Sanlam Private Wealth notes that 2017 was a year of extremes for companies within the JSE Top 40 share with spectacular performances by the likes of Naspers mixed with mediocre ones by companies including Netcare.
“Only 11 of the Top 40 shares outperformed the average of the index, which reflects how narrow the advance of the widely quoted indices was. It was a year in which investors rewarded successful operational results exponentially, but they were equally punitive when companies disappointed,” said SPW.
Several portfolio managers at the financial services group have picked the following six stocks which they believe will offer attractive value in 2018.
Altaf Rooknoodeen, portfolio manager SPW Johannesburg, and Emile Fourie, portfolio manager at SPW Pretoria have picked the following stocks:
The BHP Billiton share price doesn’t fully reflect the recent rally in commodity prices. This important point, along with the knowledge that you’re buying into high-quality assets with strong margins, should provide investors with comfort when investing in this cyclical stock, they said.
The stubbornly high iron ore price and the recent resurgence in the oil price due to production cuts and tensions in the Middle East, both bode well for the company. Net debt has been reduced significantly to June 2017 due to strong cash flows – net debt was down 38% in 2017 to $16 billion – and the company recently announced plans to dispose of its low-margin shale assets.
Capital spend continues in copper and petroleum. BHP trades at a forward P/E of 12.9 times and has a dividend yield of 5.2%, the analysts said.
The portfolio leads pointed out that locally orientated stocks have performed poorly as a result of the economic and political environment in South Africa. Investor pessimism can, however, lead to buying opportunities.
Remgro, they said, has underperformed over the past few years as a result of its investment in Mediclinic (down 52% from its high), and exposure to locally based businesses such as First Rand and Rand Merchant Insurance (RMI).
“We believe Mediclinic’s Al Noor business in the Middle East is turning the corner and will be able to grow earnings longer term off the current low base. It will therefore start to contribute to the South African and Swiss businesses. Additionally, First Rand and RMI look attractive at current price levels.”
Remgro is currently trading at a 15% discount to intrinsic value. At the current price, one is buying a basket of above-average quality assets at an attractive level, the analysts said.
With its successful high-end food offering (26% of operating profit) and strong Australian presence through Country Road and David Jones (41% of operating profit), it’s difficult to compare Woolworths with other local retailers, the SPW analysts said.
They company’s two primary markets, South Africa and Australia, have both experienced tough economic conditions mainly as a result of political dysfunction. Australia has switched prime ministers five times over the past decade, which has impacted the economy negatively over the past few years, they noted.
While the near-term environment is expected to remain tough for consumers in both South Africa and Australia, we see this as an opportune time to invest in a quality company with a highly respected management team.
Woolies trades at a forward P/E of 12.7 times, at an attractive dividend yield of 5.5%.
Recent investments made by the company should bear fruit when the cycle starts to improve. These include IT system overhauls to improve inventory management, the introduction of high-end food concepts in Australian stores, and optimisation of the real estate portfolio.
As with other mining industries, the platinum industry is cyclical. Platinum-group metals (PGM) prices are currently very low and below what we’d consider to be the normal prices required to sustain the industry.
Competitors in the PGM sector will find it increasingly difficult to survive this trying period. Impala Platinum (Implats) has the important advantage of a strong balance sheet to operate through the low-price environment. Additionally, the company has responded by concentrating on controlling costs and improving productivity, SPW said.
Implats is currently trading at 90% below its peak price reached in 2008 and at a 0.6 price-to-book value. We believe the company is worth around R55 per share, and is therefore attractively priced at R40 per share.
With its sales priced in US dollars, Carl Schoeman, wealth manager at SPW Claremont said that Sasol offers investors an attractive hedge against a depreciating rand and a rising oil price.
The stock currently trades at a discount to intrinsic value due to a depressed global oil price and massive capex (hitting a peak in FY17 of R60 billion and R59 billion in FY18 before declining by about 50% in FY19).
Schoeman said that that there are also questions about management’s ability to allocate capital (specifically around the Lake Charles project) and its strategy to hedge 82% of the company’s energy and 70% of the US dollar exposure (which could be viewed positively in the face of massive capex commitments, as it could provide revenue certainty).
“At its current price of R428, the stock is on a historic P/E of 12.89 times and a dividend yield of 2.94%, while still ascribing a value of zero to Lake Charles, which is currently estimated to be worth around R50 per share. There is thus a sufficient margin of safety at current share price levels.
“Positive catalysts for the share price to close the discount between current levels and its intrinsic value include a depreciating rand and firming global oil prices, Lake Charles starting to produce revenue in second-half 2018 and the decline in capex. All these factors should have a positive impact on earnings in FY18 and into FY19,” Schoeman said.
In addition to the construction slowdown in South Africa, PPC has faced several headwinds, including a downgrade of its debt by S&P Global Ratings, which resulted in a rights issue, Schoeman said.
“Other challenges have been a public spat between the company’s former CEO and its board, falling cement prices, and concerns over the economic viability of operations in the Democratic Republic of the Congo (DRC).”
He said that earnings fell by 83% in FY17 and the share price fell to a low of R3.44. The company was also subject to a merger offer in September that would have valued the business at R5.75 per share, only slightly ahead of the book value of R5.33 a share.
The Cape based analyst said that PPC’s share price has reacted to the offer, almost doubling from its lows (which were simply too cheap).
“However, we believe there’s still some headroom for the price to appreciate. If you value the company on a normalised ‘through-the-cycle approach’, its intrinsic value is closer to R10 per share, despite the book value of assets being just over R5 per share. This doesn’t truly reflect reality. Because of management’s continuous writing down of assets, the replacement cost would be closer to R17 per share.”
Schoeman said that potential positive earning catalysts include PPC’s DRC and Ethiopia projects becoming cash generative, and the fact that import duties in South Africa have resulted in a decrease in imports, resulting in local cement prices stabilising in the face of declining supply.
“Capex is declining, so debt reduction and resultant increase in cash flow should follow suit along with improved operational performance associated with the capex. Consensus is for earnings growth of around 430% for FY18 and a further 53% in FY19 putting the stock on a forward P/E+1 of 17.5 times and P/E+2 of 11.5 times.
“There is potential for earnings to surprise on the upside,” Schoeman said.