If you believe the market correction, which has seen the JSE all-share index down by 10% in the past five weeks, has provided a buying opportunity, here are some South African money managers’ best picks for 2008.
Value and dividends: Sam Houlie, head of equities at Investec Asset Management
- African Bank: African Bank trades at a huge discount to the market in terms of its price earnings (PE) multiple and has a dividend yield of twice the market multiple. Growth in earnings in the next three years will be very strong as a result of the acquisition of Ellerines, so what investors are getting is a cheap stock that is set to grow faster than the market and will offer a double-digit dividend yield going forward.
- Remgro: Remgro is a reasonably priced share with great underlying businesses. In addition, given the announcement earlier this year, there is a strong likelihood that shareholders will get the investment in British American Tobacco (BAT) unbundled to them. BAT is a high-quality, stable business that will provide some protection against the rand weakening. The remainder of Remgro consists primarily of industrials and financials, including a high percentage in FirstRand through its holding in RMH, which is relatively cheap and has a great balance sheet, so we expect Remgro to do very well irrespective of market conditions.
- Liberty International: Liberty International is a high-quality business that is really out of favour with investors and trades at a substantial discount to NAV. At 3% the dividend yield is in line with the market, but this is a company we expect to do very well in the next three to five years, particularly if the rand weakens.
The contrarian view: Adrian Saville — CIO, Cannon Asset Managers
Woolworths Holdings, Truworths International, Lewis Group: In the rising interest rate environment, retailers — especially credit retailers — start to show considerable value. There are three key drivers that have seen domestic retailers being marked down: the rising price inflation and rising interest rate environment; a slowdown in economic growth; and, associated with the above, a downturn in consumer spending.
While the economy will see slower growth going forward, it is likely to stay firm going into 2008. This should coincide with the peak of the interest rate cycle in the first quarter of the new year and it is noteworthy that retailers normally start to perform well once interest rates peak. These three shares are 35% off their peak for the year and they are on PE multiples of less than, or near to, 10. Compared with the market PE ratio of more than 15, these stocks are appealing. Although earnings growth is expected to be muted relative to recent performance, the companies are expected to produce positive growth in headline earnings.
In addition, these companies pay good dividends and on a forward basis. Dividend yields are expected to average in excess of 5%, which is exceptionally attractive. Each counter has strong financials: they have good balance sheets and healthy cash flows. To top this, they have excellent management in place. If investors can look beyond the slower economic growth, the weaker consumer spending and interest rates that are still rising, they will see some rather enticing investment opportunities.
Growth at a reasonable price (Garp): Richard Hasson, portfolio manager of the Old Mutual Growth Fund
- MTN: Reasonable valuation and great earnings growth prospects. MTN is the largest wireless operator in Africa, a strong number-two in South Africa and is growing strongly into the Middle East. MTN recently terminated talks with Telkom on buying into Telkom’s fixed-line business.
- FirstRand: Great valuation, reasonable earnings growth prospects. In a rising interest rate, slowing spending growth environment, South African banks are much more defensive holdings than South African retailers because of their large mortgage books, which offer annuity revenue streams. South African banks trade at about a 30% discount to global emerging market banks.
Currently offering value: Sunel Veldtman, director at BJM Private Client Services
- Bidvest: This blue-chip conglomerate reported a solid set of results with headline earnings per share growth of 21% being in line with expectation. While earnings growth is likely to slow to the mid-teens for 2008 on the back of rising interest rates and falling consumer spending, Bidvest remains in a stable condition with interesting opportunities. The company is defensive, less exposed to the South African consumer and faces less risk with regards to lower growth than Imperial. The forward PE of below 11X represents good value for a well-diversified counter.
- Tiger Brands: This company has announced the unbundling of Adcock Ingram. Tiger Brands, with its superior brands and excluding Adcock Ingram, trades in excess of a 20% discount to South African food retailers. In global markets branded food companies normally trade at premiums to retailers. The company has underperformed the market lately, but there is value to be unlocked by unbundling of Adcock.
- Investec: Because of the impact of sub-prime mortgage problems, Investec’s share price has come under pressure and underperformed relative to financials and the rest of the market. It is worthwhile noting that the company’s exposure to the United States’s subprime debt represents only about 0,4% of the group’s loan portfolio. This has been more than discounted in the current weak share price and we see long-term value in this share.