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Clothing retail: signs of a wardrobe revival

After several seasons of tight consumer wallets, South Africa’s apparel retailers are showing early signs of recovery. Easing inflation, lower fuel costs, and the long-awaited start of interest rate cuts are breathing life back into discretionary spend, with apparel among the first to benefit.

The impact is already evident in retailers’ results. Pepkor is seeing larger basket sizes and more frequent store visits, especially in lower-income segments, where fuel and transport savings are freeing up budget for non-essentials. Mr Price is feeling the uplift too, with renewed appetite for both basics and fashion-led items. TFG stands out with double-digit sales growth in beauty and womenswear – pointing to consumers cautiously indulging again. Its Bash platform is also gathering steam.

It’s early days, but the direction is clear: while consumers aren’t splurging just yet, they’re no longer just window shopping. The wardrobe refresh is back on – and for investors, this could mean the apparel cycle is quietly turning.

Remgro: a defined turnaround plan

At its recent Capital Markets Day, Remgro reaffirmed a clear strategic reset towards disciplined capital allocation and active portfolio optimisation. The firm is prioritising operational efficiency and improving profit margins across its main unlisted assets – most notably Mediclinic, CIVH (Maziv, its fibre business) and Heineken Beverages – by cutting costs to drive value growth.

Mediclinic’s investment case is supported by strong long-term demand for healthcare and a defined turnaround plan. Management is aiming for cost savings of over US$100m, with digitisation and clinical improvements playing a key role in boosting profitability across its multinational footprint.

Within CIVH, Remgro highlighted Maziv’s unique positioning as South Africa’s leading fibre infrastructure provider. With 57 000km of network, open-access economics and first-mover advantage, Maziv is strategically geared to benefit from surging data demand and penetration of underserved markets.

Remgro also reaffirmed a more hands-on capital allocation strategy, putting capital into areas with strong return potential and stepping away from assets that no longer meet its strategic goals. With a strong balance sheet and a long-term investment mindset, the group is well positioned to exploit opportunities in South Africa’s mid-cap private market, where competition for assets remains limited.

CME Group: thriving amid volatility

CME is the world’s leading derivatives exchange, with dominant market share, high margins and a transparent capital allocation policy. Its valuation came under pressure last year amid concerns over competition and growth sustainability following a strong 2019-2022 run, but in our view, this negative sentiment will eventually prove misplaced. CME’s competitive moat remains very strong given its dominance across liquidity, margin savings, and network and product breadth.

The Sanlam Global High Quality Fund invested in CME a year ago, and the share has performed well. However, the valuation upside that emerged amid competitive concerns has largely normalised, and we trimmed the position earlier this year after a strong rally. At current levels, the risk-reward trade-off appears more balanced, and we remain comfortable holding the share at a lower weight.

CME maintains a bias towards transactional revenues. The company has thrived in the recent volatile market environment, as reflected in strong volumes across its asset classes but most notably in its core area, rates and treasury futures. We believe that its leading position in interest-rate futures, combined with strength in other asset classes, is sustainable and the competitive landscape manageable. CME continues to benefit from its suite of risk-management tools that position the firm well against the current global macroeconomic and geopolitical backdrop.

ADP: staying ahead in human capital

The first investor day of Automatic Data Processing (ADP) since 2021 didn’t move the share price much, but it reinforced the company’s strength as one of the world’s largest payroll and tax filing processors. ADP serves over 1.1 million clients and pays more than 42 million workers across 140 countries.

APD issued fresh multi-year guidance largely in line with expectations and reaffirmed its stable outlook: 6-7% revenue growth over the medium term should translate into 9-11% earnings per share growth over time. It also highlighted new opportunities from AI, including the roll-out of ADP Assist across its product suite.

We were encouraged by the breadth of leadership participation and product innovation on display. We did recently trim ADP, but this was purely from a valuation point of view and not due to concern about the durability of the business model. ADP has always traded at a premium to the market, but with the shares trading at 29 times price-earnings ratio one year forward, we were of the view that it was prudent to scale back the position slightly.

Intuit: generating growth through AI

We recently attended a London presentation by the CFO of Intuit, the California-based business software company that is a key holding in some of our global funds. Intuit provides software and services for small businesses, accounting professionals and individuals. Products include small business accounting programme QuickBooks, tax preparation app TurboTax, money management app Quicken and email marketing platform Mailchimp.

A key takeaway was Intuit’s vast addressable market, cited at US$326 billion, with just 5% currently penetrated – and how the company is using generative AI in its software solutions. Intuit’s powerful ecosystem creates a one-stop digital back office for small businesses, effectively automating functions typically handled by a CEO, CFO and head of marketing.

Its next frontier, Intuit Enterprise, aims to go even further, offering tools that help small businesses manage inventory, hiring, and project timelines. These added services boost retention and raise average revenue per customer, as clients become more embedded in Intuit’s ecosystem.

Applied Materials: pioneering innovative technology

Applied Materials supplies the advanced equipment used to make semiconductors and display screens. The company pioneers innovative technology, and tests and manufactures the equipment that is driving the semiconductor industry. It also has a service business that maintains and optimises its installed base, providing a more predictable revenue stream.

Semiconductor production involves more than 1 000 intricate process steps, with circuitry finer than a human hair. In this highly specialised, collaborative industry, companies focus on innovation rather than market share battles – creating strong moats and relatively low competition.

Semiconductor capital equipment companies are often seen as highly unpredictable year to year, and many have traded at a discount to the market over time, despite returns far higher than the market. Short-term uncertainty should translate into long-term spoils if you’re prepared to invest ‘through the cycle’.

Our positive view of Applied Materials is driven by the company having the industry’s most comprehensive product portfolio, serving roughly 60% of total equipment spend. Its ability to offer co-optimised and integrated materials solutions for further semiconductor scaling will enable continued market share gains. Applied Materials screens very highly in terms of quality metrics, both on a stand-alone basis and versus the overall global equity market.