The year 2013 may go down as a strange year in equity investment terms. The South African economy has been wobbly but stocks on the JSE have run hard to reach record high levels. With indications that certain stocks may have run too hard, this could make 2014 a tricky year to pick value creating stocks.
Sanlam A list of favourite stocks for 2014 released by Sanlam Private Investments (SPI) could be useful.
SPI director of Investments Alwyn van der Merwe, has in his top five Kumba Iron Ore, Sun International, BHP Billiton, Imperial and Invicta. Van der Merwe said “I pick shares that traditionally generate high returns on capital but where the latest experience is substantially below the norm. This approach has yielded good results.”
On Kumba Iron Ore he said while latest statistics indicate significant production problems from their Sishen mine, the Kolomela mine has delivered to expectations. “The iron ore price is remarkably firm whilst Kumba’s share price has responded to poor production numbers. The market’s dim view on production problems might well have created a buying opportunity.”
On Sun International, Van der Merwe, said the company can generate relatively steady growth in casino revenues. “New management should be able to improve profitability from operational improvements. Potential major market share loss in the Western Cape could be offset, and against this background SUI is undervalued.”
On BHP Billiton he said “Resource counters are trading at a substantially lower price-to-book valuation compared to 2007/8, despite material write-downs incurred. Commodity prices are generally materially lower, which contributes to a more conservative approach to new projects, and ultimately to higher commodity prices.” He said the sock is a must-have for 2014.
On Imperial Van der Merwe said “We value the high and increasing returns on capital as the company continues to operate and grow high-return businesses. The slowdown in car sales is a concern but we see continued high growth in the annuity aftersales parts and services business. This share is relatively attractive against its peers.”
In Invicta he said the company is well set to continue delivering high returns on capital, which provides the capital to grow through acquisitive or organic means. “The Kian Ann acquisition could provide the next big step forward for Invicta should the Southeast Asian trading conditions improve. The share is not cheap but deserves the rating.”
Gary McNamara, SPI Senior Portfolio Manager Johannesburg, included in his 2014 picks the JSE Limited stock. He said the increased turnover on the JSE plays to its advantage as well as to the benefit of some new listings. “The property sector has seen a number of new listings and the addition of Glencore’s secondary listing adds to increased volumes on the JSE. The change from a five-day to a three-day settlement will free up capital and should contribute to the share being an attractive dividend payer going forward. The valuations are fair, with the share on a multiple of 15 times earnings and a forecast dividend yield of over 4% per annum for 2014.”
McNamara also featured Standard Bank which he says has constantly delivered a poor Return on Equity that has contributed to its poor rating. “The sale of the underperforming offshore business should allow management to focus on the local business, and with its established network into Africa, this will enhance ROE. A rerating of the share could be on the cards.”
McNamara also listed Anglo American and said the quality of Anglo underlying assets cannot be questioned. “Recent management changes as Mark Cutifani took over from Cynthia Carroll, a greater focus on extracting returns from existing assets is on the cards. “Recent disposals of smaller, non-core assets confirm management’s focus. The price to NAV is just too low and makes this company too cheap, despite uncertainty over global growth going into 2014.”
Arthur Clayton, SPI Branch Manager: Durban listed Exxaro, Reunert, Tongaat and Advtech. “I am optimistic about a strong earnings recovery in 2014 based on volume growth in Exxaro’s coal operations, coinciding with potential growth in exports on improvements in Transnet Freight Rail’s line capacity to the Richards Bay coal terminal. It trades on a multiple of 9.5x consensus 12-month forward earnings per share and generates high rates of return on shareholder capital.
On Reunert Clayton said “This electronics and electrical equipment supplier has delivered a five-year median return on shareholder funds of 24%. The stock trades on a low multiple of about 10.7x, a 20% discount to the market.”
He added that “unencumbered cash on the balance sheet of some R11/share leads us to believe either corporate action or greater investment in growth projects is likely in the medium term, which could lead to a rerating.”
On Tongaat Clayton said “We expect strong earnings growth FY2014 to FY2016 based on higher prices and volume growth in the sugar division, and the property unit continuing to deliver on its vast potential. Government could hasten the recovery in sugar by raising the local reference price to stem high import levels. The valuation now offer a margin of safety and looks attractive on a discount to the ‘sum of the parts’ basis and estimated earnings multiple basis of 10.5x.
He said Advtech’s almost 70% of profits are generated in the schools division. “We believe as access to private education becomes a priority, this division’s pricing power and future growth prospects are assured. The stock trades on a multiple of about 16x and historically offers strong returns on shareholder capital.”
Rikus Swanepoel, SPI Senior Portfolio Manager: Pretoria, featured property company, Attacq, in his list. He said the company offers quality assets valued around R13.35 billion and reputable management. Attacq’s three-way growth strategy provides access to property and property developments in
Europe, South Africa and the rest of Africa, said Swanepoel. “The Waterfall Business Estate represents the most significant investment to date, with great longterm prospects.”
He also featured Rainbow Chicken which is now known as RCL Foods. He said the company is pursuing acquisitions of consumer brands in strategic growth markets in the South African and greater sub-Saharan African food sector. “It has increased its ownership of SA’s third-largest food producer, Foodcorp, to 88.1%. Foodcorp’s product range includes Yum Yum peanut butter, Ouma rusks, Pieman’s, Bobtail and Dogmor pet foods, Nola mayonnaise and the maize drink its Mageu Number 1. It manufactures products for Woolworths. With the financial backing of Remgro, it should be a long-term winner.”
Swanepoel also listed RECM & Calibre. He said “Piet Viljoen deployed all the capital in this investment-based company and holds stakes in Dis-Chem, Safari & Outdoor, KWV, Sovereign
Foods, Gold Rush Gaming and Petmin. He paid an average price-earnings ratio of six for these businesses. Although it is trading at a premium to NAV (R11.83), the long-term opportunity is very much intact.”