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Alwyn van der Merwe, director of investments
I pick shares that traditionally generate high returns on capital, but where the latest experience is substantially below the norm. This approach has yielded good results.
Kumba Iron Ore
Latest statistics indicate significant production problems
from their Sishen mine. However, Kolomela has delivered to expectations.
The iron ore price is remarkably firm whilst Kumba’s share
price has responded to poor production numbers. The market’s dim view on production
problems might well have created a buying opportunity.
Sun International
Sun International can generate relatively steady growth in
casino revenues. New management should be able to improve profitability from operational
improvements. Potential major market share loss in the Western Cape could be
offset, and against this background SUI is undervalued.
BHP Billiton
Resource counters are trading at a substantially lower
price-to-book valuation compared to 2007/8, despite material write-downs incurred.
Commodity prices are generally materially lower which
contributes to a more conservative approach to new projects, and ultimately to higher commodity
prices. A must-have for 2014.
Imperial
We value the high and increasing returns on capital as the
company continues to operate and grow high-return businesses. The slowdown in
car sales is a concern, but we see continued high growth in the annuity
aftersales parts and services business. This share is relatively attractive
against its peers.
Invicta
It is well set to continue delivering high returns on
capital, which provides the capital to grow through acquisitive or organic
means. The Kian Ann acquisition could provide the next big step forward for
Invicta should the Southeast Asian trading conditions improve. The share is not
cheap but deserves the rating.
Richard Champion, director of investments: SPI UK
The weighted average return from last year’s selections –
Johnson & Johnson, McDonald’s and AB InBev – year-to-date is 51.5% compared with the JSE’s
17.1%. In US dollars, the return comes out at 24.4% while the JSE has fallen by 3.9%.
The SPI UK team has selected five new stocks for 2014.
Samsung Electronics
Samsung is a global leader in smartphones, memory chips and
semiconductors. Revenue and earnings are expected to grow by 8% compound over
the next several years. With 33% of market cap in cash and a 2014 PE ratio of
under seven times, there is plenty of potential upside.
Accenture
Accenture, the leading global management consulting,
technology services and outsourcing company, is superbly positioned to benefit
from a secular growth shift towards high value-added services. It is a highly
cash generative business committed to returning cash to shareholders. On a
forward PE of 16 times, the shares are undemanding given the massive quality of
the franchise.
Intertek
Its 35% return on equity (ROE), best-of-breed structural growth and two-year
forward PE ratio of 17.5 times makes Intertek world number three in the high growth and
oligopolistic testing, inspection and certification market – an attractive play on an upturn
in global growth and the product innovation cycle.
Philip Morris International
A prodigious share repurchase programme, high profit margins
and massive free cash-flow generation underpin its consistent dividend growth. News
surrounding e-cigarettes and rotation into value-orientated names have moved the shares to
the widest discount to the S&P 500 in three years.
AIG
AIG has transformed its fortunes since the financial
crisis, focusing on a simplified business model and massive reduction in
complex derivative exposure. A recent re-entrant to the dividend list, AIG
executed a $12bn share repurchase in 2012 and is focused on improving
shareholder returns from a low price-to-book valuation.
Arthur Clayton, branch manager: Durban
Exxaro
I am optimistic about a strong earnings recovery in 2014
based on volume growth in Exxaro’s coal operations, coinciding with potential
growth in exports on improvements in Transnet Freight Rail’s line capacity to
the Richards Bay coal terminal. It trades on a multiple of 9.5x consensus
12-month forward earnings per share and generates high rates of return on
shareholder capital.
Reunert
This electronics and electrical equipment supplier has
delivered a five-year median return on shareholder funds of 24%. The stock
trades on a low multiple of about 10.7x, a 20% discount to the market.
Unencumbered cash on the balance sheet of some R11/share leads us to believe
either corporate action or greater investment in growth projects is likely in
the medium term, which could lead to a rerating.
Tongaat
We expect strong earnings growth FY2014 to FY2016 based on
higher prices and volume growth in the sugar division, and the property unit
continuing to deliver on its vast potential. Government could hasten the
recovery in sugar by raising the local reference price to stem high import
levels.
The valuation now offers a margin of safety and looks attractive on a
discount to the ‘sum of the parts’ basis and estimated earnings multiple basis
of 10.5x.
Advtech
Almost 70% of profit is generated in the schools division.
We believe as access to private education becomes a priority, this division’s
pricing power and future growth prospects are assured. The stock trades on a
multiple of about 16x and historically offers strong returns on shareholder
capital.
Gary McNamara, senior portfolio manager: JHB
JSE
The increased turnover on the JSE plays to its advantage as
well as to the benefit of some new listings. The property sector has seen a
number of new listings and the addition of Glencore’s secondary listing adds to increased volumes on
the JSE.
The change from a five-day to a three-day settlement will
free up capital and should contribute to the share being an attractive dividend
payer going forward. The valuations are fair, with the share on a multiple of 15 times earnings
and a forecast dividend yield of over 4% per annum for 2014.
Standard Bank
This has constantly delivered a poor ROE that has contributed to its poor rating. The sale of the underperforming
offshore business should allow management to focus on the local business, and with its established
network into Africa, this will enhance ROE. A rerating of the share could be on the cards.
Anglo American plc
The quality of the underlying assets cannot be questioned
and, with recent management changes as Mark Cutifani took over from Cynthia
Carroll, a greater focus on extracting returns from existing assets is on the
cards.
Recent disposals of smaller, non-core assets confirm management’s focus.
The price to net asset value (NAV) is just too low and makes this company too cheap, despite uncertainty over global growth going into
2014.
Rikus Swanepoel, senior portfolio manager: PTA
Rainbow Chicken
Now known as RCL Foods, it is pursuing acquisitions of consumer brands in strategic growth markets in the South African and greater sub-Saharan African food sector. It has increased its ownership of SA’s third-largest food producer, Foodcorp, to 88.1%.
Foodcorp’s product range includes Yum Yum peanut butter, Ouma rusks,
Pieman’s, Bobtail and Dogmor pet foods, Nola mayonnaise and the maize drink Mageu Number 1.
It manufactures products for Woolworths. With the financial backing of Remgro, it should be a long-term winner.
RECM & Calibre (RAC)
Piet Viljoen deployed all the capital in this
investment-based company and holds stakes in Dis-Chem, Safari & Outdoor, KWV, Sovereign Foods,
Gold Rush Gaming and Petmin. He paid an average price-earnings ratio of six for these businesses.
Although it is trading at a premium to NAV (R11.83), the long-term opportunity
is very much intact.
Attacq
A Pretoria-based property company with quality assets
(R13.35bn) and reputable management, its three-way growth strategy
provides access to property and property developments in Europe, South Africa
and the rest of Africa. The Waterfall Business Estate represents the most
significant investment to date, with great longtermprospects.
Samsung Electronics
The largest electronics and information technology company
in the world based on revenue, it currently trades at a deep discount to its
peers on a forward PE of six (Apple trades on a forward PE of 12). The
attraction lies in its $50bn cash pile, equivalent to more than a 5th of
its market capitalisation.
Note: Swanepoel owns all the shares mentioned.
