Invest with Perspective

Portfolio Mananger, Tracy Brodziak, discusses the latest market activity with The Money Show’s Bruce Whitfield

• Old Mutual Investment Group

Share episode

Tracy Brodziak shares her insights on the better-than-expected performance from Truworths this week, in a positive boost for the retail sector, as well as an encouraging uptick of foreign interest in SA Inc stocks.

Thanks for listening! Follow us on Linkedin.

Bruce Whitfield  00:03

Tracy Brodziak from the Old Mutual Investment Group is on the line to us from Cape Town this evening. 

And often when companies issue warnings that their profits are going to go down, one sees shareholders running for the hills, selling shares, and finding a nice safe place to hide and suck their thumbs. Today, a warning from Truworths that its profits are 9% down, and there was a celebration! There was almost, there would have been alcohol served if it was legal!

Tracy Brodziak  00:33

Good evening, Bruce. Yes, it was a really nice pop in the Truworths share price today, up 15%. And I think maybe what is worth is just delving into some of that detail. So, they basically said that the headline earnings per share are going to be down between 4 and 9% for the six months to December. So, really in some of the peak bad period of the COVID pandemic. And this translates into earnings of about 332 cents to 350 cents. 

But when you go and look at what were people expecting, so what was the expectation for this. So, if you look at the market expectations, it was pretty much at this level, so for the full year up until June 21. So, what Truworths have done is they've basically reached that full year's earnings expectations in H1. So, they're definitely going to make money in the second half, seasonally the H1 or the period to December is a bit stronger. But it just shows you how weak expectations were.  

And I think if you look at some of the detail, there was a little bit of two things that were quite interesting, and I think quite positive for this year. So, the one is the headline earnings were down 4-9. But sales are down eight and a half. So, normally with sales down, you expect earnings to be down more, because of your costs etc. So, what this told you is that they've managed their costs very, very well over the period. And probably there's been an improvement in the bad debt ratio. So, there's been quite a good credit metrics that they announced, so, showing that the consumer or they've managed to adapt, and that bad debts are not being a continual drag on it. 

And the second one is that if you look and you back out the sales in South Africa for the last two months in November and December, and you compare it to the prior years, those are actually up about 3%. So, despite all the difficulties in the economy, despite everything else, we've seen some sort of stabilisation and a recovery in the earnings sooner than people expected. So, if you go back to people's expectations, they expected 330 or to 350 for the full year, and almost expected three to four years before got back to 2019 numbers. And what Truworths are showing is that it could actually come back quicker.

Bruce Whitfield  02:57

That's really good news. I don't know about your household, Tracy, but I'm going through - and I know everyone's cupboards because what else do you do on holiday when you can't do anything fun? Well, you tidy up, and you get rid of old stuff, and you see what you do and don't need. And I don't... I've honestly, other than some sort of upgrading of school uniforms, which is also superfluous at the moment, I can't think of any member of my family actually buying an item of clothing in the last 12 months. And that's because, you know, we're cheapskates, but at the same time, there's been no need to upgrade clothing. No need at all!

Tracy Brodziak  03:36

You clearly don't have a teenage daughter, Bruce.

Bruce Whitfield  03:39

And thank goodness I don't, from that respect. I'm sure I'd love a teenage daughter, but it's just astonishing. Maybe that's where all the money is being spent. But it's the fact that people have actually been buying clothing is encouraging, I suspect.

Tracy Brodziak  03:55

Well, I mean, the falls are still down for the period. But I think the key point here is that it's not as bad and we're seeing some sort of stabilisation. So, again, it just goes that expectations were so bad. And I mean, I'd hardly say it's booming, but it is actually at least stabilising. 

And then what we've really seen that's interesting in this pandemic is there's actually been a shift in spending. So, people who would have gone to restaurants, who would have gone travelling overseas, are spending money on things such as home improvement. So, you're definitely seeing a shift in spend, and some areas of the economy are actually doing quite well. And then unfortunately there are areas especially that are tourism or travel related, restaurants, etc. who have really felt the full brunt of this pandemic.

Bruce Whitfield  04:42

Yeah, it's been devastating for so many parts of the economy, but clothing retail coming up with a very pleasing surprise today. Truworths share price up 15% on the day, the Foschini Group and Pepkor were positive as well. We also saw nice gains coming through for Richemont, and Naspers, and Prosus. Property sector taking a huge amount of strain. 

But overall, this is a market that wants to go up. I saw some figures today suggesting that foreigners remain keen buyers of SA shares and also of South African bonds, which explains the relative stability of the currency and every day the trickle upwards in the value of the overall market.

Tracy Brodziak  05:20

You know, absolutely. I think the two key points there is, you know, if you look at a lot of SAInc stocks, they were very, very badly hit in the first part of the year, and expectations for their earnings are very low. And at some point, this pandemic will come to an end, either through the vaccine or herd immunity. And earnings do recover, so what we're starting to see people looking forward and saying how companies adjust, what are the earnings. And I think in some cases, some of the earnings expectations were just too dire. We've seen quite a nice bounce in those companies where the expectations were quite low. And that is for quite a few of the SAInc kind of stocks at the moment.

Bruce Whitfield  06:05

Cartrack is going, it's massively volatile, it's all over the place. They, in the week before anybody came back to work, came out with an announcement of a mover of primary listing from the JSE to the NASDAQ. Is that what's driving this huge fluctuation evaluations?

Tracy Brodziak  06:24

I guess there's a lot of speculation. I mean, there's always... someone said when there's more buyers and sellers, then the price goes up. So, you know, I'm never sure exactly what drives it. But there has been quite a bit of positivity on the potential moving of the listing.

Bruce Whitfield  06:39

Yeah, I think we need to talk to them at some point. Thank you, Tracy Brodziak, Portfolio Manager at Old Mutual Equities at the Old Mutual Investment Group, joining us this evening.