Coronation Industrial Fund

PERFORMANCE

The Fund returned 5.5% for the quarter, against a benchmark return of 4.8%. Since inception, the Fund has generated a 15.0% annualised return, 1.7% p.a. ahead of the benchmark.

The quarter was dominated by the Middle East conflict and its impact on energy prices. Oil spiked early in the conflict and remained elevated for much of the period, before a US–Iran ceasefire[1] and the reopening of the Strait of Hormuz brought prices back close to pre-conflict levels. The global economy has, however, suffered some damage. The shock lifted inflation and prompted tighter policy in some countries, with June’s central bank meetings highlighting divergence: the European Central Bank raised rates, while the US Federal Reserve and Bank of England held steady but struck more hawkish tones. Despite the geopolitical backdrop, equity markets performed strongly, helping the MSCI All Country World Index rise 15% over the quarter.

Contributors to relative performance included an underweight position in Clicks Group and overweight positions in Advtech, Aspen Pharmacare Holdings, Richemont and Bytes Technology. Detractors included overweight positions in Naspers, Dis-Chem, Mondi, and WeBuyCars, as well as an underweight in Anheuser-Busch Inbev.

The combined Naspers/Prosus position remains a core holding for the Fund. We view Naspers/Prosus as a compelling value opportunity because the market price remains materially below our assessment of underlying intrinsic value. The Tencent stake alone represents the core anchor of value and the broader portfolio of assets such as OLX, iFood, PayU, Swiggy, and Meesho increasingly offers additional upside as they scale, improve profitability or move toward monetisation. The recent Naspers/Prosus share price weakness has not been driven by any deterioration in the prospects of the group but by the weaker sentiment toward Chinese technology shares, including Tencent. Tencent is also spending on AI, which puts pressure on near-term profits but ultimately positions the business for positive long-term outcomes. Tencent is perfectly placed to capitalize on AI through its WeChat ecosystem which boasts over a billion users. The discount to NAV for Naspers/Prosus has widened to unusually attractive levels of just over 40%. At this valuation, continued buybacks funded by cash and non-core asset sales should be highly accretive to NAV per share, while improved capital discipline, asset disposals and better visibility on the value of the non-Tencent portfolio could support a meaningful rerating over time.

During the quarter, we increased the Fund’s exposure to Shoprite, Prosus, Aspen, Anheuser-Busch Inbev and Bytes Technology, while we reduced exposure to Premier Group, Motus, CA Sales, Richemont, and Raubex.

In this quarter, Aspen finalised the disposal of their Asia Pacific (APAC) business, realising approximately R26bn in cash proceeds. This is a transformational deal for Aspen, completely de-risking the balance sheet and unlocking the potential for share buybacks. Having moved past a heavy capital expenditure cycle – including over R13 billion invested in sterile facilities over an 11-year period – we expect the business to shift to a capex-light cash-generative phase, with the potential to deliver double-digit earnings growth from FY2027 onwards, as specialised sterile capacity is filled. We believe the market is still undervaluing Aspen, effectively assigning little or even negative value to its manufacturing assets.

OUTLOOK

While geopolitical issues continue to dominate the news flow, in the long run markets and shares are driven by the fundamentals of earnings and free cash flow (FCF) growth and we continue to focus the Fund’s exposure to high-quality businesses, both domestic (Shoprite, Advtech, Pepkor) and some international businesses that happen to be listed in SA (e.g., Naspers/Prosus, Richemont, Aspen, ABI, Bid Corporation, etc.) able to weather tough markets while delivering on earnings growth and generating strong FCF under the stewardship of management teams with a strong capital allocation track record.

[1] Conditions remained fragile at the time of writing.

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