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SIMON BROWN: I’m chatting with Simon Fillmore, the chief investment officer at Independent Securities. Simon, I appreciate the time today. You and your team have put together a cross-section of stocks, five of them. You call them Stocks for all Seasons. We’ll delve into those in a moment. My first point is that what we have here – and this is the important methodology perhaps – is diversification, not just of stocks but of strategy.
SIMON FILLMORE: Yes, absolutely. There are many different ways to make money in the market and investors have different approaches to do that. We took a cross selection of methodologies and picked shares on those methodologies.
So, for instance, we have a Net Asset Value play. We have a Garpp or a Growth at Rights Price Play. We have a Steady Compounder as well as a Pure Growth Stock. And then of course the Speculative investment for all the big risk takers out there.
SIMON BROWN: Let’s start with that Speculative. There are two local. There are three offshore. The speculative is Sibanye-Stillwater. Is that a play on the PGM prices?
SIMON FILLMORE: It is to some degree. I think when we take a step back and look at the industry, we know that it is highly cyclical. We can see that in its historical margins, and they can vary between 0% and 40%, depending on wher halved. So we get the feeling we are closer to the end than we are at the beginning, and we’ll see some sort of margin reversion for Sibanye.
But I think one of the reasons why we like it – and it’s more of a longer-term thing, it’s not something that’s going to happen in the short to medium term – is just the whole hydrogen economy. Unfortunately at this stage it’s still more expensive than electric vehicles. But we are seeing countries, specifically Japan and some of their auto manufacturers, prefer hydrogen to electronic vehicles, and we think there’ll be more of a trend behind that over time, and all the PGM manufacturers or producers will benefit from that trend over the longer term.
SIMON BROWN: Your Garpp reports growth at ‘right price’, which is a phrase I heard first from Warren Buffett, although I don’t know if he coined it. The stock is Aritzia – and I’m not sure if I’m pronouncing it correctly. I’d never heard of the stock before. What are the details here?
SIMON FILLMORE: Aritzia is a Canadian company that specialises in everyday fashion. It’s for consumers who aren’t looking for a $10 000 hamburger but want some sort of luxury item that’s maybe a hundred dollars that they can wear every day to differentiate themselves. And [the company has] had pretty phenomenal growth over the last couple of years. We’re talking 25% per annum. They started off in Canada, and now have branched out into the US and are looking to double their store count there over the next couple of years.
So we think with that store count will come significant growth. They really sell aspirational products and their store experience is quite unique. It’s almost like going into the iStore for the first time. This time it’s apparel, and they also use celebrities and social influencers to market their products on social media. So it’s a fairly small company with a $25.5 billion market cap. The share price has fallen about 70% over the last six to 12 months and, like many retailers, we saw they overstocked post-Covid, and then they had to discount that stock to move it out. We think it’s turning on a normalised PE of around 14 times but it has extensive prospects to grow the bottom line, specifically because of the foray into the US. So we are fairly excited about that business over the medium term.
SIMON BROWN: Of course growth is important, but the price you pay always matters hugely.
ASML – you call it your pure growth stock. If memory serves, I think they’re Dutch, but they basically supply into the semiconductor industry. That’s crafty because we’ve got Nvidia and Harm and all of those, [and] Taiwan Manufacturing. This actually is supplying into that growth area.
SIMON FILLMORE: Exactly. They provide the equipment to manufacture the semiconductors themselves, and essentially they provide the equipment that can etch the patterns onto the silicone. The fascinating thing about this business is a literal monopoly. If you want to get equipment from anyone else, it’s simply not possible to always hear management comment when they release their reports that they simply aren’t able to fulfil their order book.
So I think with the increasing trend towards the cloud, increasing demand from artificial intelligence, it just means that this business is going to have structural and long-term tailwinds for many years to come.
SIMON BROWN: And it’s moving into different parts of the value chain, rather than often going to sort of the obvious pointy part of it.
Your net asset value play Fortress – I’ve chatted with the CEO a number of times. Of course the pandemic was tough for them, as everyone else, but they’ve really come out of it I almost want to say stronger in many ways – and still at a discount to NAV.
SIMON FILLMORE: Yes. The business is looking very attractive to us. Fortress has two classes of fares. It has an A class and a B class. The A classes have priority with regard to dividend, as long as it’s over a certain hurdle. And then the B class shares the residual.
Just because of what happened with Covid the business isn’t paying out dividends at the moment, but it just means that their profits have been retained in the business and they’ve reduced their debt quite significantly. But for us one of the key features of the business is its inappropriate capital structure in having As and Bs. We’ve seen a couple of its peer group which had a similar structure collapse just because it’s from a bygone area and is no longer relevant.
So at the moment, Fortress is trading at around R6, its NAV is over R15. We don’t think shareholders will ever realise that. But I think that the ultimate truth is somewhere between the current share price and net asset value, and we think at some stage the A shareholders and B shareholders will sit around a table and come to some sort of deal to consolidate the share classes.
SIMON BROWN: They’ve tried a few times; it fell. But I take what you say there, at some point they need to.
The compound is Apple. We won’t detail that, but I think everyone knows Apple.
Simon Fillmore, CIO of Independent Securities, I appreciate the insights.
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