Unsecured lending: gathering clouds - Kagiso Asset Management Equity Analyst: Simon Anderssen

Unsecured lending is a risky business. Unlike with secured debt (such as home or car finance), if a borrower is unable to pay, the lender has no claim on the borrower’s assets and may have to write off the full amount of the outstanding loan. This is an immediate loss of equity. While lenders have certain recourse should borrowers default on payment, the law ultimately provides borrowers with various forms of protection. 

To compensate for this risk, lenders can charge hefty interest rates on unsecured loans, often three times higher than secured debt. While these loans are being repaid, the high interest rates generate very attractive returns on equity for the lenders, which in turn draws many new lenders to the unsecured market. 

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The contradiction between the economy and market - Kagiso Asset Management Head of Research: Abdul Davids

After an eventful year marked by widespread labour unrest, slower economic growth, rising domestic inflation and significant rand weakness, the South African economy finds itself in a precarious state.

GDP growth relative to other emerging market and African countries is anaemic, revenues from mineral exports and corporate taxes are under pressure and the growth rate in social grant spending exceeds that of fixed capital formation spending.

In addition, recent electricity price increases have been very negative for South African consumers and further hikes are on the horizon.

As a result, local consumers and businesses face major challenges and, as a country, South Africa is increasingly becoming less competitive. The local manufacturing sector is contracting as firms struggle to compete globally, partly due to cost pressures from increasing electricity and fuel prices and high real wage demands.

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Discovery Holdings is a listed financial services company that has successfully disrupted the South African insurance industry. It has done this through a dominant healthcare administration business and an innovative customer engagement programme, Vitality.

Although it is similar to competitors in the insurance industry in that it operates mainly in South Africa through life insurance, medical aid administration and asset management businesses, some features make it very different. Discovery, which was started in 1992 and listed in 1999, is much younger than most of the bigger players in the industry (Old Mutual was started in 1845 and Sanlam in 1912). This has been an advantage for the group as it has not been slowed down by old administration systems and products. It has used its more nimble position and innovative operating style to successfully break into established industries and gain rapid market share.

A very successful loyalty and wellness programme, called Vitality, has also been a strong differentiator. The final distinguishing characteristic has been Discovery’s focus on growing its international presence, with operations in the UK, US and China.

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AECI: hidden gems - Kagiso Asset Management Equity Analyst - Aslam Dalvi

African Explosives and Chemical Industries (AECI) is one of the oldest companies on the JSE with an operating history that extends well over a century, although it was listed only in 1966. The current business structure was formed in the 1920’s through the merger of Nobel Industries and the manufacturing division of De Beers Consolidated.

Today, AECI is a holding company focused on three core business areas. At 57% of profits, Chemserve is one of South Africa’s leading chemical companies and supplies specialist chemicals to the local mining and industrial sectors. AEL Mining Services (AEL), which accounts for 33% of profits, is the explosives division servicing South African, African and international mining companies. The third business area is property and is made up of Heartland Properties and Heartland Leasing.

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Pick n Pay: from underdog to top dog? - Kagiso Asset Management Head of Research - Abdul Davids

Pick n Pay, once regarded as the market leader in the food retail sector, has lost significant ground to its competitors over the last few years. The company’s failure to swiftly adapt to the changing food retail landscape resulted in its underperformance. However, we believe that Pick n Pay is currently on the cusp of a turnaround, which could significantly improve its long-term outlook.

Pick n Pay’s ‘golden years’ and ensuing slide

Pick n Pay’s history stretches back to 1968, when it was first established by Raymond Ackerman. The business’ initial success and the innovative retail strategies it pioneered in South Africa ensured strong growth in profitability and market share for around 30 years. During this time, many competitors came and went.

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The end of the world as we knew it - equity market risks and opportunities

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