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Cape Town - This week mining stocks take centre stage on the list of Brett Birkenstock's weekly five shares to watch.
Birkenstock, Director at Overberg Asset Management, lists his five shares with interesting actions for the week ahead:
1. Anglo American Platinum: R255 – R260
Anglo American Platinum [JSE:AMS], which is one of the world's biggest platinum miners, has recently released its first half financial results fro 2015. Amplats delivered earnings of R9.36 per share which is up 471% from the R1.64 for the six months which ended in June 2014.
It is important to keep in mind that the high growth in earnings are from a low base as the platinum industry is recovering from a five month strike in 2014. However, before adding Amplats to portfolios, Amplats needs to show a continued improvement on the results shown in H1 2015, considering the fact that the platinum price has recently dipped below a $1 000 per ounce.
Although Chinese growth has remained robust, the economy is structurally changing from a manufacturing economy to a consumption led economy with Chinese imports falling by 15.5% in the first half of 2015. The structural change in the Chinese economy is likely to put further downward pressure on the PGM prices.
2. Kumba Iron Ore: R120 – R130
Kumba Iron Ore's [JSE:KIO] share price has been moving downwards from R326 in July 2014 to R120 more recently. Despite some green days here and there, it has generally followed a downward spiral. Some analysts might argue that at R120, Kumba is a bargain considering its historical levels and earnings potential. However, with iron ore prices continuing to fall due to the global oversupply, some downside might still be possible.
Investors should be cautious not to try and catch a falling knife. Kumba has recently announced that Sishen, which contributes around 70% towards revenue, has only produced 7.2 Mt of iron ore which is a decrease of 14% compared to Q2 2014 and 19% lower than the previous quarter due to mining feedstock constraints. This is an indication that Kumba is not only facing external headwinds, such as the low iron ore price, but also facing some internal production problems.
The total finished product stocks declined to 4 Mt at 30 June 2015 compared with 6.5 Mt at the end of 2014.
3. Anglo American: R168 – R170
Anglo American [JSE:AGL] has recently released its Q2 2015 production results, which was broadly in line with the company's expectations. Iron ore production from Kumba decreased by 9% from Q2 2014 to Q2 2015, while platinum production increased by 60% to 572 000 ounces as the platinum industry is starting to recover from the five month strike in 2014.
Diamond production decreased by 6% due to lower grades and plant availability. Anglo American produced 8 million carats of diamonds from Q2 in 2014 to Q2 in 2015.
Although a diversified miner like Anglo American is likely to outperform the single commodity producers in a soft trading environment, the structural change in the Chinese economy towards a consumption led economy along with continued commodity price weakness has led to Anglo's price trading at these suppressed levels.
Although there are signs that the platinum industry is starting to recover from the 2014 strike, the general trading environment for all the resource companies aren’t likely to change anytime soon.
4. Woolworths: R95 – R98
Woolworths [JSE:WHL] has continued the stellar run that it had during the 2014 financial year. They recently announced increased group sales of 54.9% year-on-year for the 52 weeks ending 28 June 2015. This increase is driven by the acquisition of Australia's oldest department store, David Jones.
Woolworths acquired the Australian retailer in the second half of last year in a deal worth around $2bn.
Whether the $2bn price tag for David Jones was fair, will remain to be seen as Woolworths are trying to build the biggest retailer in the Southern Hemisphere. Based on early sales figures it would appear that they are on the right track.
Excluding the David Jones acquisition, South African clothing sales increased by 9.6%, general merchandise 7.7%, food sales 13.5% and Country Road 11.5%.
David Jones itself only increased sales by 6.6% for the 52 weeks ending 28 June 2015.
5. Reinet: R27.17
Reinet [JSE:REI], an investment holding company, holds a diversified portfolio of investments of which the biggest is a stake in British American Tobacco, contributing 70% to Net Asset Value (NAV). Contributing almost 20% to Reinet's NAV, is a stake in Pension Corporation. During the year ending 31 March 2015, Reinet invested a further £75m in Pension Corporation, bringing their total investment in Pension Corporation to about £400m.
Of late there has been some speculation that Pension Corporation might list which will unlock substantial value for Reinet shareholders. Other than British American Tobacco and the Pension Corporation, Reinet holds various other unlisted investments and cash which will increase the NAV of the company going forward.
Although investment holding companies usually trade at a discount to NAV, the current discount of close to 30% offers a relative margin of safety for investors at R27.
Do you agree with Brett's stock picks? Tell us why and send us yours.
* Brett Birkenstock is a director at Overberg Asset Management (OAM), an authorised financial services provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: The above article does not constitute financial advice and is not a recommendation. Investors must always seek the advice of professionals and trade with caution. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
