[TOP STORY] Leisure stocks, Reits, logistics, MTN and Thungela

SIMON BROWN: I’m chatting now with Carmen Mpelwane, portfolio manager at Absa Asset Management. Carmen, good morning, I appreciate the time. A very quiet news week on our market, so I thought let’s dig into some potential sectors.

Leisure stocks – they’ve certainly recovered from the hit they had back in December, when the Omicron variant arrived and borders the world over got shut. Is it a space that you’re looking at and thinking ‘there’s opportunity’ as we start to see people getting out a bit and taking some holidays?

CARMEN MPELWANE: Simon, I chuckle when you ask that, because I think there are other sectors that I’d be more comfortable with at this point. I say that because it’s going to be a slog. You don’t know what trend the consumers are going to exhibit going forward, keeping in mind that for a lot of these, for the hotel groups, for example Tsogo and Sun International, most of their revenue comes from gambling and not actually from selling hotel rooms. So, despite the fact that they have significantly low occupancy still … I think Tsogo came out in November: for the first half, they had about 21% occupancy at that point, so it’s definitely not from the hotel rooms [that they’re making revenue] and the question is: does the consumer go back to gambling? When you are under pressure in an interest-rate-increasing environment, inflation is being driven up. Yes, I would be very, very cautious about the sector. [It has] been the hardest hit over the pandemic, I think.

If you consider that each time there was a severe lockdown, or even just a curfew, [that] significantly curtailed their footfall. But it’s something to keep an eye on. As you’ve said, the share prices have recovered to pre-pandemic, but earnings haven’t yet.

SIMON BROWN: I take your point on that. I mean, yes, the state of disaster is kind of over. Yes, we can travel, but the consumer is really under pressure [with the] fuel prices; the Eskom increases kicked in last week on April 1. [There is] inflation. It is tough being a consumer – I was going to say in South Africa, but I think it’s just tough being a consumer in planet earth.

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CARMEN MPELWANE: [Chuckling] Precisely. And if you think about it, talking about the fuel, if you have to actually get yourself to, let’s say, a Montecasino, it’s going to cost you more to get there. You may not be as persuaded. So Sun International’s new avenue of online platforms – maybe that’s the way forward. I don’t know.

SIMON BROWN: I don’t know. Maybe it is. I always thought that gambling was part of being in that casino environment, but I’ve never really got the gambling bug at all. I suppose [that’s] a good thing.

What about Reits (real estate investment trusts), another sector? It actually had a negative Q1. Office remains a massive challenge. Logistics remains a great space. And then of course in the middle sit the retail shopping centres and the like. They’ve improved and in fact they’ve peaked back [to] pre-pandemic. The debt levels have improved and the like, but still it’s a sector that has some challenges.

Listen/read: SA Reit sector shows negative performance for first quarter of 2022
Read: Landlords slash rents to sign retail, office tenants

CARMEN MPELWANE: Absolutely. I think similar to a lot of the listed companies, management had to take a step back and refocus, re-strategise and, like you’ve said, improve the loan-to-value, look at their balance sheets and so on, and try to just stem the bleeding. We’ve seen lots of asset sales over the last 18 to 24 months that have really helped them. We are slowly seeing a return to cash distribution as well, which is key, and I think one of the significant tailwinds for them is the end of the Covid discounts for landlords. So you are seeing leases or rentals coming back to sort of pre-pandemic levels. But, as you’ve said, it’s about [whether] you still have that tenant in the property.

So I think it’s so key to, as you’ve said, categorise it separately. For example, Equites [Property Fund] – pure logistics, both here and in the UK an attractive development pipeline. So it’s probably better suited than a Reit that has a portfolio that’s centred on office space, because we’ve seen occupancies for office significantly higher, because people are just not back in office yet. We are seeing people saying, okay, let’s take that cost element out, reduce our office space and improve profits and cashflow.

SIMON BROWN: Yeah. I’ve commented [on that] before. I’ve driven through some of the sort of office park areas in Sandton and in Bryanston, and it looks like a ghost town.

CARMEN MPELWANE: Absolutely. Look, the traffic has picked up, I will not argue with that, but I don’t know where the people are going.

SIMON BROWN: [Laughing] Maybe they’re going to gym there.

A quick last question. You said up front that there are other sectors you prefer. What is one of the local sectors which right now is interesting you?

CARMEN MPELWANE: One of my keys is MTN. I think it still has a lot of tailwind behind it, but it’s more a medium-term play, specifically focused on the fintechs. That’s one of my keys. Then just in the retailers, I think on the discount and value offering side, an under pressure consumer, definitely something in terms of downtrading……5:36, they’ve got a strong balance sheet. Footfall is increasing in malls. So definitely an interesting space.

And then maybe a more controversial one is on the mining side, and specifically with Thungela Resources. I think the way it’s trading that valuation is too attractive not to look at it if your mandate allows you to invest in coal.

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SIMON BROWN: I hear you on that. There might be some ESG issues. But [given] some of the forward dividends I’m hearing coming out of Thungela and what we are seeing in the energy space … We are not seeing much [in terms of] sanctions against Russia, but coal is perhaps that exception. Suddenly folks are sanctioning Russian coal and Thungela is very well positioned.

Carmen Mpelwane is a portfolio manager at Absa.