Cape Town – Members of the equities team of Sanlam Private Investments, which manages R120bn worth of assets for 30 000 clients, have listed their local and international stocks to watch for 2013.
SPI director of investments Alwyn van der Merwe favours the unsecured lender African Bank [JSE:ABL], saying the market remains sceptical about the so-called “bubble” in unsecured lending.
“The strikes in rural areas in South Africa dented profit prospects of the company but the market has been too harsh. The attractive dividend yield in particular justifies a position as a stock pick.”
His other stocks to watch are:
Invicta [JSE:IVT] ticks many boxes. It’s a high-quality company demonstrated by consistently high returns at low levels of volatility and high levels of growth relative to the market. The share’s valuations in 2013 will have a PE of 10.4 times.
Steinhoff [JSE:SHF] performed operationally well in tough conditions in Europe. Its business model is tried and tested, with the potential of corporate action in the next two years.
Kagiso Media [JSE:KGM]: With a well-managed and quality portfolio of broadcasting, new media, and content assets, the group is set to benefit from a rebound in radio advertising. The assets are highly cash generative and the share trades on an attractive forward dividend yield.
Pinnacle Technology [JSE:PNC] stands to benefit the most from the technology refresh cycle following the release of Microsoft’s Windows 8. Pinnacle is a leader in the market and the counter trades on an undemanding multiple of 9 times.
Martin Schmulian, Stellenbosch branch manager, also places his bets on African Bank. “Poor global economic growth and interest rates which are expected to remain low for longer have resulted in interest-sensitive sectors. Although shares falling within this definition are fully priced in general, there are a number of shares that still offer value.”
Schmulian’s stock picks are:
African Bank’s shares have experienced pressure as a result of negative sentiment and investigations into unsecured loans. SPI believes the market has overreacted as Abil offers good value on forward price-earnings (PE) of 7 times.
Standard Bank [JSE:SBK]: Operational achievements were poor the past year however the problems are known. The London business is under review and layoffs could save the bank up to $100m. Standard Bank is a worth buy with a price to book of 1.6 times and a forward PE of 9.9 times.
Old Mutual [JSE:OML]: The inherent value is approximately R28.50. Rand weakness may influence earnings over the short-term. The long-term investment case is still in place and good earnings, from South Africa and Africa, remain intact.
Exxaro [JSE:EXX]: A drop in commodity prices has already been discounted in the share price. Exxaro, excluding Kumba and Tronox, is trading at a low 2.3 times its 2013 earnings but the share is attractive at present levels. Including Kumba and Tronox, the share is trading at a forward PE of 9.3 times.
Senior portfolio manager Humphrey Price is placing his bets on food and commodities counters:
Agri Voedsel (Pioneer Foods) [JSE: PFG]: Expect corporate action, which will improve free float, improving margins and some recovery due to the higher food inflation.
Impala Platinum [JSE:IMP]: The mining industry had a turbulent year but it will emerge stronger. With CEO Terence Goodlace at the helm, expect improvements in refining capacity. Longer-term vehicle sales should boost the demand for platinum. Globally, a rebound in rand platinum prices could lead to better profits and dividends.
Sasol [JSE:SOL]: Lower gas prices must translate into better margins. On a PE of 8 times and a dividend yield of 5%, this conservatively run company will yield steady.
Rainbow Chicken [JSE:RBW]: With Remgro backing Rainbow Chicken, the recent bid for Foodcorp will seriously enhance the food offering and brand power of Rainbow throughout Africa.
Portfolio manager Emile Fourie favours mining giant Amplats and food company Astral.
Amplats [JSE:AMS]: Platinum has been oversupplied since 2009, but moved into deficit because of extended strikes over the past few months; the market should remain in deficit during 2013. Historically, investors paid large premiums above book value during market deficits between 1999-2005 and 2007-2008. Back then Amplats traded at a P/BV above 8, making the current 1.7 times book value look very attractive.
Astral [JSE:ARL] consistently generated a good return on capital and generous dividend payments. The average return on equity over the past seven years was 35.2%, far above the average industrial company. Maize constitutes about 50% of the group’s poultry feed rations. Poultry imports had a significant impact on the local poultry industry and accounts for about 30% of total domestic market supply, depressing local prices. Imports have forced Astral’s profit margins to new lows. Paying a 10 PE on depressed margins is good value for a quality company.
In his list of stocks portfolio manager Bennie van Wyk notes Vodacom as a market leader:
Vodacom [JSE:VOD]: Despite a saturated voice-call market and increased competition in South Africa, integrated service plans are assisting in preserving revenue. Solid strategies have led to effective cost management, exceptional growth in data customers, usage and improved growth in Vodacom’s African markets. Revenue and earnings are showing healthy growth. Vodacom pays out approximately 95% of earnings to shareholders, a 6.8% dividend.
Steinhoff [JSE:SHF], had during the past two years engaged in various corporate actions, which had transformed the business. Integration of Conforama, acquired in 2011, will likely further financial benefits. Despite Europe’s economic woes, the vertically integrated business model and growth in the mass discount market segment are paying dividends. Around 75% of revenue is generated offshore, making this a good rand hedge stock. Not a great dividend payer, but at a 8.5 times one year forward PE, the valuation is compelling and offers the potential of capital appreciation.
Howden [JSE:HWN], while less liquid, this smaller market capitalisation stock offers substance and sustainability. It should benefit from increased expenditure by private and public sectors on infrastructure projects. Earnings have grown strongly over the past few years and the share price has reacted. The valuation is a good buy at a PE ratio of 11.5 times earnings.
Portfolio manager Jean du Plessis supports Van der Merwe’s choice of Pinnacle and Invicta: Pinnacle (trading on a PE ratio of 9 times), because it is well placed to benefit from a new technology refresh cycle - Africa is offering expansion opportunities through acquisitions; and Invicta, because much of the group’s success stems from its extremely successful acquisitive growth. Its recent acquisition Singaporean company, Kian Ann, will add to the track record. “At 10.8 times 2013 forecasted PE the company is of good value.”
Du Plessis also favours:
WBHO [JSE:WBO]: It is one the most consistent performers in the listed South African construction sector. While the share trades at a valuation premium to most competitors, it also has a long-term high-return on equity track record.
Coronation [JSE:CML] has had strong net inflows over the past few years. Margins did come under pressure due to lower performance fees. A recovery in margins should provide for strong earnings growth next year. This, including the generous dividend payout rate, should provide investors with a forward dividend yield in excess of 7%, which will provide an underpin to the share price.
On the international front, head of global equities Pieter Fourie’s stock picks include:
Johnson & Johnson is recovering from a difficult 2008-2011. With the big generic hits largely behind the company’s pharmaceutical business and a number of new product launches, revenues and earnings are set to accelerate from next year. Consensus forecasts are for organic growth to accelerate from 4% in the second half of 2012 to a 5% range from 2013-2015.
Estimated earnings will be at the minimum $6.30 per share by 2015. This is a compound growth rate close to 10% per annum from 2012 levels. If current valuation levels are maintained, the stock could approach $85 per share over the next 18 months from $69, along with a yield of 3.5% set to grow by 7% per annum over the next three years.
McDonald’s has already underperformed in a very strong overall market in 2012 before the recent earnings update. New products and promotions are set to accelerate both the company’s revenue and earnings in 2013-2014.
If EPS does grow from the current depressed level to an estimated $6.43 per share in 2014, there is an upside to $105 over the next two years from $85 currently. Investors will also receive an estimated 4% dividend yield by 2014 based on consensus forecasts, a level not seen since the market lows of 2009, when the dividend yield approached 3.8%.
Anheuser Bush Inbev, the world’s largest beer company, provides sector-leading growth in earnings and dividends per share of high double-digits over the period 2011-2014.
The full benefits of the recent acquisition of Modelo (which owns Corona) will be realised in full by 2015, as EPS is set to jump another 19% from 2014 levels, leaving the stock on an undemanding 12 times the 2015 estimated EPS.
If current valuation levels are maintained and with dividends set to double from 2011-2015, investors could achieve double-digit total returns over the next three years if the company executes well.
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