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Wood for the Trees | May 2024
11 June 2024


The South African national elections took center stage in May and the outcomes that will unfold will no doubt be front and center over the next few weeks. While global markets continue to perform well, most of our attention this week will be on what’s going on at home.

Before we focus on events in South Africa, May was a cracker of a month for global equity markets. Strong earnings numbers, softer job data and softer-than-expected inflation numbers created the perfect mix to push the S&P 500 to all-time highs, with May adding 4.8%. Ongoing excitement around AI continues to propel tech stocks higher.

Graph, black background and orange graph line: showing S&P 500 to all-time highs, with May adding 4.8%. Ongoing excitement around AI continues to propel tech stocks higher

On the local front, national election outcomes and the future of the South African government are dominating mindsets and media outlets. The JSE All Share followed global indices higher in the first part of May; primarily led by resources on the back of BHP’s bid for Anglos, and the financial sector that saw sentiment improve ahead of elections.

JES graph, black background with coloured lines showing : The JSE All Share followed global indices higher in the first part of May; primarily led by resources on the back of BHP’s bid for Anglos, and the financial sector that saw sentiment improve ahead of elections.

Things took a negative turn for the JSE once voting began on the 29th of May, when the market quickly realised voter turnout was low and the ANC’s popularity was deteriorating more than expected. As a reminder, going into the elections the general expectation was for the ANC to get about 45% of the vote, allowing them to partner with a smaller, like-minded party (IFP) essentially retaining its majority in parliament; ensuring the status quo continued.

This is not what happened. ANC’s share fell to a democratic era low of 40% which meant multiple scenarios for coalitions came into play. The ensuing political uncertainty, like any uncertainty, is not ideal for equity markets.  Mandy will investigate the NEC’s preferred outcome in more detail later in this letter.

Despite the initial sell-off in local markets, they remain orderly, and we have yet to see any panic selling.

A country’s currency is typically the main transmission mechanism for investor sentiment. After the Rand strengthened 4% against the USD in the 3 weeks prior to elections, it quickly gave back those gains in the week after the election outcome became known. Despite this, the Rand ended May at the same level as it started. Hardly an indication of investor panic.

Graph, black background showing graph of orange and green lines: After the Rand strengthened 4% against the USD in the 3 weeks prior to elections, it quickly gave back those gains in the week after the election outcome became known.

Likewise, SA government bonds remained steady. Similar to the Rand, we haven’t seen any signs of investors dumping government bonds. The 10-year government bond yield is actually at better levels than April.

Graph, black background, orange line, showing: 10-year government bond yield is actually at better levels than April.

While events remain fluid and we expect to see limited new flows into the market in the short term, it does seem that the “Doomsday” scenario – ANC/EFF or ANC/MK coalitions – is off the table as the ANC seeks a Government of National Unity (GNU). In fact, the news of a GNU saw the Rand stabilise and SA bond yields tighten from intraweek highs.

Despite all this uncertainty there are some positives to take away from these elections. This is the first time in South Africa’s democratic era that the ruling ANC has lost its majority. Encouragingly and perhaps as a retort to Afro-pessimists, rather than contest the result or try to cling to power, the ANC has accepted the relative loss in its stride. This is momentous, as the history of failing liberation movements clinging to power and subverting democracy is rife across emerging economies. With its actions South Africa has shown that it is different, and that democracy and its ideals are still key.

By the end of the week, we should know the new structure of government and who will be president. The make-up of the new cabinet will take longer to be negotiated. One thing that I am confident about, is that despite the current uncertainty South Africa will survive this, we have triumphed against far worse.

May was a busy month for us at NVest Securities, not only were we busy keeping abreast on all elections related news and its implications across our various portfolios, we were also busy adding a few new positions across our local and offshore portfolios.

With the stratospheric surge of companies that are instrumental in the rise of AI, we have been looking at second derivative plays that will benefit as the AI build-out continues. Liza takes you through our new holding, Infineon Technology, which is ideally placed to benefit from the increasing power needs of AI data centers, EVs and renewable energy.

Khonie discusses why we think Mr Price provides a good investment opportunity looking out over the next 12 months.

Finally, Anda wraps up the brief romance between BHP and Anglo America, which ended this month with Anglo’s refusing to extend the deadline for further negations.

I hope you enjoy this month’s edition of Wood for the Trees.

Headline banner containing a Nguni bull

By the Numbers

The JSE sustained its momentum from April for most of May, with the ALSI increasing by 0.8%, despite experiencing a pullback in the last two days of the month following the initial election results. Industrials emerged as the best performers, rising by 1.7%, followed by Resources (+0.8%). SA Inc stocks were hit hardest by the initial sell-off, which saw Financials and Property declining by 0.7% and 0.4%, respectively, while Retailers remained flat for the month.

A notable best-performer in the Industrial counters was Richemont. The stock was up 13.5% for the month after it reported a solid FY24 result reflective of the group’s relatively resilient business. Raubex increased by 17.2% following a robust FY24 result, which showed EPS increased by 21.3% year-over-year to 476.3 cents per share. On the flip side, Famous Brands was down 10% after reporting weaker annual results for the year ended 29th February 2024, while MTN (-9.8%) also sold off after reporting weaker 1Q24 results.

Montauk was the best-performing resource stock this month. Despite reporting a decline in FY23 operating revenues and EPS, the stock rallied by 47.0% as management reaffirmed their positive FY24 earnings guidance. African Rainbow (+15.8%), South32 (+15.6%), Impala (+13.1%), and Tharisa (+12.5%) were among the best performers. Amplats (-8.3%) came under pressure as Anglo announced it would unbundle its 79% stake in the company. Sasol (-5.6%) likely declined due to weaker oil prices.

Pick n Pay outperformed in the retail sector, increasing by 21.3% this month as management detailed its turnaround plan for the company. Lewis (+4.6%), Motus (+3.5%), and Mr Price (+2.9%) recorded modest gains for the month. Woolworths was down by 9.7% this month. The company released its FY24 trading update, stating tougher-than-expected trading conditions in the apparel business and noting it expects a more than 20% decline in EPS, partly due to the inclusion of David Jones in FY23. Cashbuild (-7.7%), Foschini (-5.5%), and Pepkor (-3.8%) were also down for the month.

In the property sector, Fairvest (+7.8%), Equites (+5.4%), Burstone (+5.0%), and Growthpoint (+4.2%) were up for the month, while Redefine (-9.3%; mostly due to paying a dividend in May), Hyprop (-5.6%), and Resilient (-4.5%) were down. Equites and Burstone came out with solid results that were in line with expectations and reflected improving fundamentals. While this was also the case for Redefine, the increased LTV raised concerns about the balance sheet and likely impact on the payout ratio.

Financials lagged as gains from Coronation (+15.1%), Quilter (+9.4%), and PSG (+7.9%) were offset by share losses in Brait (-11.5%), Transaction Capital (-9.2%), Capitec (-9.0%), and Discovery (-8.3%). Coronation released decent 1H24 results during the month, which likely supported gains. Transaction Capital, on the other hand, was down after the company reported poor interim results following the unbundling of WeBuyCars. Discovery shares dropped following the signing of the NHI Bill into law by President Cyril Ramaphosa.


Blue graphs and red and green bar charts of international sector performances. red being negative and green being positive.
Blue graphs and red and green bar charts of international sector performances. red being negative and green being positive.

A Government of National Unity

Silhouette of wildebeest in the African bush, deep orange sun set

The NEC meeting concluded with Cyril Ramaphosa announcing to the country on Thursday evening (6th June) the ANC’s decision to progress with a Government of National Unity (GNU). A GNU is a broad coalition government of all parties (or majority parties, in this case ANC/DA/MKP/EFF/IPF/PA/NFP) in the legislature. Favoured during war times, it is preferred when the need for maximum solidarity is heightened, as was the case in South Africa’s 1994 elections.

On the other hand, a Gnu, or Wildebeest is a large African antelope. A Gnu, not unlike a GNU, has a body that appears disproportionate, with a hefty front, slim hindquarters, and spindly legs. They are sociable, territorial animals with territories frequently overlapping, which lead to challenges from neighbouring bulls. The similarities appear fitting…

The Devil is in the Details

Ramaphosa has previously stressed a coalition needs to have partners committed to shared values, nation-building and social cohesion. During his closing address following the NEC meeting, he was quoted as saying “These values include respect for the constitution of the Republic of South Africa and the rule of law, social justice and equity, human dignity, non-racialism and non-sexism”.

Known as the ultimate consensus builder, a structure of this sort does play into Ramaphosa’s style, but the devil is in the details as this outcome tends to throw the proverbial ball into the opposition party’s court.

The DA have been vocal in their refusal to work with the EFF. A main theme of their election strategy had highlighted their “Doomsday” scenario which would see a coalition between the ANC and EFF. A GNU places them at a crossroads:

      • Refuse to join the GNU on their anti-EFF and MKP position and ultimately allow the “Doomsday” scenario to play out by creating an ANC/EFF coalition, or,
      • Compromise on its views on working with the EFF choosing to enter the GNU for the best interests of the country

The DA are the first party to release their GNU principles including the protection and promotion of the Constitution, the independence of the SARB, and the protection of reforms including the quiet but effective Operation Vulindlela. They have put their manifesto commitments of ending BEE and scrapping the minimum wage, on the back burner. Big sticking points in prior talks with the ANC. The principles give evidence to what appears to be pre-election coalition discussions between the two parties.

The EFF, on the other hand, have been outspoken on their demands for land expropriation and the nationalization of the SARB. While we have seen some softening in their stance on running treasury following the election, whether they will be open to relaxing manifesto goals remains to be seen.

The MKP on the other hand wants to scrap the constitution in its entirety, and similarly favour the nationalization of the SARB. Statements from the ANC have confirmed their attempt to open talks with the MKP, as they have with all other parties, with the MKP initially ignoring their advances. The MKP on the other hand, have been vocal in not receiving an official invitation to open talks. The MKP have now confirmed upcoming meetings with the ANC. Again, we wait to see how this unfolds.

The Market Stands its Ground

The market’s reaction to Ramaphosa’s press conference saw some jitters but ultimately was neutral. The ZAR has remained steady despite a few blips with equity markets following suit. However, the current climate is extremely fluid. Given the short deadline, every minute sees fresh news changing the outlook.

The ANC has a difficult task bringing such divergent agendas towards an outcome best suited to all in South Africa. As territories begin to overlap, we anticipate the occasional locking of horns with the hope that logic prevails for the good of the herd.


Mr Price – Time to Enter the Sector

Given expectations for improving fundamentals, along with catalysts in the form of decreasing interest rates and cash injections from the implementation of the two pot-system, the discretionary retail sector stands to benefit. We entered the sector by taking a position in Mr Price (MRP).

Fundamentals are Improving

An increasing interest rate cycle, loadshedding, and tough economic conditions have weighed on the discretionary retail sector over the past two years. Adding to the environmental challenges, MRP has faced concerns regarding its operational quality. Challenges in implementing its new inventory system resulted in lost market share and closures, due to loadshedding requiring heavy promotional activity pressurizing margins. Performance from recent acquisitions (Power Fashion and Studio 88) exceeded expectations but the performance of core stores pressured the overall performance of the group.

As we await the release of FY24 results on 13 June 2024, we are pleased with recent updates indicating improving fundamentals. Core MRP stores are regaining lost market share, inventory levels have stabilized, and margin pressure has eased. Furthermore, management has ensured that all stores have backup power, reducing interruptions during severe levels of loadshedding.

Valuation is Undemanding

Prior to the national elections, sentiment was skewed to the negative with the worst-case outcome being priced in. Consensus expectations for EPS for FY24 and FY25 are at R12.70 and R14.00 respectively, putting MRP on a forward PE ratio of 14.6x and 13.3x respectively, below the 10-year average of 17x. Further, MRP offers a forward dividend yield of 5%.


Blue graph showing the share price performance of Mr Price pre and post SA national elections

We expect the company results, which are due on Thursday, June 13, to show continued improvement in fundamentals. While we anticipate continued volatility in the near term due to election developments, we believe there are enough catalysts on the horizon to drive a rally in discretionary retail. Consequently, we stand to benefit from our position in MRP.


Anglos says NO!

On the 23rd of April, BHP Group (BHG) came to market with an all-share offer for Anglo American (AGL). The offer valued AGL at £25.08 a share and represented a 13.7% premium to the prevailing price, prior to the announcement of the potential deal. As an inter-conditional part of the deal, BHG required AGL to demerge its Anglo-American Platinum (AMS) and Kumba Iron Ore (KIO) subsidiaries to shareholders. As the proposed offer did not amount to a firm intention, BHG were given until May 22nd to either make a firm offer or walk away.

The deal structure made it clear to us that the assets that BHG was most interested in, within the AGL rump, were the South American copper assets, which would have given the combined group ten percent of global production in the highly sought after metal. The market also viewed the insistence of a demerger of AGL’s South African exposure as an indication of global business’ dim view of operating in the local environment.

AGL rejected BHP’s offer, characterizing the proposal as opportunistic, prejudicial to its shareholders due to its complexity, and significantly undervaluing Anglo American and its prospects.

On May 13th, BHG made an updated offer for AGL, with the only change to deal structure being an increase in the offer price from £25.08 to £26.86 per share. AGL rejected this offer within minutes of it having been tabled, considering it to be an under-valuation of its business and having an unattractive structure.

A day following the updated offer, AGL announced an acceleration in the delivery of its own strategy to unlock significant value. The salient points announced were the divestment of the steelmaking coal business, the demerger of AMS, and the separation of De Beers. This would leave the group with a copper, iron ore and crop nutrient focus.

One final offer was made by BHG, with an increase in the offer price per share from £26.86 to £31,35 one day before the original May 22nd deadline. This offer was also quickly rejected by the AGL board, who continued to assert that it undervalued the firm while additionally exposing their shareholders in a disproportionate manner to the complexity of the deal structure and elevated levels of completion risk.


Table: BHP Group/Anglo American Deal Progression

In addition, AGL announced a seven-day extension to the date by which BHP was required to announce a firm intention to make an offer. The two boards used this extension as an opportunity to engage and try to arrive at a consensus. Despite this, an agreement was not able to be reached and BHG walked away. In line with the UK takeover rules, BHP will step away for 6 months unless AGL’s board decides to set aside the rejection statement, or a third-party step in with an offer for AGL.

We remain of the view that AGL is undervalued, assigning the counter a fair value of approximately ZAR700/share. We are also, however, cognizant of the prospect of elevated volatility in the name due to the possibility of another bid coming in from a rival miner and BHG exercising their consequent right to counter. Even in the absence of future M&A activity, AGL’s own announced strategy will be subject to execution risk, leading to murkier than ideal visibility on operations and earnings. After the second offer was made and rejected, and in light of what was approximately 20% run-up in the AGL share price on the news, we opted to take a bit of froth off the top of our AGL position. We maintain material exposure and take a constructive view on future organic and corporate action prospects in the name.

branded gif on NVest securities locol prouct offerings, Nguni bull on green triangle and dark gray back ground
Branded banner International section_- side profile of an Nguni Bull

By the Numbers

Major indices rebounded in May, delivering the strongest monthly performance year-to-date; namely in the U.S. S&P 500 (+4.9%, +11.2% YTD) and Nasdaq 100 (+6.6%, +11.2% YTD). Positive sentiment was driven by inflation resuming its downward trend and economic data again favouring rate cuts this year.

A few mega-cap U.S. tech stocks outperformed; namely Nvidia (+28.9%, +122.6% YTD) which has more than doubled in 2024 after its better-than-expected earnings update and bullish sales forecast; showing that AI computing spend remains strong. HP (+30.4%) rose sharply after noting signs of green shoots in PC demand. Qualcomm (+24.0%) also benefited after strong semiconductor demand fueled upbeat guidance. Additional data center demand driven by AI computing, increases additional renewable power needed and benefitted First Solar (+53.9%) as analyst upgrade estimates.

In Europe, the central bank cut rates at their June meeting ahead of the U.S. Fed. Investment managers, Hargreaves Lansdown (+29.6%), received a takeover offer which was later rejected on basis of undervaluation. On the other hand, software company Sage (-11.6%) fell after trimming revenue forecast due to lower growth in the U.S. Luxury brand, Burberry (-9.8%) dropped after reporting a slowdown in sales.

China unveiled stimulus measures to stabilize the property market but is yet to show a sustainable recovery. Freight and logistics companies Wan Hai Lines (+60.5%), COSCO Shipping (HK +36.0%, SH +32.5%), and Yang Ming Marine Transport (+34.9%) rallied after a spike in freight rates, driven by prolonged Red Sea disruptions, busy season beginning earlier than normal and leading to container scarcity.


Blue graphs and red and green bar charts of international sector performances. red being negative and green being positive.
Blue graphs and red and green bar charts of international sector performances. red being negative and green being positive.

New Holding: Infineon Technologies (IFX)

There are several major themes that are driving secular change across global industries and are set to drive revenue growth for those companies that are able to participate in transforming the future for the next decade. These include:

    1. Rise of EVs and Autonomous Vehicles
      2. AI & Data Center build out
      3. Renewable Energy
      4. Transition from 12V to 48V electrical architecture

While there are many facets to each theme with multiple ways to benefits from their advancement, it is widely acknowledged that power and power supply is going to be a critical factor in reaching full potential. Infineon is a semiconductor company, that finds itself bang in the center of all 4 themes, with its power management technology that provides essential functionality across an ever-increasing array of concepts.

Infineon is firmly positioned to benefit from accelerating growth across multiple categories. Revenue growth is forecast to grow at double digits over the next several years, translating to over 30% EPS growth. Shares are currently trading at 16x earnings, at the low-end of its trading range and at an attractive entry point. Our price target offers over 50% upside to current levels.


1. Automotive: Best Positioned to Benefit from Secular Trends in Automotive

Across the automotive space, we have seen the rise in electrical components in all vehicles, increasing adoption of EVs, and the advancement in autonomous driving technology. As the number of electronics integrated in vehicles increases, so does the need for more Infineon components.

EV adoption has already taken off, and even with the strong growth seen over the past few years, EVs accounted for only 13% of cars sold globally last year. Given those low penetration levels and global EV targets, EVs are forecasted to be one of the fastest-growing end markets for semiconductors over the next decade – expected to grow by 17% CAGR (compounded annual growth rate) to 2030.

Infineon is the number 1 supplier of semiconductor chips for the automotive industry; serving all key applications ranging from functionality to electronics as well as safety systems in both combustibles, EVs, autonomous and non-autonomous vehicles.

Infineon’s CEO noted on the recent call, “At the same time, silicon content continues to be our growth driver in the coming years. This is not only driven by further EV adoption, but also from higher levels of ADAS (Advanced Driver Assistant Systems) and our wide range of products, allowing cars to become autonomous, more digital, and more connected.”

Within Infineon’s automotive segment, is its EV Battery Management Systems (BMS), which are designed to ensure safe, efficient, and reliable operation of EV batteries. These systems play a crucial role in managing the performance and longevity of battery packs, which are central to the operation of EVs. BMS revenue is expected to be the fastest growing segment, with the company predicting it will grow by over 80% CAGR between 2023 and 2028.

As cars become computers on wheels, Infineon is best positioned for strong growth over the next 5-7 years. The adoption and sales of EVs and autonomous driving, as well as Infineon’s anticipated gains in market share, will continue to drive Infineon’s automotive revenue at high-teens growth rates. They have consistently gained market share – growing from 9% to 29% over the past five years – with further gains expected.

2. AI & Data Centers: AI Hype Leading to Broader Electrification and Power Demand

Data center investments continue to experience growth acceleration on the back of generative AI. High-performance computing is extremely power hungry and potentially putting pressure on the current inadequate power supply. Consequently, power consumption has become a major focal point; we are seeing a dedicated effort from all participants to minimize power consumption as much as possible and reduce the potential bottleneck that could hinder AI development.

Infineon offers products that help reduce power consumption of server racks, improve the efficient conversion of AC power to DC, and help manage the power supply economically by directing power where needed. Additionally, these high-performance engines are leading to a major jump in the semiconductor content needed to support their processes.

To put this growth into perspective, the CEO recently put forward that, “conventional servers contain power semiconductors worth between $65-80. In an AI server its $850-1800.” As a result, the company has forecast its AI server revenue to grow at over 50% CAGR over the next 5 years.

Graph showing AI as a strong driver of Infineon's server business with a sharp increase

3. Renewable Energy Remains One of the Fastest Growing Markets

 As most people are already familiar, global net zero targets are driving the growth of renewable energy solutions: predominately solar and wind. Clean energy technology is experiencing the classic S-curve adoption acceleration as pricing for these solutions continue to come down.

Infineon has seen its renewable energy segment grow 38% annually for the last 5 years. Strong growth rate is expected to continue at least till the end of the decade.

Infineon supplies the main semiconductor components in inverters and battery systems; primarily involved in converting the DC current coming out of the PV panels, wind turbines and storage battery to match the AC current in the grid.


Bar chart, navy blue bars, showing Infineon's renewable energy revenues, they have grown by 38% CAGR since FY18

4. 48V Architecture Set to Replace Current 12V Systems

 Another big thematic that will benefit Infineon is the transition of electrical architecture from 12V currently to 48V. This is being driven to enhance power efficiencies and reduce heat dissipation as power demand increases in Data Centers and power supply becomes a real bottleneck.

In the autos market, shifting to 48V architecture, not only improves power efficiency but reduces the weight of the vehicle by up to 60kg, as lighter weight copper wiring can be used at reduce currents. Tesla has been the first manufacturer to transition, recently announcing the CyberTruck would be based on 48V architecture. From 2025 onward, even Model S and Model X are forecast to fully transition to 48V architecture. By 2029, the 48V architecture will equip more than 3 million vehicles from Tesla’s assembly line.


bar chart showing the number of tesla vehicles with a 48V architecture from 2023 to 2029 (in thousand units)

Infineon silicon will be essential in order to convert AC/DC and then to step down the high voltage to lower voltages such as 1/1.5V, at which various server boards and other electrical components operate.


Weakness in the automotive and industrial sector led to a pullback in Infineon’s share price as earnings estimates were cut for this year. With earnings cuts behind us, earnings upgrades should start to come through by the end of this year as inventory levels normalise. Management noted on the most recent earnings call that bottoming is visible, demand is stabilizing, and inventory correction is slowing down.

Looking ahead, revenue growth is forecast to grow at double digits over the next several years, as automotive and industrial demand rebounds into 2025, as well as on continued strength in AI. Revenue growth translates to over 30% EPS growth over the next several years.

Table, grey header, two columns

Shares are currently trading at 16x earnings, at the low-end of its historical range and at an attractive entry point. It is expected that Infineon will steadily re-rate (valuation multiple expansion) alongside the broader semiconductor upcycle over the next 12-15 months. Our price target offers over 50% upside to current levels.


investment graph


 As always, there is never a dull moment in Equity markets. In times of uncertainty, it is important to take a minute to take stock of the situation and prevent oneself from overreacting to self-perceived dangers. Opportunities arise in periods of increased volatility.

We are very excited to have Anda Tyali join the NVest team in May. Anda joins as a Senior Portfolio Manager and a member of the Investment Committee. He will no doubt add a new dimension to our team as we continue to focus on generating top class outcomes for NVest clients.