The current cyclical revival in both South Africa’s economy and share prices is largely the result of the generous salary increases and the favourable relaxed climate surrounding monetary policy and, therefore, interest rates, JPMorgan says in its latest report to SA’s asset managers. That’s good news for retailers and investors who like these traditionally safe shares, who could just as well start accumulating some of them now rather than waiting until September/October, when the Christmas lights start twinkling.
JPMorgan says SA currently isn’t really enjoying wonderful economic growth – it’s around 3,5% to 4%/year. And our capital investment and job-creation prospects aren’t up to much either. They differ only slightly from the rest of the Brics, of which we’re now officially the “S”. Nevertheless, JPMorgan predicts growth of around 20% to 25% in company profits for this year, after they rose by 14% in 2010. That could, of course, in turn mean a 20% increase in share prices without valuations, the earnings multiple having to rise further. That’s the kind of opportunity investors shouldn’t allow to escape.
In addition to its preference for mainly SA’s food retailers, JPMorgan also mentions Anglo American [JSE:AGL], Sasol [JSE:SOL], MTN Group [JSE:MTN] and Naspers [JSE:NPN] as good opportunities. Readers will note the shares of SA’s flashy banking sector seem to have fallen out of favour with JPMorgan. That’s fully in line with our own expectations for the banking sector, where the brazen promise of profit growth of inflation plus 10 percentage points made a year or two ago has quietly disappeared, to be replaced by excuses for poor performances.
The construction shares, from large to small, also seem to be falling completely out of favour. Just think of Murray & Roberts Holdings [JSE:MUR], which should have done well out of all the construction work involving the Gautrain and last year’s Soccer World Cup. Instead of a profit, it’s now forecasting a major loss.
Yesterday’s favourites among the smaller construction shares – such as WG Wearne [JSE:WEA] and William Tell Holdings [JSE:WTL], to mention only two – are now high on the selling lists of even the biggest fans of pennystocks.
Let’s return to the retail shares. JPMorgan prefers food, while the analysts at PSG Konsult are more favourably disposed to furniture retailers. Drikus Combrinck, of PSG Konsult in Pretoria East, says the function of credit extension is still shifting from the “big” banks that are too big for new consumers to companies such as Lewis Group [JSE:LEW] and JD Group [JSE:JDG]. The consumer-friendly Capitec Bank Holdings [JSE:CPI] and Abil’s recent takeover of Ellerine – precisely so to obtain access to its debtors – may perhaps underwrite that view. In fact, PSG’s office is fairly excited about the prospects for JD Group, which last year had already shifted its emphasis from furniture dealer to financier, especially now the transaction with Steinhoff also gives it access to motor trading and the necessary financing.
Incidentally, Steinhoff International Holdings [JSE:SHF] is currently the most popular share among the fairly rich Cape Afrikaner nobility. It’s widely recommended by every analyst who did his basic training in Stellenbosch and it’s bought for their personal accounts by people such as
Christo Wiese and
Jannie Mouton. However, Steinhoff’s price is rather reluctant to move away from its current 2500c to 2600c/share. Remember that Steinhoff’s business in Germany is now far greater than the little that’s remained in SA. The share isn’t on JPMorgan’s shopping list.
For the 2012 financial year the food retailers’ shares are currently trading at a forward earnings multiple fluctuating between 12,3 for the expected profit for
Woolworths Holdings [JSE:WHL] and a very healthy – perhaps too expensive – 22,9 for
Pick n Pay Holdings [JSE:PWK]. Some time ago I recommended Woolworths as an excellent investment for dividend income over the next 13 months. Not only have investors already banked the first of the three dividends, but its share price has also increased by a pleasing 10% over a mere two months. Do yourself a favour and buy some more of this winner. The research by JPMorgan (see table) shows there’s more excellent value in it. If you perhaps have a few Pick n Pay shares it would be worth your while switching them for Woolworths.
Among the clothing retailers, JPMorgan chooses only Mr Price Group [JSE:MPC].
De Klerk holds shares in Woolworths and Lewis