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    Seed Weekly - Let’s Recap on 2014

    Local Economy

    South Africa is facing many headwinds – some of the factors contributing to the restricted economic growth are:

    The Rand
    In view of the rand getting hammered during the last couple of months to its weakest level vs the US dollar in 6 years, there was some good news with Fitch’s decision not to downgrade SA’s credit rating earlier this week. This meant that the rand firmed against the US Dollar after big recent losses but there is still concern, as analysts predict that SA’s credit rating could still be cut within the next six months. At time of writing the rand was trading at R 11.57 to the US dollar, R 18.08 to the British pound, and R 14.22 to the euro.

    The weak rand continues to pose risks to the inflation outlook, given its vulnerability to swings in market sentiment as investors speculate on the timing and scale of monetary policy normalisation. CPI figure for the year as at end of November sits at 5.81\%. It is still within its target of 3%-6%. A sharply lower oil price will, however, put a big brake on inflation going forward.

    Current Account and Budget Deficit
    With the current account being traditionally funded by foreign portfolio inflows, the persistently large shortfalls on the budget and current accounts increase our vulnerability. The concern here would be that the United States is expected to raise interest rates in 2015, which in turn would reduce the appetite for investing in emerging markets.

    Trade Deficit
    The cumulative trade deficit for 2014 stands at R 95bn as at the end of October and this is R 20bn more compared to the same time in 2013.

    Unemployment Rate
    The unemployment rate is over 25%.

    Major role players state that load shedding and Eskom problems have cost us R 6bn so far – and that we could face electricity shortages for the next three to five years with the energy-hungry manufacturing and mining industries to be hit the hardest.


    The world is in a general low growth, low demand, state with an oversupply of labour and commodities and a large supply of liquidity.

    In the US, the stronger dollar represents a headwind for their economy but does help with their inflation. The low oil price (still under $ 60 per barrel) and low interest rate is also a welcome boost to their economy.

    The emerging markets are slowing down with the MSCI emerging markets returning 2.2% year to date, compared to the developed markets which have returned 6.7% thus far. The big question is whether US growth will be strong enough to counter the falling growth in emerging markets and Europe in the coming year. European growth is only estimated to be 1.3% for 2015.

    As expected, the above factors (among others) have had a major impact on the market for the year which is evident by looking at the year to date performance.

    An ALSI return of 10.0%* for the year thus far, compared to 21.4% for 2013, makes for ugly reading.

    There is, however, light at the end of the tunnel and long term investors should not be too concerned. In this environment, we are pleased that our unit trust funds have outperformed their benchmarks and peers for the year. (Figures below)

    We want to make use of this opportunity to thank all our clients for their loyal support. Have a blessed Christmas and may 2015 be a prosperous year and one where South Africa brings home Cricket and Rugby World Cups.

    Kind regards,

    Renier Hugo

    021 914 4966

    Permalink2014-12-22, 12:32:28, by Mike Email , Leave a comment

    Seed weekly - Portfolio Concentration

    Investors holding very concentrated investment portfolios are a common occurrence in the investment world. Typical examples of concentrated portfolios include where an investor has the majority of his/her wealth tied up in shares of a privately owned business, holding large amounts of your employer’s stock, or being heavily invested in certain sectors of the market.

    If the wealth of an investor is tied up in a concentrated portfolio, the risks faced are markedly different from a client with a diversified portfolio. Some (but not all) of the risks faced are highlighted below:

    The value of any asset in the shorter term, especially shares, is worth what the next person is willing to pay for it. The audited statements may point to the longer term value of a business, but a large portion of the value may be lost when the person running the business is no longer there. It is therefore important to be aware of the value of the business principle/founder in a smaller enterprise and what the business is worth if he/she is no longer there.

    Another big risk facing the investor surrounds the liquidity of the asset. If a person holds a large amount of a single company’s stock and needs the assets to retire with, either the capital or dividends will need to fund the income for the investor. If these shares can be easily sold and the act of selling the shares doesn’t adversely affect the price, the risk is largely mitigated. However, in many instances the shares are illiquid, not enabling the investor to generate the required cash flow from selling the shares.

    A very serious consideration, often overlooked, is the volatility one is exposed to when your wealth is concentrated. This is often more serious when the business is very dependent on the business cycle to make a profit. More concentrated portfolios afford less protection to investors during times when the assets underperform. As a rule of thumb, the peaks and troughs of the cycles are much less pronounced in a diversified portfolio compared to a concentrated one. For long term investors this is not as much of a concern as for a person looking to sell shares in the near to medium term.

    Going concern:
    This risk can be applied broadly and is applicable to many different situations. The most obvious going concern risk is when you have a large holding in your own business/employer’s shares and the company goes under. If this happens you are out of a job and made a big loss financially. This is the most extreme example. It can also happen when you are employed in a certain sector and use your expertise of this sector to buy shares in a related company because of your greater understanding of the industry. Once again if the sector is going through a difficult period your employment may be at risk at the same time as when the value your investment holdings will be, often severely, depressed.

    Most business owners are subject to being taxed at a very high level when they sell their shares. The risk for them is more pronounced as the majority of the stock they own was accumulated at a very low base cost (assuming that the shares were issued when the business was founded) and therefore almost the entire value will be seen as a taxable gain by the authorities. Not planning for the effect taxation has on your investment holdings may be detrimental to your financial health.

    The above are a few of the risks faced by clients with concentrated portfolios. For each of the risks faced there are a multitude of options available for an investor. At Seed we are aware of the above and many more risk factors and through expert consultation are able unlock value and mitigate risks faced by our clients. Although it is crucial to manage the risks you face throughout the year it offers peace of mind to know that you have measures in place for the new calendar year fast approaching. By setting up a consultation with Seed we are able to assist you by putting measures in place to protect your wealth against risks such as those mentioned in this article.

    Kind regards,

    Stefan Keeve

    021 914 4966

    Permalink2014-12-09, 11:27:15, by Mike Email , Leave a comment

    Seed weekly - Netcare Ltd – Investors in Safe Hands

    Private hospital group Netcare Ltd offers a comprehensive network of healthcare services in South Africa and the United Kingdom. The group is the second-largest healthcare provider by market cap listed on the JSE, and is currently trading near all-time highs after delivering a price return of 47% over the last year.


    Netcare was initially formed to combine the operations of Clin-Run, a specialist hospital promotion and management company, and the interests of founder Dr Jack Shevel. The group was listed on the JSE in December 1996 with 6 owned and managed hospitals.

    A series of acquisitions followed, including Clinic Holdings in 1997 that added 25 hospitals to the group, and Excel Medical Holdings in 1998 that added another 10.

    In 2001 Netcare acquired the Medicross group, and also expanded into the UK by providing specialised healthcare services to the NHS on contract. A controlling interest in the General Healthcare Group in the UK - then comprising 49 hospitals - was acquired in 2006.

    Healthcare Network

    Netcare operates 54 hospitals (9,424 beds), 87 primary healthcare facilities and 83 retail pharmacies in SA. In addition, the group operates 57 hospitals (2,788 beds) in the UK and 1 hospital and 4 primary healthcare facilities in Lesotho.

    Latest Results

    Netcare recently released its annual results for the year ended 30 September 2014, and reported strong growth in adjusted headline earnings per share (+19.5%), group cash flow from operations (+15.6%) and revenue (+16.1%). In addition, the final dividend increased by 18.5% to 48 cps.

    SA operations increased revenue by 7.4%, with this growth being largely organic. The operating margin improved from 17.8% to 19.1%, reflecting process efficiencies and cost controls implemented by management. Full week occupancy of hospital beds improved to 69%, while 89 new beds were commissioned for the year.

    An amount of R 2bn is allocated for capital investment in 2015, with plans to add another 510 beds to the network via new hospitals in Polokwane and Pinehaven and the acquisition of Ceres Private Hospital.

    Netcare is employing a comprehensive long-term strategy to reduce its electricity usage and costs, and is launching several energy efficiency and renewable energy projects across the group. A cumulative saving of R 1bn on energy costs over the next 10 years is expected from these measures.

    In the UK, revenue increased by 4.5% in pounds, with the NHS caseload increasing by 10% over the year and private demand remaining under pressure.

    The graph below illustrates the change in payer mix over the last 4 years, with NHS cases increasing in significance for Netcare UK:

    The percentage of total group revenue generated from the UK operations has increased from 45% to 49% over the reporting period, making Netcare a true rand hedge for SA-based investors.

    In constant currency terms, the group’s revenue and earnings growth is not as impressive, with the impact of the rand weakening by 12% against the pound over the reporting period being very favourable for the group’s rand-based reporting.

    Fundamentals and Outlook

    Management expects demand for private hospital services in SA to remain strong, while the increased patient capacity generated by the planned capex projects should pull through to the bottom line over time. The energy efficiency programme should reduce ongoing costs over the longer term.

    The UK healthcare market is underpinned by strong demand drivers, including population growth and increased population ageing projected to 2032. The caseload from private clients should increase again as the UK economic recovery gathers momentum, while the NHS is also expected to increase contracting to the private sector.

    Netcare currently trades at a PE of 23, which is 35% more expensive than the ALSI’s 17, while the dividend yield is 2.2% compared to the ALSI’s 3.0%.

    Netcare is currently held in the Seed Equity Fund at a 2.5% weight as a result of strong price and earnings momentum.

    Kind regards,

    Cor van Deventer

    021 914 4966

    Permalink2014-12-02, 12:01:29, by Mike Email , Leave a comment