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Hindsight Insight Foresight - Cannon Asset Managers Roadshow

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Hindsight Insight Foresight - Cannon Asset Managers Roadshow Powered By Docstoc
					Geoff Blount (CEO)
Dr Adrian Saville (CIO)


March 2010
                                     Agenda

Welcome and Overview

Portfolio Review: Delivering Value

The Year That Was

We Aren’t Done: Two Big Bubbles

Building An Investment Case

Putting It Together

Questions & Discussion
                         Cannon Asset Managers’ Year In Review

Last year, we expressed optimism about the country and capital markets


  • successful elections, economy out of recession
  • domestic markets buoyant
  • reflects recovery in global sentiment after doom


Cannon Asset Managers


  •   our management team
  •   our investment team
  •   assets under management
  •   portfolio performance


Prospects
                            Cannon Asset Managers’ Year In Review

New institutional clients

  •   Sygnia & Sasfin
  •   Financial Fitness
  •   Investment Solutions Multi-Manager Value Equity
  •   Institutional inflows R960mn


Development initiatives

  • CHOC, Highway Hospice, Alzheimer’s SA & Ethembeni Children’s Home
  • Accenture Education Trust
  • CIDA City Campus


Gradidge-Mahura Investments


Our client base continues to grow
                                     Agenda

Welcome and Overview

Portfolio Review: Delivering Value

The Year That Was

We Aren’t Done: Two Big Bubbles

Building An Investment Case

Putting It Together

Questions & Discussion
                                                                                                         South African Product Suite

                                                                    22.2%
                 Return                                             18.6%

               Objective
                                                                                     Cannon All Equities
                    (%)
                                                                                     Cannon Equity Fund †
                                                                    21.3%
                                                                    19.3%
                                                                   Cannon Large Cap Equities
                                                                   Cannon Core Companies Fund†                                                Better than
                                                                                                                                              market return

                                                       12.9%
                                                       13.2%
                                                     Cannon High Yield Portfolio

                                                                                                                                                   17.3% return
                                                                                                                                                   19.7% volatility
                                                                                       Lower than market risk
                                                                                                                                             Investment Universe




                                                                                                                                  Risk Objective (σ)



† Registered CIS (South Africa); Cannon Asset Managers (Pty) Ltd, period is five years to end January 2010 compound annual returns; McGregor-BFA
                     Cannon Asset Managers’ Investment Platforms

Relationship heads

  • Retail:               Bella Shongwe and Doug Turvey

  • Institutional:        Geoff Blount and Andrew Newell


Retail investors & IFAs


Institutional investors


Global equity feeder
                                                                                              Evidence Of Our Process
1000

 900
                            Cannon ALSIEquities Portfolio
                             Cannon All Index                                                                                                       732%
 800
                            All Share Index Share Index
                             JSE-FTSE All
 700

 600

 500
                                                                                                                                                    366%
 400

 300

 200

 100

   0
       Aug-00




                               Dec-01


                                        Aug-02




                                                          Dec-03


                                                                   Aug-04




                                                                                     Dec-05


                                                                                              Aug-06




                                                                                                                Dec-07


                                                                                                                         Aug-08




                                                                                                                                           Dec-09
                   Apr-01




                                                 Apr-03




                                                                            Apr-05




                                                                                                       Apr-07




                                                                                                                                  Apr-09
                Flagship portfolio extends performance

   •            2/3 months positive and 63% > than market
   •            Above water 86%
   •            Volatility 10% < market
                                                                                Why Value Works




                                                                                            28.8%




      -3.9%



                                   Returns and performance comes from most unloved stocks
                                   Growth does not grow!




Source: DRKW Macro Research (2007); updated by Cannon Asset Managers (2010)
                                                                              Why Value Works: 22/7




                                                                                              7
                                                                                            Years



       22
      Years




Source: DRKW Macro Research (2007); updated by Cannon Asset Managers (2010)
                                                      The Consequence Of Our Search For Value


                                                                                   ALSI              Cannon Equity Fund

         Price-Earnings Ratio                                                       16.5                     10.9

         Dividend Yield (%)                                                          2.2            3.8 (forward yield 4.2)

         Price-Book Ratio                                                            2.9                     1.4

         ROE (%)                                                                    13.3                     17.9

         HEPS growth (real) (%)                                                   22.7%                     24.3%




                 “The Cannon Equity Portfolio exhibits the most significant value tilt of any portfolio we
                  have analysed to date. The deep value philosophy is clearly reflected in the portfolio
                                                                                               holdings.”


                                                                                           Brockhouse Cooper (January 2010 )

Source: McGregor BFA & Cannon Asset Managers; www.brockhousecooper.com/en/Consulting.php
                                     Agenda

Welcome and Overview

Portfolio Review: Delivering Value

The Year That Was

We Aren’t Done: Two Big Bubbles

Building An Investment Case

Putting It Together

Questions & Discussion
            A Year Ago We Said


Oil Price
              Could you be a
            little more precise
              than “umpteen
                  million”?
                                                                                                                    A Year Ago We Said

                                     Our Stance                                                        The Result            The Score

                           Recovery led by EMs                                         Asia, Latin America and Africa
       Economics




                                     SSA robust                                            Global bust, African boom


                   Bigger government and greater
                                                                                                On the money, sadly
                            protectionism

                    Price inflation follows printing
                                                                                              Not yet, but it’s coming
                                 money

                   Safe to burn “Are You Missing                                         Unless you bought Chinese
                   The Real Estate Boom” (2005)                                               property, spot on
       Markets




                   In equities, opportunity abounds                                                Massive recovery




Source: International Monetary Fund (2010); The Economist (2010); World Bank (2010); Financial Times
                                                                                                  Emerging Engines

10

                                                                1980-
                                               Economic Growth: 1980-2014 (% per annum)
8



6



4



2



0

                                 Advanced Economies
-2                               Emerging and Developing Economies
                                 World

-4
     1980


            1982


                   1984


                          1986


                                 1988


                                        1990


                                                 1992


                                                        1994


                                                               1996


                                                                      1998


                                                                             2000


                                                                                    2002


                                                                                           2004


                                                                                                  2006


                                                                                                         2008


                                                                                                                2010


                                                                                                                       2012


                                                                                                                              2014
                                                                                                                    A Year Ago We Said

                                     Our Stance                                                        The Result            The Score

                           Recovery led by EMs                                       Asian, Latin America and Africa
       Economics




                                     SSA robust                                            Global bust, African boom


                   Bigger government and greater
                                                                                                On the money, sadly
                            protectionism

                    Price inflation follows printing
                                                                                              Not yet, but it’s coming
                                 money

                   Safe to burn “Are You Missing                                         Unless you bought Chinese
                   The Real Estate Boom” (2005)                                               property, spot on
       Markets




                   In equities, opportunity abounds                                                Massive recovery




Source: International Monetary Fund (2010); The Economist (2010); World Bank (2010); Financial Times
                                                                            An African Tale




                                                “The hopeless continent”

                                                The Economist (May 2000 )




Source: The Economist (May 2000); Time (2009)
                                                                                                                                   An African Tale

                       8
                                                                   1980-
                                                  Economic Growth: 1980-2014 (% per annum)
                       7

                       6

                       5

                       4

                       3

                       2

                       1
                                                                                         Sub-Saharan Africa         World
                       0

                      -1

                      -2
                            1980


                                   1982


                                           1984


                                                    1986


                                                           1988


                                                                  1990


                                                                         1992


                                                                                1994


                                                                                       1996


                                                                                              1998


                                                                                                     2000


                                                                                                            2002


                                                                                                                   2004


                                                                                                                            2006


                                                                                                                                   2008


                                                                                                                                          2010


                                                                                                                                                 2012


                                                                                                                                                        2014
Source: The Economist (May 2000); Time (2009)
                                                                       An African Tale




                                                “Africa offers more opportunity than
                                                any place in the world”

                                                Time (March 2009 )




Source: The Economist (May 2000); Time (2009)
                                                                                                                    A Year Ago We Said

                                     Our Stance                                                        The Result            The Score

                           Recovery led by EMs                                       Asian, Latin America and Africa
       Economics




                                     SSA robust                                            Global bust, African boom


                   Bigger government and greater
                                                                                                On the money, sadly
                            protectionism

                    Price inflation follows printing
                                                                                              Not yet, but it’s coming
                                 money

                   Safe to burn “Are You Missing                                         Unless you bought Chinese
                   The Real Estate Boom” (2005)                                               property, spot on
       Markets




                   In equities, opportunity abounds                                                Massive recovery




Source: International Monetary Fund (2010); The Economist (2010); World Bank (2010); Financial Times
                                                                                 No New Taxes … Not One Dime


                                                      US Federal Deficit (% GDP)
     30

     25


     20


     15

     10


      5


      0


      -5

    -10
           1792


                  1807


                           1822


                                   1837


                                              1852


                                                     1867


                                                            1882


                                                                   1897


                                                                          1912


                                                                                 1927


                                                                                        1942


                                                                                               1957


                                                                                                      1972


                                                                                                             1987


                                                                                                                    2002
Source: www.usgovernmentspending.com (2010)
                                                                                        Writing IOU’s


                                   Total Federal Spending and Median Income (2008 Dollars)




Source: Heritage Foundation based on US Census Bureau and OMB
                                                                                                                    A Year Ago We Said

                                     Our Stance                                                        The Result            The Score

                           Recovery led by EMs                                       Asian, Latin America and Africa
       Economics




                                     SSA robust                                            Global bust, African boom


                   Bigger government and greater
                                                                                                On the money, sadly
                            protectionism

                    Price inflation follows printing
                                                                                              Not yet, but it’s coming
                                 money

                   Safe to burn “Are You Missing                                         Unless you bought Chinese
                   The Real Estate Boom” (2005)                                               property, spot on
       Markets




                   In equities, opportunity abounds                                                Massive recovery




Source: International Monetary Fund (2010); The Economist (2010); World Bank (2010); Financial Times
                                                                     Green As Far As The Eye Can See
                                                                    Red                            %
        • 2002, Nikkei below DJIA for the first time since 1957                     FT-SE All World             48.6

        • 2008 economy of China > Germany                                           FT-SE Developed             44.3
        • 2009 Shanghai > Tokyo                                                     FT-SE Emerging              85.7
        • 2010 economy of China > Japan                                             Claymore Frontier Markets   74.4




                                 %
Russia                      157.3
Argentina                   106.2
Vietnam                      83.7
India                        81.4
Brazil                       69.6
US                           36.5
South Africa                 36.1
China                        34.0
Switzerland                  21.2
Japan                        17.3

http://www.emerginvest.com/WorldStockMarkets//World_Markets.html#
                                     Agenda

Welcome and Overview

Portfolio Review: Delivering Value

The Year That Was

We Aren’t Done: Two Big Bubbles

Building An Investment Case

Putting It Together

Questions & Discussion
                                                 Bubble #1: These Little PIIGieS Went to Markets




            “… [UK] gilts are resting on a bed of nitro-glycerine. High debt with the potential to devalue
                                                       its currency present high risks for bond investors.”

                                                                                      Bill Gross (PIMCO, 2010 )


Source: Bloomberg, International Monetary Fund
                           Bubble #1: Look Who’s Riskier Now


                                 Debt-to-
                      Government Debt- to-GDP (%)
140


120


100

                                                    Advanced Economies
80
                                                    Developing Economies
60


40


20


  0
      2006   2007   2008   2009     2010    2011    2012     2013        2014
                                                                        Bubble #1: A Sad State, Glad It’s Not Us



                                                                         US National Debt (% GDP)
                       140


                       120


                       100


                        80


                        60


                        40


                        20


                         0
                             1792


                                     1807


                                               1822


                                                        1837


                                                                 1852


                                                                          1867


                                                                                   1882


                                                                                            1897


                                                                                                   1912


                                                                                                          1927


                                                                                                                 1942


                                                                                                                        1957


                                                                                                                               1972


                                                                                                                                      1987


                                                                                                                                             2002
Source: www.usgovernmentspending.com (2010); Rogoff and Reinhart (2009) This Time Is Different
                                                                                                          Bubble #1: Sovereign Debt

       US GDP ($'tn)                                                                             14.2                            Debt-to-
                                                                                                                                 Debt-to-GDP a cool 83%
       US Population (mn)                                                                       305.0

       Income Per Person ($)                                                                  46,557

       US National Debt ($'tn)                                                                    12.8

       Debt Per Person ($)                                                                    41,901

       Medicare & Medicaid ($'tn)                                                                 39.8
       Social Security ($'tn)                                                                     10.7
       Drug Liability ($'tn)                                                                       8.6

       US Debt & Unfunded Liabilities ($'tn)                                                      70.9

       Debt & Unfunded Liabilities Per Person ($)                                          232,459


                                                  Obligations-to-
                           Total Debt & Liability Obligations-to-GDP a
                                                    hypothermic 700%


Source: Steven Moore, Bureau of Economic Analysis, Federal Reserve, Census Bureau; usdebtclock.org; Van R. Hoisington & Lacy H. Hunt
                                                              Bubble #1: Sovereign Debt


                  Corporate versus Sovereign Credit Default Spread (Jan’2009 to Feb’2010)




                      Sovereign Debt % GDP

                      • Greece         120%
                      • Italy          120%
                      • Ireland        100%


Source: www.indexuniverse.com
                                                                              Bubble #1: When In Doubt, Print


                                              Board of Governors Monetary Base, Adjusted for Changes in Reserve
                                                             Requirements (BOGAMBNS) ($'bn)
                            2,500



                            2,000



                            1,500



                            1,000



                               500



                                  0
                                      1959



                                                 1964



                                                        1969



                                                               1974



                                                                       1979



                                                                               1984



                                                                                       1989



                                                                                               1994



                                                                                                       1999



                                                                                                                  2004



                                                                                                                         2009
Source: St Louis Fed (2010); research.stlouisfed.org
                                          Bubble #1: The Mugabe Option



Good repayment   fast growth, high revenue, low government spending


Bad repayment    stagnation, high taxation, spending not managed


Refinancing      revolving credit


Default          the Argentinean option


Debt deflation   the Zimbabwe option
Bubble #1: Why Default When You Can Steal It Back?




“By a continuous process of inflation, governments can confiscate, secretly and
                  unobserved, an important part of the wealth of their citizens.”



                           John Maynard Keynes (Economic Consequences of the Peace, 1919 )
Bubble #2: Belief That Economic Growth = Investment Success

                                                                               1900-
                                           Equity Returns and Economic Growth: 1900-2002
         8
                       Real Equity Return (% pa)
         7
                       Real Per Capita Income Growth (% pa)
         6

         5

         4

         3

         2

         1

         0
                                                     Spain




                                                                                                                                                                 Australia
                         Italy




                                                             Japan




                                                                                   Ireland




                                                                                                                                         South Africa
             Belgium




                                            France




                                                                     Switzerland




                                                                                                                     UK




                                                                                                                                    US




                                                                                                                                                        Sweden
                                 Germany




                                                                                                                          Canada
                                                                                             Denmark

                                                                                                       Netherlands
                             “… economic growth rates are … irrelevant to stock returns”


                                                                                                                                   Jay Ritter (2005 )
Bubble #2: Belief That Economic Growth = Investment Success

                                                                                1900-
                                            Equity Returns and Economic Growth: 1900-2002
         8
                        Real Equity Return (% pa)
         7
                        Real Per Capita Income Growth (% pa)
         6

         5

         4                       0.02x
                       y = 2.2 - 0.02
         3

         2

         1

         0
                                                      Spain




                                                                                                                                                                  Australia
                          Italy




                                                              Japan




                                                                                    Ireland




                                                                                                                                          South Africa
             Belgium




                                             France




                                                                      Switzerland




                                                                                                                      UK




                                                                                                                                     US




                                                                                                                                                         Sweden
                                  Germany




                                                                                                                           Canada
                                                                                              Denmark

                                                                                                        Netherlands
                              “… economic growth rates are … irrelevant to stock returns”


                                                                                                                                    Jay Ritter (2005 )
                        Bubble #2: Economic Growth May = Economic Success

           Policy success

    •      Poverty relief

    •      Savings → investment expansion
    •      Urbanisation, industrialisation and export-led growth
    •      Foreign sector surplus
    •      Further anecdotal evidence (retail sales)

    •      Growth 2009




           There is cause for doubt and concern




Source: SEB Merchant Banking, Country Risk Analysis, November 11, 2009 ; Newedge, 2010
                                                                          Bubble #2: Greater Than Eight


                                                                                 Global economy’s Ben Johnson?


                                                                                  • Growth consistently >8%

                                                                                  • 24/31 provinces and
                                                                                    municipalities > average

                                                                                  • Sum-of-parts 10% > whole

                                                                                  • 88% of Chinese doubt the
                                                                                    numbers

                                                                                  • 92% growth from GDFI




Source: International Monetary Fund (2010); * 2010 figure is a forecast
                                                                          Bubble #2: Greater Than Eight


                                                                                 Global economy’s Ben Johnson?


                                                                                  • Growth consistently >8%

                                                                                  • 24/31 provinces and
                                                                                    municipalities > average

                                                                                  • Sum-of-parts 10% > whole

                                                                                  • 88% of Chinese doubt the
                                                                                    numbers

                                                                                  • 92% growth from GDFI




Source: International Monetary Fund (2010); * 2010 figure is a forecast
Bubble #2: Confounding The Chinarazzi


                                House of Cards?


                          • P/B ratio 7x (Nikkei 5x)

                          • Graham and Dodd 50x

                          • Real estate 15-20x income

                          • GDFI = -50% of GDP

                          • Japan grew as fast (but with
                            30% GDFI)




   “… there has never been a bubble that hasn’t burst …”

                                            Peter Tasker
Bubble #2: Confounding The Chinarazzi


                                House of Cards?


                          • P/B ratio 7x (Nikkei 5x)

                          • Graham and Dodd 50x

                          • Real estate 15-20x income

                          • GDFI = -50% of GDP

                          • Japan grew as fast (but with
                            30% GDFI)




   “… there has never been a bubble that hasn’t burst …”

                                            Peter Tasker
                                                                                    Bubble #2: Bulls In A China Shop




Source: SEB Merchant Banking, Country Risk Analysis, November 11, 2009 , www.businessinsider.com/, PIMCO, The Economist
Eventually, All Bubbles Burst


   “Nowhere is an appreciation of history
              more important than in the
             understanding of bubbles.”



                         Benjamin Graham
                            History May Not Repeat Itself … But It Rhymes


                                          How Bubbles End
               0


              -10


              -20


              -30


              -40
Return (%)




              -50


              -60


              -70
                                      Dow J ones
              -80
                                      1929-
                                      1929 - 1940


              -90

             -100
                    0   2    4    6            8     10     12   14   16   18   20
                                                    Years
                            History May Not Repeat Itself … But It Rhymes


                                          How Bubbles End
               0


              -10


              -20
                                                        NAS DAQ
                                                           2000-
                                                    Marc h 2000- Present
              -30


              -40
Return (%)




              -50


              -60


              -70
                                      Dow J ones
              -80
                                      1929-
                                      1929 - 1940


              -90

             -100
                    0   2    4    6            8          10         12    14   16   18   20
                                                         Years
                            History May Not Repeat Itself … But It Rhymes


                                      How Bubbles End
               0


              -10


              -20


              -30
                                                                         Gold
                                                                       1980 -
                                                                       1980- 1999
              -40
Return (%)




              -50


              -60


              -70


              -80


              -90


             -100
                    0   2    4    6      8      10      12   14   16      18        20
                                               Years
                            History May Not Repeat Itself … But It Rhymes


                                      How Bubbles End
               0


              -10


              -20


              -30
                                                                               Gold
                                                                             1980 -
                                                                             1980- 1999
              -40
Return (%)




              -50


              -60


              -70


              -80
                                                                    Nik kei 225
                                                                         1989-
                                                              Dec ember 1989 -Present
              -90


             -100
                    0   2    4    6      8      10      12   14        16        18       20
                                               Years
                            History May Not Repeat Itself … But It Rhymes


                                          How Bubbles End
               0


              -10


              -20
                                                        NAS DAQ
                                                           2000-
                                                    Marc h 2000- Present
              -30
                                                                                             Gold
                                                                                           1980 -
                                                                                           1980- 1999
              -40
Return (%)




              -50


              -60


              -70
                                      Dow J ones
              -80
                                      1929-
                                      1929 - 1940
                                                                                  Nik kei 225
                                                                                       1989-
                                                                            Dec ember 1989 -Present
              -90


             -100
                    0   2    4    6            8          10         12    14        16        18       20
                                                         Years
         The Seduction of Myopia


          “Lord, make me chaste, but not yet.”

St Augustine (Christian Theologian, 354AD-430AD )
                    The Seduction of Myopia


“If an investor merely recognizes the way mob sentiment
                   works, he is far ahead of most others.”

         William Bonner (Mobs, Messiahs and Markets, 2007 )




No direct exposure to China
No advanced-economy government bonds
                                                Agenda

Welcome and Overview

Portfolio Review: Delivering Value

The Year That Was

We Aren’t Done: Two Big Bubbles

Building An Investment Case: A Global Example

Putting It Together

Questions & Discussion
                                                                                             Japan: Land Of The Setting Sun?


                Two decade recession after 1980s’ bubble in equity and property


                                       600
                                                                        Nominal GDP (Local Currency, 1980 = 100)
                                       500


                                       400
                                                                      Japan                 US
                                       300


                                       200


                                       100


                                             0
                                                 1980

                                                        1982

                                                               1984

                                                                       1986

                                                                              1988

                                                                                     1990

                                                                                            1992

                                                                                                   1994

                                                                                                          1996

                                                                                                                 1998

                                                                                                                        2000

                                                                                                                               2002

                                                                                                                                      2004

                                                                                                                                             2006

                                                                                                                                                    2008
                Plagued by demographics, debt and deflation
                Investors have forgotten about the country

Source: International Monetary Fund (2010)
                                                              Or Land Of The Rising Sun?


Monetary prudence


                                  Monetary Base:GDP (2007=100)
        300


        250


        200


        150


        100


         50
                          Japan                US            Euro Area       UK
          0
              Dec-07




                                      Aug-08




                                                    Dec-08




                                                                             Aug-09
                       Apr-08




                                                                    Apr-09
Naoto Kan favours a weaker Yen
Bank restructurings largely complete

Double whammy: operational & earnings leverage
                                                                 Operational, Earnings and Export Leverage



                                                                        Japan's Exports By Destination (% of Total)
                                  60


                                  50


                                  40


                                  30


                                  20
                                                       Asia             US              China

                                  10


                                    0
                                        1979

                                                1981

                                                          1983

                                                                 1985

                                                                          1987

                                                                                 1989

                                                                                           1991

                                                                                                  1993

                                                                                                         1995

                                                                                                                1997

                                                                                                                       1999

                                                                                                                              2001

                                                                                                                                     2003

                                                                                                                                            2005

                                                                                                                                                   2007

                                                                                                                                                          2009
Source: Datastream International & Credit Suisse (2010)
                                                                                  Very Cheap!

PE relative to Global PE close to all-time low
P/B only 0.7 times global figure


                        Cash On Balance Sheet Versus Market Cap (%)
          25
          23
          21
          19
          17
          15
          13
          11
           9
           7
           5
                Japan




                                                   World




                                                                       America
                                                           EMEA
                                        Asia (ex




                                                                  US




                                                                                 UK
                           Europe (ex




                                        Japan)




                                                                        Latin
                              UK)
       We Favour Japan: An Example Of Exceptional Value




And we find compelling cases of value elsewhere

Asia 18.9 (9.8), Brazil 5.0 (2.2)
                Search For Global Value Demonstrated In Metrics


                          FTSE All World Index   Cannon Global Equity Fund

Price-Earnings Ratio             27.2                      12.3

Dividend Yield (%)                2.4                       3.4

Price-Book Ratio                  2.0                       1.6

ROE (%)                           8.1                      17.0

HEPS growth (real) (%)           17.0                      19.5
                                                  Agenda

Welcome and Overview

Portfolio Review: Delivering Value

The Year That Was

We Aren’t Done: Two Big Bubbles

Building An Investment Case: A Domestic Example

Putting It Together

Questions & Discussion
                                                            Missing Value At Home

             We know the negatives …



              •   Job losses and skills deficit (TIMMS)
Structural




              •   Health
              •   Income and wealth inequality
              •   Infrastructure (especially electricity)
Cyclical




              •   Hurt by global slowdown
              •   Domestic recession
                                                                     Few Pigs At This Trough


                                      Trough Level of ALSI Earnings Past Cycles (%)

                                     Jul-61                                      -3.9
                                     Aug-66                                      -7.2
                                     Dec-69                                      -6.6
                                     Feb-82                                     -15.3
                                     Jul-90                                       -10
                                     May-97                                      -2.2
                                     Feb-03                                     -19.8

                                     Average                                     -9.3
                                     Current                                    -28.4




Source: JP Morgan estimates (2010)
                                                                                    Earnings Recovery



60




40




20




 0
                                                                                                        +20%
-20

                     ALSI EPS Growth (%)          Average (%)          Forward EPS Growth (%)

-40
      1961




             1966




                    1971




                                1976




                                           1981




                                                       1986




                                                                1991




                                                                             1996




                                                                                          2001




                                                                                                 2006
                                                          Building Value At Home

             But …



              •   Fiscal austerity
Structural




              •   Monetary prudence
              •   Income/capital +85%
              •   GDFI pipeline (R850bn infrastructure)
              •   Neighbourhood



              •   World Cup
              •   500bp relief
Cyclical




              •   Inventory rebuild
              •   Wage settlements
              •   Earnings and income recovery
                                                      Fallen Angels

Grim backdrop and prospect aversion → fallen angels
A clear example is building and construction
                                                                  Fallen Angels

Grim backdrop and prospect aversion → fallen angels
A clear example is building and construction


                                               2000-
                                     G roup 5: 2000-2010
      8000                                                          700

      7000                                                          600
                    Earnings
      6000
                    Peak Price (Except 2010 - Current)              500
      5000
                                                                    400
      4000
                                                                    300
      3000
                                                                    200
      2000

      1000                                                          100

         0                                                          0
             2000                              2005        2010
                                                                                                   Building Value

                               Group 5: Revenue By Region (%)                 Aveng: Revenue By Region (%)

                         Eastern
                        Europe 4%                                    South East
                                                                      Asia 6%


                                 Africa 18%

                                                                                  Australia
                               Middle East                                         30%
                                  13%                    Southern
                                                        Africa 65%                             Southern
                                                                                              Africa 64%




                     South African R850bn over three years
                     Africa infrastructure $22bn annually
                     Australasian and Pacific infrastructure A$297bn over five years
                     Five- to seven-year construction in Middle East $272bn




Source: Macquarie first South (2010); company reports
                                                  Building Value




Aveng a compelling case

•   Market cap R14bn
•   Cash R8.0bn at last result
•   EBITDA R3.0bn
•   P/B ratio 1.5x
•   PE 7.4x and DY 4.1%

GijimaAST

•   Market cap R1.1bn
•   Cash R625mn at last result
•   EBITDA R250mn
•   P/E ratio 7.5x and DY 6.3% (maiden interim)
                                                    Ben Graham’s Net-Nets


Current assets minus:

• all short-term debt
• all long-term debt

Produces net current assets

• this is compared to stock market value
• > 1 you are being paid to buy the business
• currently three domestic firms, we are invested in two

• Datatec & BP are other recent cases
                                                  Agenda

Welcome and Overview

Portfolio Review: Delivering Value

The Year That Was

We Aren’t Done: Two Big Bubbles

Building An Investment Case: A Domestic Example

Putting It Together

Questions & Discussion
                                Putting It Together

          “The most fertile source of insight is hindsight.”

       Morris Kline (Mathematics: The Loss of Certainty, 1980 )




“May you have the hindsight to know where you've been,
             The foresight to know where you are going,
   And the insight to know when you have gone too far.”

                                                 Irish Blessing
                                           All That Matters Is Value

  “… according to Morningstar, there is only one true value fund in South Africa,
                                                               Cannon Equity …”



                                              Stephen Cranston Investor’s Notebook
                                                    (February 2010, Financial Mail)




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 Research
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Committed                             Competitive


                                          Cognitive
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     Circumspect       Credible



                      Critical

  Contrarian
                            Conclusive
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