand. And to me that is code for the industry still over-supplied. They have been somewhat protected from imports, because of supply chain constraints. And because of the Rand being where it is. So, that's not necessarily a permanent fix for the import problem. Really, what we need is a pickup in infrastructure and construction, to actually soak up a lot of the excess capacity in industry, in that sort of environment, PPC should do well. High fixed cost base, they really need volumes to come through.
The Money Show 06:29
And in terms of the local market, because the JSE closing in negative territory this evening, All Share down by more than a half a percent. The biggest losers there are the likes of Northern, Amplats, down 5 and 4%. Would I be reading too much into it into saying the commodity prices going down with China saying it's going to be going on in terms of those strict Covid conditions?
Meryl Pick 06:54
No, I think that's well spotted. Clearly commodity prices are driven or at least expectations drive the prices, expectations of a pickup in demand. And the converse being true when people expect a slowdown in demand. So China, number one is a big driver just as global growth and with the US and other developed markets raising interest rates and trying to cool inflation down, almost are crystallizing or precipitating a recession in those territories. And to some extent, China coming out of Covid lockdown is meant or expected to be the counter attack to this recession, to buffer the impact on global growth. So, I think anytime we see negative news out of China, we see a risk-off day like today with weakening commodity prices. But then also China specifically is a very big manufacturer of cars and vehicle consumer of the platinum group metals, which go into catalytic converters. So, yes, any, you know, we're seeing an upsurge in Covid cases. We saw a death today for the first time in months reported anyway. So, that is definitely dampening any hope that China will be open soon. However, you know, I guess in the November party conference, there was some expectation that there'd been an announcement, maybe a softening in reopening. I think if you take a longer-term perspective though, you'd have to say, China cannot remain in lockdown indefinitely. So, yes, there was speculation that they would open up in March, perhaps it's not going to be March. But if you really take a long-term view, I think the probability that China is still in lockdown a year from now, two years, three years from now, the longer you shift your perspective out, the probability just goes to zero. They cannot stay in lockdown indefinitely, and price weaknesses off bad news like this can actually be investment opportunities.
The Money Show 09:00
All right, breaking down the markets for us there was Meryl Pick, Portfolio Manager at Old Mutual Investment.