Asset manager Coronation has disinvested from Exxaro, worried that the company, which is facing a leadership turmoil, might misallocate capital as it chases deals to diversify the business from coal.
Coronation analysts said the money manager had cut the resource position in favour of industrials and, to a lesser extent, financials, in the final quarter of 2024.
“Within resources, we have sold out of our holding in Exxaro, a long-held position in the fund. It has been a good investment for many years, mainly due to the strong cash generation by Exxaro’s underlying businesses,” they said.
“However, the prospect of the company misallocating capital under pressure to buy assets outside its existing businesses has become a significant risk. We also reduced our exposure to Sasol in this period despite the very cheap valuation, as we are no longer particularly bullish on the oil price which is necessary to drive earnings at Sasol given the company’s poor production performance and outlook.”
Exxaro, worth about R53bn on the JSE, has been chasing “green metals” deals, targeting in particular copper and manganese.
The mining house’s board in December placed CEO Nombasa Tsengwa on precautionary suspension while undertaking an investigation into her management that is said to have led to an exodus of the mining house’s executives.
Coronation, whose assets under management are approaching R700bn, said it added two new positions in the quarter: Woolworths and Vodacom, and while both companies’ share prices have been weak, its analysts now believe there to be good return potential.
“Woolworths has seen its food and groceries business continue to do well in SA, defending its market share in a very competitive market and continuing to innovate, which makes its offerings so desirable. Its clothing business has, however, been the main drag on performance, both in Australia and SA,” Coronation’s analysts said.
“Significant investment is being channelled into the South African business to deliver better product and availability, which should then result in the business stabilising its market share and returning to growth,”
“The market has derated the business substantially, especially when you look at the rating of the other FMCG [fast-moving consumer goods] businesses as well as against the more successful fashion retailers in the local market. With management progressing a turnaround in the fashion business and the potential benefits from an easing interest rate cycle, we see the group as well positioned to outperform from here.”
Woolworths warned on Tuesday that half-year profit could decline by more than a quarter as a result of a weak performance at its clothing division, casting a shadow over CEO Roy Bagattini’s plan to reposition the unit as an integral part of the business.
Another stock Coronation has taken a liking to is Dis-Chem. Pallavi Ambekar, head of the absolute return investment unit, said despite the share price doubling in the nine years since listing, the asset manager believes Dis-Chem offers compelling upside for its client portfolios.
“Coronation participated in the IPO [in 2016] placement at an average price of R18.50. We built up our position in subsequent placements and currently own 30% of the company. The share has doubled since listing and outperformed the FTSE/JSE capped shareholder weighted all share index,” she said.
“Despite this handsome showing, we believe the investment case for Dis-Chem remains attractive.”
Within financials, Coronation has added to its positions in the banking sector, adding Investec to its holding.
“Investec is now one of the largest wealth managers in the UK, with good runway for growth and cost-saving synergies.”
Coronation said: “In 2025, returns are going to be driven by the actual policy decisions being implemented around the world and how these decisions will drive economic outcomes. We remain active in identifying those businesses best able to handle volatility and those that can take advantage of the potential opportunities.”
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