Riding the Bull: The JSE Bounce and My Portfolio Playbook
South African Market Resurgence
South African equities have experienced a recent bounce back largely driven by positive investor sentiment regarding the country’s electoral outcomes. As noted by Bloomberg, the FTSE/JSE Africa All Share Index has climbed to record highs and the South African Rand has also rallied.
Eskom's Turnaround: A Game-Changer for the Economy
The situation is still developing, but there are signs that macroeconomic fundamentals in South Africa are improving. One of the most significant developments has been Eskom’s enhanced performance, which has resulted in over 140 consecutive days of uninterrupted power supply. Detractors had previously dismissed this improvement as an election gimmick, but the data is clear.
I had the opportunity to discuss these developments with Mr. Mteto Nyati, Eskom’s Chairman, who provided insight into the extensive efforts behind Eskom’s turnaround. From the moment Mr. Nyati was appointed, I was confident that Eskom’s challenges would be effectively addressed. Mr Nyati is not only highly knowledgeable and cerebral, with a BSc in Mechanical Engineering, but he also has a proven track record in driving growth and executing successful turnaround strategies, most notably during his tenure at Altron. On a personal note, I can attest to his deep commitment to South Africa and its people. We are fortunate to have leaders like him driving change (he has even recently initiated a program focused on tackling youth unemployment in the digital era).
Strategic Steering: Navigating South Africa’s Equity Waters
With the resurgence in South African equities, I therefore find it an opportune time to detail my retail investment portfolio. Over the next few weeks, I will provide an analysis of the recent performance and my investment thesis for each business. For now, I will first provide a broad understanding of my strategy.
I avoid investing in sectors like mining, agriculture, and real estate (I have indirect exposure to real estate). I also steer clear of capital-intensive industries that rely heavily on public infrastructure for production and transportation (again, I have indirect exposure to a brick, ceramics and packaging manufacturer). For instance, if a company operates a factory that will require significant capital expenditure to replace in the future and relies on government-maintained highways or ports, I am unlikely to invest in it within South Africa.
My investment horizon is long-term, typically 8-10 years, with no short-term liquidity needs. My primary objectives are capital preservation and sustainable growth. A sustainable business, in my view, is one that would still function, and perhaps even flourish, even in the most adverse doomsday scenario in South Africa. I particularly favour businesses with the potential to scale beyond South Africa’s borders, especially those in the early stages of expanding into the fast-growing, digitizing ASEAN region.
Finally, I have an affinity for software businesses, an interest initially piqued by Robert Smith and Vista Equity Partners. Software businesses often provide predictable revenue streams, high margins, scalability, and strong customer retention.
The characteristics I generally seek in an investment include:
Cash-generation and asset-light business model
Predictable and strong revenue growth, preferably with high recurring revenue
Large addressable markets domestically and internationally, with a leading position domestically
Management teams that have a proven track record of effective capital allocation and execution
Low gearing
Karooooo (NASDAQ:KARO)
Karooooo (that’s five o’s) is headquartered in Singapore, listed on the Nasdaq, and generates approximately 75% of its revenues through its operations in South Africa. It is primarily known for its flagship product, Cartrack, which offers a comprehensive SaaS platform focused on mobility and real-time data analytics for vehicle tracking and fleet management. Karooooo Logistics is an emerging growth area for the company, offering delivery-as-a-service (DaaS) through third-party crowd-sourced drivers and logistics companies. The company’s SaaS model ensures a high percentage of recurring revenue, with strong operating margins and a track record of profitability.
I believe the business will capitalize well on the increasing demand for digital transformation. In particular, the increasing demand for fleet management and vehicle tracking solutions in the ASEAN region, driven by the growth of e-commerce and logistics, presents a significant opportunity for Karooooo to capture market share.
Capital Appreciation (JSE:CTA)*
Capital Appreciation is a fintech platform operating through two primary segments: (1) Payments and Payment Infrastructure Services, and (2) Software and Software Services. The Payments division primarily sells hardware, such as POS terminal devices, with distribution rights for Ingenico and Newland in the SADC region. They have also recently developed HaloDot, a contactless payment solution that enables convenient tap-to-pay transactions without the need for physical terminals. This technology allows smartphones and other NFC-enabled devices to act as a POS terminal, supporting contactless payments from cards, mobile wallets, and wearable devices. The innovation behind Halo Dot lies in its scalability and ability to reduce the need for traditional hardware, making it an attractive solution for SMEs looking for cost-effective payment infrastructure.
The Software division includes software development and consulting services, with Synthesis being a leading player in the cloud migration space. While some have criticized the company for operating in silos, a deeper look reveals that its acquisitions are strategically positioning the software division for integration across the cloud migration value chain, making it a one-stop shop. The business is managed by astute capital allocators, including CEO Bradley Sacks, former BoFA Global Head of TMT.
*Outside of my retail portfolio, I have indirect exposure to Capital Appreciation
African Rainbow Capital Investments (JSE:AIL)
ARC is a holding company with a diversified portfolio of listed and unlisted investments. However, I view my investment in ARC primarily as an investment in TymeBank, with the rest of the assets coming essentially for free.
TymeBank is one of South Africa's leading phygital banks. It provides low-cost banking services, primarily through digital channels. Its limited physical presence relies on partnerships with retailers for customer access points. It has recently increased its lending offering through the acquisition of Retail Capital. With the exponential growth of Capitec and the surge in neobanks, TymeBank is positioning itself as a leaner, more digitally enabled version of Capitec.
What I particularly like about TymeBank is that its management team has executed all their stated goals ahead of schedule, including achieving profitability in under five years. The bank’s innovative approach to digital banking, coupled with its low-cost, scalable platform, positions it well to replicate its success in South Africa in markets like the Philippines, Indonesia, and Vietnam.
Lesaka Technologies (Nasdaq:LSAK)
Lesaka, like Capital Appreciation, is a pure-play fintech platform, but the two are not competitors. In fact, they are complementary. While Capital Appreciation focuses on the formal market, Lesaka provides low-cost financial and value-added services to small businesses and consumers in South Africa’s informal sector, particularly grant recipients who are largely excluded from financial services.
However, a quick perusal of its past financial performance will immediately show that it is unlike the three other businesses in my portfolio: it has recently taken on a pile of debt to fund acquisitions, and it has a complicated history. Additionally, the business requires continued investment in technology, especially in financing its ATMs, to maintain its competitive edge.
Despite these challenges, I am particularly bullish on its merchant division. It empowers South Africa’s informal economy with POS systems and payment processing solutions, enabling businesses to accept digital payments, including cards and mobile transactions. It also offers financial services like working capital loans and business analytics tools, which I believe can significantly improve operations in township businesses—something that resonates with me, having grown up in a township (right next door to a tavern).
Portfolio Risks
One of the primary risks to my portfolio is concentration risk in the technology and financial services sectors, particularly through my significant exposure to TymeBank, Rain (African Rainbow Capital), and Karooooo. While these sectors are poised for growth, they are also susceptible to regulatory risks, especially in the financial services industry, where increased scrutiny on digital banking and data privacy could impact operational flexibility and cost structures. Furthermore, the South African consumer market, presents a risk given the country’s ongoing economic challenges, including high unemployment, currency depreciation, and general economic stagnation.
Another risk lies in execution risk, particularly for companies like Karooooo and TymeBank, which are expanding rapidly. Scaling their operations effectively without compromising service quality or customer satisfaction is crucial. Failure to manage this growth could lead to operational inefficiencies and margin compression. Additionally, the interest rate environment poses a risk, especially for Lesaka and TymeBank, as rising rates could increase the cost of capital, slow down loan growth, and strain consumer spending, potentially affecting their revenue streams.
Foreign exchange risk is also a concern, particularly for Lesaka, given their ambitions to expand continentally. Volatile exchange rates could negatively impact earnings when converted back to the South African Rand. Lastly, technology obsolescence is a significant risk, especially for businesses heavily reliant on innovation, such as those in my portfolio. The fast-paced nature of technological advancements could render current solutions outdated, necessitating continuous investment in R&D, which might pressure margins if not managed properly.
And that, folks, is a snapshot of my portfolio. I welcome any comments or insights you might have!