Photo: iStock I have a diversified portfolio where most positions are a 2% allocation and only a few individual positions are more than about 5%. This is a deliberate decision that helps me ride out volatility. It also gives me space to add to positions that have been sold off by the market – provided it makes sense to do so.
Recent updates from three companies that I own in my portfolio – Prosus, Karooooo and Accelerate Property Fund – are worth reflecting on. All three are under pressure, but for very different reasons.
Prosus: a victim of market sentiment
Prosus is down 27% year-to-date. Perhaps more importantly, it’s down 40% from the 52-week high! That’s a pretty severe drawdown that could lead you to believe that the entire business model has crumbled.
Instead, we find a technology platforms business that has profitable ecosystems in India, Europe and Latin America. They are focusing on the execution of recent acquisitions, along with the need to embed AI across the organisation in pursuit of efficiencies.
Sure, there are some headaches, like an unsustainable competitive environment in Latin America where competitors are overspending on marketing costs. But this is always going to happen in a world where venture capital funding is supportive of risky land-grab strategies. When you are a market leader, you’ll spend your life fending off the competition.
Only a small portion of the pressure on the Prosus share price is attributable to the group excluding Tencent. The evidence lies in a chart of Prosus against Tencent. You’ll find that they are almost perfectly correlated, which tells us that the market doesn’t pay much attention to the ecosystems outside of China.
In the Trump era of isolationist politics and tariffs, the market is worried about Chinese equities. Goodness knows the Chinese government hasn’t done themselves any favours here either, with regulatory interference as a feature rather than a bug. This creates a structural impediment to the Tencent valuation.
To their credit, Tencent has worked hard to grow earnings and expand margins. But with only single-digit revenue growth and a message to the market that they are getting the hammer down on AI investment, Tencent punters have run for the hills in fear of what might happen to margins. The Prosus share price has been dragged down with Tencent.
This kind of market distaste can create a buying opportunity, but only if you’re willing to take a positive view on China. I’ve learnt patience, so I’ll wait for signs of improving sentiment before adding to my existing position.
Karooooo: A victim of an impatient market
Karooooo has been an excellent position for me over several years. But in the past 12 months the share price is down 22%. It’s trading very close to 52-week lows. This isn’t because of a structural problem, but rather because of more pressure than usual on operating margins during a period of expansion.
To understand this, you need the context that Karooooo has taken the Cartrack business to global markets. Covid slowed down the global expansion significantly, but they’ve since recovered and shown what they are capable of.
It’s impossible to achieve this growth without investing in sales and marketing efforts. With front-loaded costs vs recurring revenue streams, this can create distortions to margin – particularly when viewed through a quarterly lens.
In the latest quarter, despite subscription revenue for the quarter increasing by 18%, operating profit actually fell by 12%. Operating profit margin dropped sharply from 34% to 25%. The market has seen volatility in margins at Karooooo before, but I don’t recall seeing anything quite like this!
Before panicking about a quarterly number, it’s critical to zoom out and see the bigger picture. Guidance for the next financial year reflects a return to the margins that the market is more accustomed to seeing, helped in part by a slowdown in hiring as they look to unlock efficiencies from AI. They also expect revenue growth of between 18% and 24%.
These numbers make me inclined to add to my position rather than reduce it. This is especially true in a world where software companies with recurring revenue models are under fire from AI. Karooooo has one of the few models where the recurring cash flows are probably not going to be disrupted by AI. After all, an LLM is not going to chase down and recover your vehicle!
Accelerate Property Fund: A victim of macroeconomics (mostly)
Accelerate Property Fund has been an extremely volatile stock. This is what you would expect from a turnaround story during a difficult market. The share price is now perfectly flat over 12 months, but it went as high as R0.76 and as low as R0.34!
The valuation underpin remains the property portfolio. The bull case is that they will deliver upside at Fourways Mall, while selling off other properties to help shore up the balance sheet. Both elements of the bull case have taken a knock.
The first problem is the macroeconomic situation, with the hellishly high oil price leading to significant inflation concerns heading into the second half of this year. This puts consumers under pressure, making the turnaround of retail centres a lot harder. There’s also the risk of interest rate hikes rather than cuts, although one would hope that the SARB wouldn’t hike into oil-driven inflation. There’s always a risk though, which is why a company like Accelerate with debt on the balance sheet is at risk.
The second problem is that properties aren’t always easy to sell. The news on Friday was that the sale of The Bosveld Bela Bela Shopping Centre for R88-million has fallen through, with the purchaser repudiating the agreement. Accelerate is considering a damages claim while they begin negotiations with other potential buyers.
I remain long Accelerate, as I believe that there will be meaningful upside here as the management team continues to improve the situation at Fourways Mall. It’s also reasonable to think that the remaining properties can be sold at reasonable prices.
The “perfect hindsight” trade was, of course, to sell the spike above 70 cents per share. But if you bully yourself over what could’ve, should’ve and might’ve been, you’ll drive yourself nuts in the market. DM