What’s priced into SA stocks?

1. Markets Outlook: Steve Minnaar Head of Investment Research SA Equity Market: “What is being priced in?”

2. What’s priced into SA stocks?

3. The markets • Since 1 Jan 2004: • SA (SWIX ) up 100%, S&P 500 down 24% in USD, up 5% in ZAR Source: OMIGSA

4. Current Market turmoil ignores valuations • Momentum drove share prices, not valuation Source: CSSS Holt Style Monitor

5. Earnings downgrades and uncertainty • EPS estimate dispersion at very high levels (causing much uncertainty and less valuation focus) • Big downgrades in expectations Source: CSSS Holt Style Monitor Source: Thomson Financial, Morgan Stanley

6. Too early or too late? • Merrill Lynch research shows that being too early does not necessarily pay off • Chart below superimposes all cycles so the troughs coincide • Emerging markets recover sharper than this chart • But 22% down and then 22% up is still less than 1… • The risk-averse move is therefore to wait

7. A long-term perspective – things do change Source: Analytic

8. Valuation framework • We model intrinsic value – we can’t forecast the share price or market in the short term! • Quants can tell us what drives the share price, research tells us what influences value. • Valuation 101 • Cashflow must beat the cost of capital • Really understand cash (vs accounting…) • If this is true, grow your assets to create more shareholder value, if: • You can maintain your asset utilisation • Always include the impact of inflation • Look at real asset base (add back depreciation and inflation) • Normalise margins over time

9. Price/Earnings? • The problem with Price/Earnings • Earnings – spot number – not indicative of long-term model • Angloplats – Dec 2009 EPS forecasts • From >R93 to <R3 within 12 months Source: OMIGSA

10. Long-term value creation • Consistent cash • Deploy effectively • Did not meet cost of capital • No clear plan with underperforming assets Source: OMIGSA

11. What is priced into the SA Market? • Assuming consensus earnings correct and… • Cashflow return, asset growth, EBITDA margin back to normal (in 5 years), then • SA market within 10% of fair value 2007 had well above normal Cash Returns – now factor in normalisation SA Inc’s asset growth was above normal trend (as cashflow was above normal) SA Inc’s EBITDA margins were above trend – now priced in to normalise Source: OMIGSA

12. But pendulums swing… Greed: Conviction of a New Era Capitulation and Contempt Caution Enthusiasm Denial Fear • Several indicators above trend; e.g. • - Technology in 1999 • “Supercycle” for commodities • Global infrastructure for construction Things will never improve again MTN in 2002 Saw some signsbut not enough… Distribution of Returns We are here… And that is the concern After strong bull market it feels odd to stop at fair value Extremes more likely than most investors think

13. SAPPI – Industry needs to change Source: OMIGSA

14. AGL – No more upside in commodities? Source: OMIGSA

15. Shoprite – Priced for perfection Source: OMIGSA

16. Example – Construction in September 2007 Implied CFROI too high Source: OMIGSA

17. Example – Construction one year later Source: OMIGSA

18. Conclusion • Jeremy Grantham – what will we have learned from this crisis? • “We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term. That would be historical precedent”

19. Regulatory Information Old Mutual Investment Group (South Africa) (Pty) Limited Physical Address: Mutualpark, Jan Smuts Drive, Pinelands, 7405 Telephone number: +27 21 509 5022 Old Mutual Investment Group (South Africa) (Pty) Limited is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group is a wholly owned subsidiary of Old Mutual (South Africa) Limited. Reg No 1993/003023/07. The investment portfolios may be market-linked or policy based. Investors’ rights and obligations are set out in the relevant contracts. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares. All employees of Old Mutual Investment Group are remunerated with salaries and standard short-term and long-term incentives. No commission or incentives are paid by Old Mutual Investment Group to any persons. All inter-group transactions are done on an arms lengths basis. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Limited who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Old Mutual Investment Group has comprehensive crime and professional indemnity insurance. For more detail, as well as for information on how to contact us and on how to access information please visit www.omigsa.com.