FNB’s top 5 stock picks in South Africa

South African company valuations are less attractive than a year ago, but several local companies still offer good value.

According to Chantal Marx, Head of Investment Research at FNB Wealth and Investments, there is still an upside in certain sections of the SA Inc. basket.

Rand hedge counters also seem to offer very good value.

“While there is still a very strong thematic thrust behind the US-based technology stocks, these companies now look expensive, and this has prompted us to look for better value elsewhere,” said Marx.

“The market has readjusted its interest rate expectations for the US Federal Reserve and by extension, interest rates globally.”

“It is now expected that we will only see a further two cuts of 0.25% each in the US. The shallower than initially anticipated cutting cycle will likely be negative for risk assets.:

The dollar is also expected to remain strong as US President Donald Trump’s policies gain traction.

With possible disruptions to global trade, is generally regarded as a further negative for emerging markets.

FNB Wealth and Investments thus enters the year with some trepidation around overall market returns and believes that 2025 is a good year for “stock pickers.”

Below are the top local companies that FNB Wealth and Investments think are strong companies:

Naspers 

Naspers is South Africa’s most valuable company, and its most notable asset is Prosus, which, in turn, has a large shareholding in Chinese internet giant Tencent.

Despite the persistent regulatory risk and current macroeconomic weakness in China, FNB remains positive on Tencent’s near- and long-term growth prospects.

This is especially the case in spaces like fintech, cloud computing and AI.

“We believe there are significant growth opportunities for several of the group’s assets, as was the case previously with Tencent and Delivery Hero, which have since lived up to their potential,” said Marx.

“Recent acquisitions in the payments space in India and the travel sector in Latin America could be a catalyst for better diversification and growth in the future.”

“The group’s focus on high-growth sectors (such as fintech and edtech) within emerging markets (such as Latin America, Asia, and Eastern Europe), is particularly encouraging.”

That said, Prosus, Naspers and Tencent share prices came under pressure early in January after Tencent was placed on the US Department of Defence’s Section 1260H blacklist,

This refers to companies suspected of doing business with the Chinese military.

Although this does not pose a direct risk to the fundamentals of the group, it does restrict trade in its shares.

“While Tencent has denied any business dealings with the Chinese military, this may place a negative overhang on the name, at least in the short term.”

“We think that following the sell-off in the three counters, they are offering even better value in our view.”

Sun International

Sun International operates in the gaming and hospitality industry and is best known for the Sun City resort.

Marx said that the group’s simplification and streamlining of its operations post-Covid-19 continues to bear fruit.

Sun International also stands to benefit from increased international travel and local tourism.

Although Sun International’s deal to acquire Peermont, the owner of Emperor’s Palace, has not been endorsed by the Competition Commission, FNB believes that the downside price has been factored in.

“The share price has trended slightly downward since this announcement in October 2024 and the current levels serve as an attractive entry point,” said Marx.

“Additionally, if the deal does not take place, Sun International will be cash flush and we would anticipate increased and attractive cash returns to shareholders in the short-to-medium term.”

Sun International is currently trading on an undemanding 12-month forward PE of 9.0 times, with reasonable near-term growth expected to come.

The Foschini Group

The Foschini Group also looks set for sustained positive revenue development despite the pressure on consumer spending.

This comes off the back of the expansion of the brand portfolio, and further growth in online retail turnover in South Africa driven by Bash.

Marx said that the latest results have been relatively soft, but they have highlighted an improving trading environment

“The group’s keen focus on gross margin expansion has been paramount, with all regions persistently gaining impressive traction,” said Marx.

“Online platform sales have continued to grow, with the group highlighting that there were more than 245 million engagements with its online platforms in 1H25.”

“The group’s loyalty programme is also supportive of its customer retention, with over 38.8 million members it continues to grow by the high-single digits.”

She added that the company benefits from its local manufacturing approach, which gives it a clear competitive edge.

The group should also benefit from continued monetary easing given the group’s approach to managing the debtors has been tight and more on the conservative side.

“Lower interest rates should also offer lower finance costs for the group going forward, which, together with continued robust cash generation, provides a positive underpin for further deleveraging over time, particularly paying down the debt associated with the acquisition of Tapestry in 2022.”

TFG is trading a forward PE of 12.9 times, which Marx said is attractive from a longer-term perspective and is currently trading at a 6% discount to its sector average.

Coronation Fund Managers

Marx said that Coronation is a well-established asset manager and has built a trusted brand over time.

Due to its size, the firm is enjoying economies of scale as it has a relatively small fixed-cost base.

On top of the name, the group has a long track record of strong cash generation and provides an attractive dividend for income-seeking investors.

The group also received a boost after beating SARS at the Constitutional Court. Not only did this allow the group to declare a special dividend, but it also eased any regulatory fears.

Although the establishment of the two-pot system is set to introduce short-term headwinds, it is also expected to have a relatively small impact overall.

“Asset management companies trade in line with market cycles, and while the market could remain volatile amid prevailing global geopolitical risks,” said Marx.

“We anticipate an improvement in the macro environment will bolster earnings growth and in turn positive returns from risk assets, which should support AUM growth as well.”

“In the same breath, easier economic pressures on consumers will likely support improved saving and investment dynamics, and therefore lower outflows– notwithstanding increased fund flows to offshore allocations.”

Coronation is currently trading on a 2.2% P/AUM, which is below its long-term average P/AUM of 3.0%. The group also has a dividend yield of 11.1%.

Bidcorp

Bidcorp is a food service product distributor in several areas, such as the United Kingdom, Europe, the Middle East, South America, the Asia-Pacific region, and South Africa.

Marx said that the group has a well-diversified client base and businesses at different life cycles across developed and emerging geographies.

The group is also not overly exposed to specific clients or categories, giving it a healthy diversification across the portfolio.

Although consumer demand remains subdued amidst the cost-of-living crisis in many countries, the group continued to deliver record levels of growth in its most recent update ended October.

“Margins also held up well and came in ahead of the comparative period, assisted by a slight improvement in the UK and despite many other businesses sacrificing some gross margin to grow sales.”

“Looking ahead, the company remains financially strong, with relatively low levels of gearing and a robust business model with solid diversification and defensive characteristics.”

“In addition, management remains flexible, nimble, and highly adaptive in maintaining reputable service levels and relevance to targeted markets.”

Bidcorp is currently trading on a forward PE of 16.9 times, below its long-term average of 20 times.