Jean-Pierre du Plessis, Head of Equity Management South Africa and Ryan de Kock, Senior Analyst Equity Investment South Africa
By the end of 2020, investors were in a better position to digest the fundamental impact of the Covid-19 pandemic and what lessons can be learnt. Our principal takeaway thus far is that strong, adaptable businesses deliver under even the most trying of circumstances. An investment approach emphasising the qualitative aspects of management stewardship, business strength and sustainability of growth, complementing rigorous valuation and risk disciplines, should be well positioned to deliver under even the most uncertain of market conditions.
Quality management shining through
What matters during times of severe stress is how effectively management teams can adapt to factors beyond their control. A central theme amongst the best management teams has been the focus on efficient cash flow management. Branded goods producer AVI delivered a 14% increase in operating cash flows to R2.3 billion for the financial year ending 30 June 2020, driven primarily by a material improvement in working capital. Capital expenditure was reduced by 22%, supporting the free cash flow generation of nearly R2.0 billion.
Survival of the fittest
Companies entering the crisis with appropriate debt levels and a durable competitive advantage have proven resilient. A key source of competitive advantage for global packaging and paper group Mondi stems from its low-cost asset base and conservative, ‘through-the-cycle’ balance sheet management. Mondi entered the crisis with net debt to equity of 55% and a 19.8% return on capital generated in the financial year to 31 December 2019 This has served the group well and was evident in the businesses interim results where Mondi retained its investment grade credit ratings and resumed dividend payments.
Few companies have avoided the impact of Covid-19 at the revenue line. Astute management teams have used their competitive positioning to adapt business models appropriately, achieve efficiency gains or even gain market share. This has alleviated some profit line pressure and positioned these businesses to deliver optimal and sustainable future growth. In addition to ongoing market share gains, Clicks has further benefited from a ‘location tailwind’ in recent months, with 70% of stores located inconvenience and neighbourhood shopping centres. This has supported relatively robust top line growth, which together with stringent cost management saw the business deliver earnings growth of 14% in the 12 months to 31 August 2020.
Opportunities for best of breed companies will persist
Management teams and business models are facing unparalleled operating conditions. We will likely see further disappointments from lower quality companies. Given the elevated levels of pessimism and generally depressed valuation levels in the domestic listed equity space, investors may be tempted into investing into companies at ‘bargain-basement’ prices. The key lesson for us is to remain steadfast in our process emphasising quality, value and risk – especially when many businesses are trading at optically attractive valuation levels.
 Mondi plc: Full year results for the year ended 31 December 2019; Interim results for the half year ended 30 June 2020
 Clicks Group Limited – Financial results for the year ended 31 August 2020.
Issued by Stonehage Fleming Investment Management (South Africa) (Pty) Ltd, an authorised Financial Services Provider (FSP No. 42847). We do not intend for this information to constitute advice or a personal recommendation. It does not take into account the individual financial circumstances, needs or objectives of the recipient. Before making any investment decision, you should consult an independent professional financial adviser. Collective investment schemes are generally medium to long-term investments. The value of investments and any income derived can go down as well as up. Investors may not get back the full amount invested. Past performance is not a reliable indicator of future results. Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes. © Stonehage Fleming 2020. All rights reserved.