Coronation, which manages funds valued at more than R600bn, has backed embattled retailer Spar to come good, believing the group presents a value proposition at its current valuation, instead of the dreaded value trap.
Spar’s share price has plunged 52% in the past five years as the group stumbled from one crisis to the next.
Neville Chester, a senior portfolio manager at Coronation, said the money manager had diverted profits from its Richemont position, which provided a strong trading update.
“We invested the majority of these funds into Spar. Spar experienced a tough 2023 as poor implementation of SAP at its key KwaZulu-Natal warehouse resulted in significant lost sales. This is slowly turning around, and recent trading updates indicate that Spar is maintaining its market share in a tough retail environment,” Chester said.
“We also expect a resolution to their Polish operation sale in the next few months, which will give investors further certainty. The share price declined significantly in the quarter, allowing us to build our position at very attractive levels.”
Coronation said it also added to its holding in Dis-Chem through a large placement of shares in the market. “Dis-Chem remains one of the few SA businesses with a compelling growth story regardless of the economic outlook. Dis-Chem has a long runway of store openings and format expansions, which should enable it to keep growing in the foreseeable future.”
Coronation in January took a commanding position in Dis-Chem after the retailer’s founders sold shares worth R1.4bn to the asset manager. Dis-Chem said Coronation now owns nearly 30% of the group’s stock after the transaction. The Cape Town-based asset manager held 24.3% of Dis-Chem before the transaction.
This came after the company’s founder and outgoing CEO, Ivan Saltzman, sold R1.4bn of shares, while his son Saul sold shares worth R87.9m. This reduced the Saltzman family’s stake in the business to 29.31% from 35.12%.
Coronation said it also added to its holding in African Rainbow Minerals (ARM), a diversified miner with exposure to iron ore, platinum group minerals, manganese and gold.
The asset allocator said the SA equity market remains cheap by almost any metric.
‘Compelling returns’
“This is also reflected in the very high dividend yields on which many of the shares are trading. No-one can call when sentiment will change, but in the interim, if one can get exposure to good-quality businesses which will grow their earnings and return cash to shareholders, one can still make a case for compelling investment returns to be had without any rerating.”
A value trap occurs when an investor looks at the fundamentals and market price of a stock, and it appears the stock is valued at a discount (cheap to own), but it ends up not being the case. The illusion causes the investor to expect to beat the market, but they end up with either a negative or lacklustre return.
In a trading statement issue on Thursday, Coronation said it expected interim diluted headline earnings per share (HEPS) to end-March to rise to at least 190c from 6.2c in the previous corresponding period.
The difference comes in part as a result of a R716m allowance it made in the 2023 period, when it outlined the “financial impact in respect of the tax litigation relating to the group’s international operations, following the Supreme Court of Appeal judgment”, it said.
In February, Coronation approached the Constitutional Court to overturn the above ruling in a dispute it has with the SA Revenue Service over a tax bill related to its Irish operations.
The central dispute is whether the Irish subsidiary is a “foreign business establishment”, a specific term in SA tax law.
Sars, Coronation argued, should not be able to claim SA tax for its Irish subsidiary as the subsidiary fell within the tax definition of “foreign business establishment” and was exempt. Sars disagreed.
In its argument before the apex court, Coronation said a finding against it would “materially impede SA tax residents” from competing on a level playing field in foreign markets.
Coronation believes its subsidiary in Dublin fell into what tax law calls a “foreign business entity”. Such foreign entities that are controlled entirely by an SA company are exempt from adding to the income tax of the SA holding company.
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