Our opinion on the current state of CORONAT(CML)

Coronation Fund Managers (CML) is a significant figure in South Africa’s asset management landscape, recognized as one of the largest managers in the country and the only one directly listed on the Johannesburg Stock Exchange (JSE). Established in 1993, the company experienced robust growth until a pivotal leadership change in 2015 when Adrian Pillay took over as CEO following the resignation of the founding CEO.

Leadership and Investment Challenges:
Despite Pillay’s strong qualifications, his tenure has been challenging. Notably, Coronation faced substantial losses due to investments in African Bank and Steinhoff, both of which significantly underperformed. These financial missteps have shaken investor confidence, leading to a re-evaluation of Coronation’s asset selection capabilities and resulting in substantial institutional outflows. The asset management sector heavily relies on maintaining trust and confidence, and these setbacks highlight the inherent risks in fund management where even experienced teams can face significant challenges.

Regulatory and Financial Setbacks:
Further complicating matters, in February 2023, Coronation lost an appeal with the South African Revenue Service (SARS), resulting in additional tax liabilities and a potential suspension of its dividend. This development adversely affected the company's share price. For the fiscal year ending 30th September 2023, Coronation reported a 2% decrease in revenue and a significant 50% drop in headline earnings per share (HEPS). The company managed R602 billion in assets, but noted net outflows amounting to 10% of average assets under management (AUM). This outflow was attributed to broader industry trends, including global emerging markets' declining demand after a decade of underperformance and shrinking savings pools within South Africa.

Recent Financial Performance:
Looking ahead, a trading update for the six months ending 31st March 2024 suggested a potential recovery in HEPS, estimating it to be between 199.7c and 200.9c, compared to just 6.2c in the previous corresponding period. This forecast indicates some stabilization, although it’s early to determine a full turnaround.

Stock Performance and Investment Outlook:
From a technical analysis perspective, Coronation’s stock performance mirrored its operational challenges. The share price saw significant growth from 2008 until it peaked at R115 per share on 30th December 2014. Under new management, coupled with several external setbacks, the share price declined notably, reaching a low of 2541c during the COVID-19 outbreak. Since then, the trend has been mostly sideways to downward.

Currently, with a price-to-earnings (PE) ratio of around 17.9, the shares might appear reasonably valued in comparison to historical averages and the broader market. However, the sustained downward trend and ongoing challenges suggest caution. Investors are advised to monitor the stock for a clear break above the long-term downward trendline before considering entry, as the current market conditions and company-specific factors do not yet indicate an imminent reversal of the downward trajectory.

Conclusion:
For potential investors, Coronation presents a mixed picture. While there are signs of potential stabilization, the historical performance, ongoing outflows, and recent financial results suggest that careful consideration and continued monitoring are advisable before making investment decisions in this stock.