Episode Transcript
The Finance Ghost: Welcome to episode 280 of Magic Markets, where Moe has decided he is Canadian this week because, of course, Canada beat Bafana Bafana in the World Cup.
So, Moe, I'll let you wear your Canadian flag this week. Or actually, let me just ask you outright: who were you supporting on Sunday evening in the soccer (or football, I should say)?
Mohammed Nalla: [Laughs]. Ghost, I was laughing. I was like, “I'm Schrodinger's cat on this one”. Because regardless of who won or lost, I would both win and lose.
We were quite a split household. The funniest thing is my youngest daughter who's pretty much lived most of her life up here in Canada. She was very pro South Africa, a Bafana supporter. She had a little jersey going and so forth. My older daughter was very diplomatic. She had a Canadian T-shirt with a South African hat on.
I had to go with my younger daughter to give her some support. So was supporting Bafana there. Unfortunately, it didn't come through. But if you looked at how they held their own against the Canadian team, which has been, I must argue, slightly stronger than I had expected through this tournament, I think it was a respectable performance from Bafana.
So, I’m sad South Africa lost there. But this is how things go in the World Cup.
The Finance Ghost: They certainly did a lot better than many expected, which I can't say for a basket of South African stocks that I'll certainly be talking about. So, Bafana is, right now, performing a bit better than some of the names on the JSE.
What we are going to be talking about this week is some of our recent trades. And I use the word trades very loosely because, well, certainly speaking for myself, they are investments.
I rarely sell stocks, although I do have one that I sold and I've got a bunch of names in South Africa that I bought recently for a variety of reasons.
So, I'll give you a little preview. So that'll be Cashbuild, Pepkor, iOCO, WeBuyCars and Afrimat. And then internationally, I'm going to be talking about Intel. Moe, what are you going to be bringing to us this week in terms of stuff you've recently bought and/or sold?
Mohammed Nalla: I've done a lot of housekeeping recently, trimmed a lot of positions. I haven't outright sold much, but I have added some very interesting positions.
The theme for me is going to be looking at geographical diversification. I'll tell you why I bought each of these names.
Taking a cue from you, none of these are trading positions. So, these are all long-term positions that I believe will do well for the portfolio over a long period of time.
So, I'm going to cover Tencent, which is obviously China exposure. I'm going to cover MercadoLibre, a stock we've covered in Magic Markets Premium, kind of eating our own cooking there, added that to the portfolio recently; as well as Nu Holdings, which is also a Latam-exposed name.
And then lastly, a Canadian name which a lot of people obviously wouldn't have heard of because you don't really look at the Canadian markets. That's Manulife Financial Services (so you're talking insurance, wealth management and so forth), but with a distinct Asian flavour coming through in that name as well.
Hopefully that's enticing enough to kind of get the juices going and get some debate between the two of us this week.
The Finance Ghost: Yeah, absolutely. Moe, why don't you kick us off then, give us an idea of some of your recent activity.
Mohammed Nalla: Yeah, I'll start off with Tencent. The theme here really was discounted quality. We've covered Tencent historically in Magic Markets Premium as well. And for me it's a really high-quality platform in China at what I think is a discount.
I think the share price is currently being quite hard-hit by negative China sentiment. And Tencent is a really high-quality business that's trading within that context, because it's giving you exposure to a number of things.
In the Tencent ecosystem you're getting gaming, you're getting the WeChat ecosystem, which comes with payments as well, you're getting advertising. And then on top of that you're also getting some optionality around cloud, around AI. And so that's a lot of the reason as to why I was looking at Tencent as a whole.
If we just drill down a little bit, if you look at something like WeChat, anyone who's been to China - the ecosystem is quite closed off. You can't easily access Western platforms, Google and the like.
And so, WeChat becomes a lot more than just a messaging app. It’s effectively a person in China's entire identity. It wraps up the payments; there's content on there as well. And so I see that as a very, let's call it, powerful digital ecosystem that ticks a lot of boxes or, “let's get the clips on the deal ticket” as we say in the dealing room.
Now, if we look at Tencent, even in terms of the underlying fundamentals, the results, Q1 revenue that was up around 9% on a year-on-year basis, that's pretty decent. Gross profits, also low double digits. And so, this is a business that continues to spit out cash. The free cash flow was up around 20%.
Now, if you take that into the context, they've also been buying back a lot of shares. On a quarterly basis they're obviously taking advantage of what they think are depressed valuations. And so, the stock on a trailing earnings valuation is around 15 X; on forwards, is probably around 12.
And so, I see this as a very strong business. It's certainly not broken. The ecosystem's working quite well, it's still growing, it's highly cash generative. I'm just ticking these boxes off saying these are all some of the very strong reasons as to why I added it into the portfolio.
We've mentioned the AI optionality as well, but no investment is without risks. So just to wrap up that discussion, when you're looking at risks, the China macro risk remains big, goes beyond just the regulatory risk or these companies falling foul of the government.
If you look at recent macro data out of China, the consumer is not really firing on all cylinders. A lot of the China story has been driven by the external sector. Trade has been pretty strong. I would see that as some of the risks when I contextualise this position.
In aggregate, I'm not just buying this because it's a China story or not a China story. I'm buying it because, in my perspective, the underlying business is a lot better than the current valuation implies.
The Finance Ghost: Of course, the Naspers/Prosus results are out this week in South Africa. I still need to give those a read at time of recording. They are out but I haven't had a look yet, so that's going to be very interesting. I do hold shares in Prosus, so certainly looking forward to seeing that. But had a quick look now and the share price is up today. So maybe there's some good news in there.
Some stuff that I have recently bought, I'm just going to cover that entire South African basket if that's okay. Because although they sound like they have very little in common, they are all very much SA Inc. stocks. So that's really the golden thread here.
Starting with Cashbuild, currently on a P/E multiple of around 10x. Their latest operating update for the third quarter showed revenue growth of 4% in existing stores. So not exactly a rocket ship, but it is going up slowly but surely, limited inflation in that environment. So, they are very much reliant on volumes right now. Few acquisitions here and there along the way too.
I originally bought Cashbuild around the time of the GNU coming through and I absolutely should have sold the subsequent rally without a doubt, but I didn't because it was a long-term play for me on South Africa. Alas, one can only think back and wish that I'd sold.
I added to the position recently as part of just bringing the average cost down and because, as I said, is a long-term play on SA Inc. Position is still in the red but not by a huge amount, and it sits on a trailing dividend yield of 6%, so certainly not a complete disaster.
Should have sold, of course, but it's a dog that will have its day again. Of that, I'm sure. And I think the difference is that maybe next time it does, I will sell that day, and wait to buy it further down again. It’s perhaps more cyclical than I realised.
Second one I think is not a cyclical stock at all. That's Pepkor. Fantastic business. Lots of pressure in the broader clothing sector right now, share prices are really in trouble everywhere you look. But Pepkor is one of the best local names, they have the fintech business as their growth engine.
But above all, in that case I'm looking at the longer-term story around their banking ambitions. I think that's very exciting. It's a recent position for me, as in very recent. So, currently I'm flat, but it's quite a high conviction play for me, and we'll see how that goes over the next few years.
Moving on to a much smaller one, that's iOCO. I just really like the management team there. I think that they are great capital allocators (the new management team that is).
And they give forward free cash flow guidance. Can you believe it, Moe? When have you ever seen that on the JSE? Pretty encouraging stuff.
They're not necessarily an industry that I love that much, so I have sized it appropriately. It's a small position for me, but I think there might be something there in years to come at iOCO (that's obviously what used to be EOH, but those skeletons in the closet are long gone now).
And then WeBuyCars. I want to talk about that as well. It’s currently pretty close to its 52-week lows. That's a position I've held since Transaction Capital unbundled this thing to shareholders while the rest of that group gently broke. I have recently added to the WeBuyCars position because it has come off really hard.
The market has gone quite cold on them. But I think that the market has also been a little bit harsh, when you consider what WeBuyCars has had to go through in order to adapt to the Chinese cars on the road. What that's meant for depreciation of the legacy brands. Big churn that they needed to achieve in their inventory base to actually have it more reflective of consumer tastes right now.
And the other big underlying story there is around the data. They're building an incredible data set, better than I think anyone else has in the country around used cars. And that pricing model will hopefully pay off in years to come.
And then the final SA Inc. story, Moe, is Afrimat, poor broken Afrimat. I bought them for the first time after the news broke around Merafe getting a preferential deal from Eskom. So that's to basically switch the smelters back on, because the ferrochrome industry has been essentially shut down in South Africa, because they can't afford to operate.
And that affects the entire value chain, including Afrimat. It's just been a perfect storm for Afrimat, unfortunately.
It’s that, it's the Lafarge deal, and how tough it's been in South Africa in general. So that was when I bought them relatively recently, down 11% since then. But I mean, obviously it's going to flap around like crazy. It's enough for me right now though, because there is a ton of upside in that thing if the cycle turns.
And the news at the end of last week was that Merafe has now locked in the T's and C's with Eskom so that they can actually switch two of their smelters back on. I think it's going to take time for the market to feel good about Afrimat again. When these previous darlings go wrong, then it takes a while for the trust to come back.
But I'm not going to be greedy there. I don't need to oversize the position. I'm happy with that one. That just gives you a taste of some of the South African positions I've added to recently.
Generally speaking, as you'll see, I like to buy a share price weakness, right? It's not about buying things at 52-week highs. That's the smart play long term.
Mohammed Nalla: I like that, Ghost. I mean, that’s some interesting South African context. Some common themes which pull through between your approach and my approach there. You like buying on the weakness. That certainly was the story that I'm picking up on Tencent, that was my value play that comes through.
But some other themes which you kind of touched on in the names you mentioned included fintech (and I think fintech's an interesting one, it's going to play very nicely into what I'm going to cover quite shortly), as well as platform businesses.
So let me jump into that because, as I mentioned, MercadoLibre and Nu Holdings, which is the holding company of Nubank, is giving us two things. It's giving us LatAm exposure because I want something ex-US, but it's also giving us some very interesting platform plays.
Now, I'm not going to go into a lot of detail on MercadoLibre. That is a stock we've covered in Magic Markets Premium. And again, if you're a subscriber, go check that out. It's in the library. If you're not a subscriber, there's a full deep dive there. It's only R99 a month. So go and check it out at magic-markets.com.
Let's jump into MercadoLibre though, because this is a premium compounder, right? I'm not buying this because it's cheap in a traditional sense. It's not a deep-value stock. But it is a very strong platform that has had exceptional execution over the longer term.
And in Latam, it still has a long runway. They've got e-commerce penetration that comes through digital payments. They've got logistics that come, through credit advertising. And you superimpose on that the Latam demographic story, emerging markets, you're getting some of that. You're getting much larger population sizes than maybe you're just getting in a localised South African exposure there.
And if you look at the recent fundamentals, they've come through quite strongly. So that's been really some of my thesis around MercadoLibre. I think if you look at that, the ecosystem is pretty healthy, similar themes coming through. If you look at what I discussed on Tencent versus MercadoLibre in terms of an overall ecosystem, payments and so forth.
However, again, we’ve got to look at the risks. The valuation's not cheap. It's one of the hardest stocks to buy out there because again, the share price is so high you're buying one or two shares, you're sitting at several thousand dollars. So, you've got to obviously keep that in the back of your mind.
Some other risks are that they are growing very fast and we've covered this. But I'm going to mention it: credit portfolio risks that might come through, they've changed their behaviour a little bit. So, you got to pay attention to that.
I'm not going to detract from what we've covered in our premium report on that though. I see this as a quality growth stock. Execution needs to just keep on coming through to justify that multiple. Great Latam exposure.
If we move on to Nu Holdings or Nubank, that's giving us fintech. So, it's really digital banking at scale. I'll go into a little bit more detail here because we haven't covered this.
This is really around the digital banking platform. They are one of the largest digital financial services platforms globally and certainly in that region. They've got over 135 million customers across Brazil, Mexico, Colombia. So you're getting that Latam flavour.
And if you look at their return on equity, it's up at around 29%. So, those are pretty strong numbers coming through there. For a growth stock, PE is around 20 times. So not cheap, but it's a growth story. And they're using that digital platform of theirs to go and attack the same profit pools as MercadoLibre but slightly different in terms of where they play in the value chain.
Your main risk is going to be credit quality. As these businesses try to scale quite aggressively, the question mark is, are they putting bad risk onto their balance sheet? So, you've got to pay attention to that fast loan growth. It does need some scrutiny.
And then if you have a look at the non-performing loans, you look at this very similar to a bank. Yes, it's a fintech but you've got to look at it in terms of banks. Non-performing loans are creeping up a little bit. So, I'm paying attention there. The credit numbers, the one I'm going to be watching, but I think they're growing so fast it's still pretty much a bank.
The thesis overall is growth, and as long as they continue to execute and have some degree of discipline further down in terms of their risk management, I think this was a nice addition to the portfolio. Certainly, if you put MercadoLibre and Nu Holdings together, it's giving me a nice distinct exposure to a sub-theme within Latin America.
The Finance Ghost: Moe, just one more from me and then I'll see if you have anything else you want to share.
But mine is Intel, so let's all laugh at the Ghost. Yay! Well, you know, this is actually a lesson in using hindsight to hurt yourself in the market because the reality is I did very well on Intel. The sad thing is that I sold it in April and it doubled. So that is obviously super frustrating.
But at the time the valuation was so demanding. Good luck trying to pick the top of this AI theme. It's just not going to happen. And obviously I have ongoing exposure to it through things like just owning the index.
Which just shows you how important it is to still have things like ETFs as the building block of your portfolio. Because even if you do things like sell Intel too early, I'm still carrying a lot of that exposure as those big AI names have come into the S&P 500, etc., etc. It's all sitting there, which is helpful.
But yeah, Intel was one where I'd bought it a while ago, couple of years probably actually, in the hope that onshoring would make a big difference, etc., etc. Took its sweet time. It took Trump eventually to really give it a kick up the you-know-what, and then up it went and I figured that that was probably the best of it.
Obviously, I was wrong because, as I said, has doubled since April, but happy to wear that one. At least I got out for a gain and heaven knows where the top of this thing is. I must say news like OpenAI considering delaying their IPO, what's happened to the SpaceX share price in the last week…
I don't want to distract us from what we're talking about, but it does feel like top-of-the-market kind of behaviour. So, we'll see what happens with Intel. But that one of my recent sales, one of my only recent sales actually and sadly a couple of months early.
Mohammed Nalla: Yeah, I hate it when that happens, right? Because the thing's going to double literally as you've hit the sell button. That entire semiconductor sector has been insane. Micron, just go and have a look at what that's done from April to now.
I'm concerned because, as we're recording this, you know those stocks are correcting. Micron is down around another 5% just today. So, Ghost, again, you've got to manage your risks. Yes, sometimes you take the profit too early.
What I generally tend to do is, I'll take profit, but I leave these residual positions as optionality, because I'm not going and putting in the ETFs as building blocks. If I want the beta in the portfolio, I try and leave those residual positions in there just to give me the beta. Maybe not the cleanest way of going about it.
Let me not digress.
I'm going to give you my last name because it's so different to the first couple of names I gave you. The first names were slightly more risky. They had (certainly on Tencent) sold off. Slightly more of a growth flavour coming through in those names.
My last name is boring, but it's useful - and that's why I want to cover it. Because if you look at it, it's Manulife - it's a Canadian financial services firm - if you can think of a comparative maybe I would say an Old Mutual in South Africa where you've kind of got insurance in there, you've got wealth management.
Manulife's done pretty well, and I'll tell you why I've added it into the portfolio is that it brings through several elements. It brings through cash flow: good strong cash-generative business. It brings through a decent dividend yield. So, it's giving me a bit of a cash balance.
Something slightly more defensive in the portfolio. Again, strong share buybacks, which is again a feature that I like. It's giving me financial sector exposure, which has been a common theme that have come through in a lot of the adds that I've put into the portfolio more recently.
And then importantly, on the whole original theme I discussed around geographical diversification, it's a North American name, it's ex-US because it's Canadian, but it also has exposure to Asia.
And that's something that's quite interesting because the Asian growth is giving me some of that upside optionality, which makes this more than just a traditional boring cash-balanced, cash-generative name in the portfolio.
There are strong net inflows in terms of their wealth and asset management businesses. And again, that's a risk. You know, we always like to contextualise the opportunity and the risk. If markets correct, some of these names will come under a bit of pressure.
If you're looking at the insurance business, you're going to get exposure to interest rate cycles, credit markets, big risks around there. So, it's not risk-free but it fulfils a very different role to the other names that I mentioned earlier on.
I'm going to wrap that in the interest of time but again, I hope we've actually shared with our listeners some of the thinking that goes into when you're building a portfolio. Look at the reasons, your investment thesis. It's not sometimes just around valuation, sometimes you've got to add some growth flavour into that as well. Sometimes you've got to add some cash flow as a ballast into the portfolio. That's certainly my approach.
And again, eating our own cooking. A lot of this has come out from the work we've done in Magic Markets Premium. Certainly Tencent, certainly Mercado Libre.
Nubank was actually a name that came out of our work we did on Mercado Libre in the competitor slide, which we include every single week. If you aren't a subscriber, we think at R99 a month, it's the best value you're going to get in terms of doing your own research out there.
Ghost, I'm happy to wrap up there. Let's see how this goes.
The Finance Ghost: Thanks, Moe. Very interesting as always. To our listeners, we'll see you again next week. Hope you have a wonderful time in the markets this week.
Mohammed Nalla: Let us know what you thought of the show. Hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X. Or you can find us on LinkedIn. Pop us a note on there.
Until next week, same time, same place. Thanks, and cheers!
The Finance Ghost: Ciao.
