Here are a few great stocking fillers for those who wish to invest wisely their Christmas bonus over the festive season, handpicked by Sanlam Private Wealth (SPW), Nedbank Private Wealth (NPW) and Cannon Asset Managers.
Alwyn van der Merwe, Director of Investments at Sanlam Private Wealth
Last year I applied a value bias in picking shares for this year; as it turned out, 2014 was a year where cheap shares became cheaper and expensive shares continued their upward trend. For next year I have picked shares that look relatively cheap and have experienced good short-term share price performance.
SuperGroup
This group’s successes are closely linked to that of SA’s economy as they are involved with logistics locally and in Africa, freight management services and motor dealerships. Hardly sounds exciting. The company has, however, managed to grow their earnings stream consistently in a tough environment and still trades at a healthy discount to the market. We believe the earnings trend is likely to continue; therefore there is still some runway left for good share price performance.
Astral Foods
Last year this company faced serious headwinds. Not only did very cheap chicken imports hurt the selling price; high input costs also weighed on margins for the chicken producer. Although chicken imports are still high, feed costs have moderated and restored margins. We foresee continued recovery in margins in the coming year as the full benefit of the lower feed costs is likely to boost margins further.
FirstRand
Having produced a superior return on equity (24% in last year) relative to the other banks, this bank’s capital position would also allow it to continue double-digit growth in advances or personal loans.
Similar to the other three big banks, they also target Africa to grow their footprint; however FirstRand arguably has a better track record in terms of execution. Despite a marginally higher rating than the other banks, the operational performance might well support further share-price appreciation.
Pieter Fourie, Head of Global Equities, SPI UK
eBay
eBay’s ecosystem is one of the best positionedto thrive in the new digital world since onlya small fraction of commerce is currentlyoccurring online and the growth opportunity isunderappreciated by investors. eBay’s shareholder return has been lacklusterin 2014, providing long-term investors withan opportunity to buy into a secular growthcompany at an attractive price. eBay is tradingat 16 times earnings for next year with net cashof $5 billion on the balance sheet. We forecast double-digit revenue andearnings growth for the foreseeable future andthe spin-off of their PayPal business next yearshould provide a further boost to sentiment.
Oracle
Oracle is likely nearing an inflection point of a positive secular growth trend associated with its database machine line and its core license sales growth, combined with an ever-growing opportunity in the software maintenance division. Even though Oracle’s most important (and most profitable) business and infrastructure software (database and middleware) is experiencing some secular pressures, we believe these fears are fully discounted at current share-price levels. Trading at 12 times earnings with a return on equity of 25% investors, we see an upside for long-term investors.
Cognizant
We believe this IT service name is well-positioned to capitalise on market trends, given its focus on high value and industry-specialised services. The improving environment in discretionary IT spending and adoption of cloud-based applications and solutions will drive growth over the long term. Cognizant’s clients are looking for more efficiency, fuelling demand for its services around core applications, outsourcing and IT infrastructure. The recent TriZetto acquisition also strengthens Cognizant’s position, enabling it to take advantage of US/ global healthcare reforms and provide the Group with a significant competitive advantage. This name has excellent balance-sheet strength, robust and free cash-flow generation and an attractive growth profile cumulating in an estimated normalised return on equity of 22%.
Gregory Katzenellenbogen, Director SPW
Anglo American
2014 was a truly annus horribilis for commodity producers. Anglo, in particular, was beset by strikes in the platinum industry, a plummeting iron-ore price and a lower growth outlook for China. These all conspired to send the share down 19% year-to-date. A focus on cost cutting, improved capital management, a target return on equity of 15% and the market realising that Anglo has a ‘gem’ in the form of De Beers could help the share rerate in 2015.
Richemont
The world’s largest jewellery maker with some of the most glamorous names in luxury, such as Cartier and Montblanc amongst others, has weathered the slowdown in China and the recent troubles in Hong Kong. Swiss watch exports to the US increased 22% in October from a year earlier. The US is the second-largest market for Swiss watches, accounting for 11% of exports. A recovering US economy will be an important driver for the company and shareholders could be rewarded handsomely.
Steinhoff
The proposed listing in Frankfurt (around June 2015) will bring Steinhoff to the attention of a whole range of European investors who could see the potential of the company’s European operations as a significant driver of returns in 2015. The German business is performing very well and there is progress in Eastern Europe, both helping to drive a 38% increase in full year profit. Conforama also continues to gain market share in France (15%) which makes up around 70% of divisional exposure. A recovery in Europe in general could be very beneficial for Steinhoff.
Arthur Clayton, Branch Manager SPW
Adcorp
This is a cash-generative staffing solutions business with a five-year average dividend yield of 5.3%. On normalised margins the stock trades at 8x historical profit relative to a global peers average of 15x. Even if there is no growth in the difficult SA environment, the growth and higher rating ascribed to management’s international aspirations should lead to substantial growth in shareholder value.
Afrocentric
Medscheme, the group’s largest subsidiary, is well positioned to capitalise on market consolidation as one of the three biggest healthcare administrators in SA. This business is highly geared towards volumes and economies of scale from new memberships, a key driver of profitability. The group valuation is cheap relative to profitability and growth prospects.
Howden Africa
With 70% of current revenue exposed to the power sector, this engineering company is pursuing growth opportunities in Africa to improve diversification. Despite a strong balance sheet (net cash equal to 15% of market capitalisation) and a five-year median return on equity of 53%, the valuation is very low based on normalised profit levels.
Wilson Bayly
Management has a track record of generating relatively consistent returns in the notoriously cyclical construction industry. With low growth persisting at home, 65% of the order book is now Australia-based. On a normalised operating profit margin of 4.7% and valuation of 11x profit, we see value up to R170.
Sizwe Mkhwanazi, Portfolio Manager SPW
Impala Platinum
The year 2014 was tough for platinum producers after a five-month strike and low platinum prices. Nonetheless Impala currently has a strong balance sheet and little debt, represented by a net debt to equity ratio of 8%. The company is undergoing a cost rationalisation exercise and will look to contain unit cost increases below 8% until 2016. The share trades at a discount to its book value. Encouragingly, the sale of diesel cars in Europe – an important sector for platinum – is slowly starting to recover.
Attacq
Being a capital focused property fund, Attacq focuses on net asset value per share (NAVPS) growth. Since 2005 Attacq has managed to grow its NAVPS at 20% per annum. Adding impetus to its already impressive local pipeline and core income-producing assets is the company’s exposure to offshore opportunities via investment vehicles that allow for exposure to both Europe and Africa. Under current management, we believe that the trend of impressive NAVPS growth will continue over the next three years given its current and expected pipeline and would so benefit investors.
Grindrod
Our liking to Grindrod is largely premised on our belief that eventually the shipping division’s profitability will recover to normal ‘through the cycle’ levels and continued steady growth from the freight services business. Over the last decade Grindrod has focused on building its freight services business which has surpassed the shipping business in size and is expected to produce a steadily growing earnings stream as assets are better utilised and consumption in Africa increases.
We believe the market is currently only paying for this division and pricing the shipping division as if it will not earn profits again. On our normalised earnings assumption we believe Grindrod is trading at 9.5 times normalised earnings, well below the 15 times we believe it justifies.
Humphrey Price, Portfolio Manager SPW
Murray & Roberts
This South African-based broadscale construction and engineering company with wide geographic representation presents value after seeing share prices come down sharply this year. The company has sold off non-core assets, has recapitalised and also refocused on higher-margin business. Trading on a price earning (PE) of 10, dividend yield of 2% and price to book value of 2 times – I expect a 20% plus return in the price from the levels of R21.
Anglo American
I like Anglo due to expected turnaround in ‘consumer-related resources’, namely platinum and diamonds. These divisions are expected to contribute upwards of 35% to group earnings and with a world consumer with extra cash, thanks to lower petrol prices, this bodes well. Trading on a PE of 16, dividend yield of 3% and price to book value of 1, this unloved company will start to rerate at some stage. Time to acquire now and be patient.
Mondi
Mondi has, over the years, transformed itself from a paper company to a packaging company. And because packaging is such an important component of modern-day commerce, this leaves Mondi in a healthy position. Trading on a PE of 12, dividend yield of 3.5% and price to book value of 2 times, this quality company deserves more attention than it receives. With good margins and strong cash generation we can expect another acquisition or special dividend within 12 months. This company is essentially European-based now and a weaker euro should further benefit the bottom line.
Nedbank Private Wealth
Last year’s stocking selection for the 2013/14 period posted a market-beating performance, returning 23,3% (excluding dividends) over the measurement period against just 4,2% by the All-share index. The notable performers were Telkom (+86%), Adapt IT (+39%) and Aspen (+27%). The only laggard in the stocking was Old Mutual, which declined by 10%.
Safari Investments
This newly listed company develops and manages township shopping centres; currently in Mamelodi, Atteridgeville and Sebokeng. Outside of South Africa Safari has a development project in progress in Swakopmund, Namibia. The company intends to distribute 85% – 90% of its earnings in any given year, giving access to some cashflow while you wait for the capital gains. Retained earnings will be used to fund development projects, which will drive NAV growth. Safari intends to double the portfolio in the next four years. Management plans is to grow the group mainly through adding retail space to its existing portfolio, as there is too little township retail stock available to grow through acquisitions. Safari currently trades at a 9,1% forward yield (SAPY: 7,1%); we think Safari is undervalued at this yield given the quality of its assets and management team. At the current price (815 cpu) Safari is also one of the few quality property stocks trading at a discount to NAV (FY 2014: 920 cpu). We expect the share price to rerate and the discount to narrow over time.
ARB Holdings
ARB Holdings is strategically well positioned to continue benefiting from both organic and acquisitive growth as it looks to expand its presence in the lighting and electrical markets. The group remains under-represented in key target markets, particularly in the Gauteng region. We view the group’s ongoing rollup strategy as a good medium-term growth vector.
Master Drilling
Master Drilling is a highly specialised South African company that has developed a cost-effective method of drilling large-diameter holes for underground mining. This is a requirement to maintain operations across different kinds of mining, such as gold, copper, iron ore and coal. The company started operating in 1986 and focuses on raise-boring, which entails drilling sloping shafts in underground mines backwards and upwards, using successful technology that has been developed in-house. However, it has extended its expertise to the drilling of much larger shafts (over 7 metres in diameter and more than a kilometre long). Master Drilling is competent in other drilling methods as well and actively promotes its services as being a safer choice than blasting to achieve the relevant objective. About one-third of the company’s revenue is domestic, but it has spread its geographic influence and most of its other revenue and earnings come from Latin America, with a small portion from the rest of Africa. The company has a large order book for work during the 2015 financial year and beyond, indicating that it should continue to grow earnings as its technology becomes more sought after in the mining industry. Its exposure to numerous commodities and geographies effectively lowers potential investment risk. You will enjoy the earnings growth and potential share price growth that we expect from this innovative and well-established company.
Quantum Foods
Unknown and unloved Quantum Foods presents an exciting opportunity for investors, who, after a tough 2014, is getting ready to dust himself off and grab the new year by the horns. After a rough couple of years for domestic egg and poultry producers such as Quantum, things finally appear to be looking up. Industry consolidation, increased protection against imports and lower raw-material prices all bode well for Quantum’s short- to medium-term earnings prospects. While the majority of Quantum’s listed peers have already rerated significantly in response to this improved industry outlook Quantum, in our view, still offers value. You might want to check his pacemaker before piling into this one, as favourable conditions don’t change the fact that the group still operates in a difficult and highly volatile industry. But shrewd investors would know that under the right circumstances even the most cyclical of companies can present great opportunities to make money. After all, there are no such things as bad assets, only bad prices. We think 2015 could mark a significant turnaround for Quantum, which is why this share would make a great addition to any Christmas stocking.
Sephaku Holdings
If appears that 2015 will be the year where everything will come together for Sephaku Holdings, which has been in a start-up phase over the past few years. Its recently commissioned cement plant will be up and running for a full year, the company will benefit from cost savings as a result of using its own clinker raw material and its Gauteng presence, through Métier, will be expanded to four plants. The reported numbers will become clearer from 2015 as the company moves to stable-state production, and the pending share issue as part of its payment for the Métier transaction will be something of the past. This is likely to result in a reassessment of this counter by the market and a better appreciation of its potential. Early indications are that Sephaku’s cement is well received by customers. An experienced management team, the backing of Dangote Cement (Africa’s largest cement player owned by Africa’s richest person) and a new, more efficient plant all add to the appeal of this counter. The current internal focus of its largest competitor, PPC, also plays into Sephaku’s hands for now, as Sephaku is entering new markets to sell its products. While Sephaku still faces some uncertainties as part of its ramp up, in our view the potential upside is attractive, which makes this a great gift for any Christmas stocking.
City Lodge Hotel Group
The higher-than-usual number of public holidays and strike action saw the occupancies of hotels in the City Lodge Group come under some pressure in 2014. We expect to see a recovery in the growth momentum of hotel occupancies over the next year as local trading conditions improve. Earnings will be given a further boost by the consolidation of the group’s two Kenyan hotels; CLH acquired the remaining 50% share of the hotels earlier in the year. The traction CLH is gaining on its Africa (ex-SA) expansion, together with a pullback in the share price from recent highs, makes the current valuation on CLH attractive. Agreements have been signed for the development of two new hotels in East Africa, Kenya and Tanzania, with more announcements likely to follow in the year ahead. CLH is well positioned for growth, well beyond this Christmas.
Truworths
Don’t just spruce up your wardrobe by taking the salary slip to Truworths to open an account. Hedge yourself by buying Truworths shares. There are many people like her who are able to pay their monthly instalments, and as a consequence the bad-debt cycle for credit retailers will improve. The ringing of the tills doesn’t need to increase dramatically for the positive effect of rising interest income and decreasing bad debts to outweigh any short-term margin pressure. We are also looking forward to some European influence on the group when Jean-Christophe Garbino, the CEO of the French-based Kiabi retail group, takes over as CEO designate in March 2015.
Naspers
Naspers is a leading broad-based multinational group of e-media, entertainment and e-commerce companies. Most of the businesses are market leaders within their segments. We expect Tencent to continue to report robust earnings growth, while the pay TV segment continues to deliver solid financial results and strong cash generation. However, it is the improved financial disclosure on Naspers’ e commerce segment that could result in a rerating in Naspers’ share price. Naspers has the capital to back and fund its prime e-commerce assets through their loss-making years. At current prices, you are purchasing the world’s fourth largest e commerce player virtually for free. Clear structural opportunities remain within the e-commerce segment. However, these are not fully priced in by the market due to the limited disclosure regarding Naspers’ accelerated development spend. It is our view that over the next 12 months there will be further clarity on when the e-commerce segment may reach EBITDA neutrality.
Octodec
Octodec listed on the JSE in 1990 and over the last 10 years has delivered a total compound return to shareholders in excess of 20% pa. Following the recent successful merger with another stellar performer, Premium Properties, the business is set to achieve favourable returns on the 320 properties it owns in the Pretoria and Johannesburg CBDs and surrounding areas. An ongoing strategic focus for the business is its existing large residential portfolio and the continued conversion of office assets into residential units. Management’s track record of unlocking the value of properties through development, refurbishment and renewals is unblemished. With a high first-year income return and a management team with a proven ability to deliver growth, acquiring these return prospects at a discount to NAV is enough to get anyone’s heart racing!
Adapt IT
Although Adapt IT featured in the previous Nedbank Private Christmas stocking, we don’t think there is any need for you to discard this winner in 2015. Following its recent acquisition of cloud-linked business AspiviaUnison, and assuming a reasonable level of performance warranty profitability is achieved over the next 18 months, we believe the purchase of ADI at 810 cps should yield at least a 20% return in the year ahead. In addition, we expect Adapt IT to continue with its IT services rich, acquisition-led strategy in 2015 and more corporate action is likely to boost the share price. Adapt IT also plans a fully paid-up BEE transaction during 2014, with existing staff being among the key role-players in the transaction. With an even greater alignment of shareholder and management interests, you should be swinging for the fences with ADI!
Eskom
Another year goes by with Eskom still desperate for coal in an effort to keep the lights on. Investors did reasonably well out of Keaton Energy over the past year; however, we believe that the best is still to come. Increasing his exposure to the share should continue to generate above-average market returns going forward. Although Keaton had a troubled birth during the financial crisis, it has maintained steady-state production throughout 2014. The bulk of production is being supplied to Eskom at favourable rates. Coal currently remains the cheapest source of energy for electrical power generation in South Africa. The company is fast becoming a key mid-tier coal supplier to Eskom, whose demand for coal seems insatiable as it struggles to meet the country’s demands for electricity. The recently acquired Moabsvelden asset should start production towards the end of 2015 and once the project is fully developed by FY 2016, we expect the group’s production of thermal coal to increase by 50%. This should be a catalyst to rerate the share, as the company will no longer be dependent on a single colliery for the majority of its production. Keaton Energy is ideal for those with a higher-risk profile.
Victor von Reiche, Senior Investment Manager at Cannon Asset Managers
The best investment opportunities reside in places where others aren’t looking. In practical terms, this translates into mid- and small-cap value stocks offering an excellent hunting ground for great long-term investments. This leads us to recommend three under-researched companies as Christmas stocking fillers, namely Afrimat, Sasfin and ELB Group.
Afrimat
Afrimat is listed in the building materials and construction sector. The group is made up of a portfolio of strategically located quarries across the country which gives Afrimat a wide competitive advantage on the basis of high transport costs faced by competitors. The group embarked on a deliberate strategy over the past couple of years to diversify its product offering away from aggregates and ready-mix products into industrial minerals. This initiative was highlighted by the acquisition of Glen Douglas, a metallurgical dolomite mine, from Exxaro three years ago. The Clinker Group was acquired a little more than two years ago, further diversifying revenue streams and giving Afrimat access to a niche building material. These acquisitions have generated excellent returns for Afrimat shareholders. The group’s most recent acquisition was an 80% stake in the struggling listed industrial minerals group Infrasors, with early evidence pointing to a strong turnaround. While corporate finance is littered with the history of failed mergers and acquisitions, Afrimat’s executive team has demonstrated exceptional skill in consolidating assets at very depressed prices which, in turn, shows that a company with a good management team and a robust business model can thrive in a sector that is under pressure. Over the past five years investors have earned a total return of 544% (45% p.a.) at a time when the domestic construction and materials sector has fallen 27% over the same period. After a recent pull back in the share price, we think Afrimat offers investors an attractive opportunity.
Sasfin
Sasfin offers a range of comprehensive financial services focused on the needs of entrepreneurs, corporates, institutions and high-net-worth individuals. Amongst other things, what attracts us to the business is the strong balance sheet, long profit history and the high level of family ownership. On this last point, global evidence shows that companies which have high levels of family or management ownership (FOMO) generally outperform their peers. As intimated, further to the high level of inside ownership, our investment case is premised on a number of aspects. The company has a record of uninterrupted profitability since its listing in 1987 and the balance sheet and operations are managed conservatively. Sasfin is growing strongly into wealth and asset management as well as transactional banking, which should lead to a higher return on equity for the group in time. In a market which we believe to be expensive at the moment Sasfin offers good value, trading on a price-to book ratio of 1.4 times – a 25% discount to the banking sector – and pays investors a 4% dividend yield. Notably, Sasfin’s return on equity is materially higher than the industry average, underscoring the argument that this is a good business available to investors at a good price.
ELB Group
ELB Group is an engineering service provider focused on providing bulk materials handling solutions. A key part of the group’s business is the distribution of earthmoving, mining, construction and quarrying equipment in Africa and trench digging equipment in Australasia. The group is positioned to benefit from increased thermal coal mining activity in South Africa, as the two new coal-fired power stations Medupi and Kusile come online, as well as from increased African mining exports. Strong demand for trench digging equipment in Australia and New Zealand is also driving earnings growth. The group has an experienced management team, with a consistent track record of delivery. From an investment perspective ELB Group has been a stellar performer over the past decade returning, 28% p.a. to investors driven by earnings growth of a similar magnitude. ELB Group remains well positioned to continue growing earnings supported by the increasingly diversified business footprint, growing project pipeline and strong balance sheet which remains debt free. ELB Group is a compelling investment proposition trading on an attractive 11 times historical earnings and makes for an excellent investment heading into 2015.
