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Johannesburg - With traders and investors ducking for cover as jittery global markets prove to be extremely volatile, there may be some value emerging, according to South African fund managers.
Value investing is the practice of looking for intrinsic value within a business that the overall market may be discounting in the near term in terms of the share price.
With many investors bailing from equity markets, share prices have tumbled, with many investment managers concluding that the market offers value at present.
Old Mutual's picks
Feroz Basa, a portfolio manager for Old Mutual's value investment boutique, said that three shares he believes to offer value are Exxaro Resources, Investec and logistics and automotive group Imperial.
"We are very bullish on coal at the moment and see significant upside in Exxaro," said Basa.
On Investec, Basa said that despite the crisis in European and American investment banks, Old Mutual remains bullish on Investec's prospects. Basa said that Investec has conservative management with a strong deposit base and a forward dividend yield of more than 10%, which provides a better return than cash at the moment.
Imperial is an interesting choice from Basa, considering the negative climate for motor vehicle-linked companies. Imperial has unbundled many of its non-core industrial assets and primarily operates in the motor vehicle repair and resale sector.
Basa said: "The new management team has done very well to get rid of non-core assets. Imperial also has a fantastic car rental and logistics business which are doing relatively well as well as holding good offshore assets."
He also points out that Imperial is trading on a low forward price to earnings multiple.
Coronation looks at cash
Neville Chester, a senior portfolio manager at Coronation Fund Managers, said that the institution primarily focuses on a company's cash flows. "We prefer to invest in businesses which are strong cash generators," he said.
Chester believes that the economic crisis has highlighted the value of cash generative businesses.
He said: "In the 'new world' post the credit crunch, debt is going to be far more expensive and far less freely available. Companies that have the ability to grow their earnings without the need to consume cash and raise debt funding will prosper."
According to Chester, one of the best businesses on the JSE in this regard is Naspers. "The satellite TV business, DSTV, generates an enormous amount of free cash flow and can grow subscribers without significant additional capital investment. As an added bonus, it tends to be very defensive in a cyclical downturn."
He said much of this free cash is being recycled into new external growth ventures which have enormous growth potential, mainly in the internet space in other emerging markets.
"At current prices you are gaining access to most of these blue-sky opportunities such as Tencent (China), Tradus (Poland) and Mail.Ru (Russia) for free," said Chester.
SIM: 'Value emerging'
Claude van Cuyck, the head of equities at Sanlam Investment Management (SIM), believes that some value is emerging.
He said: "We try to isolate the value offered through the cycle and thus we don't value a share based on a short-term situation. Our view on a share is based on our calculation of the normalised profit of the company. This is the sustainable level of profits that we believe the company can realistically generate under normalised operating conditions."
In a recent note to clients, Van Cuyck said that he believed that financial counters could be offering value right now. He also said that cyclical retailers and certain industrials were moving into value territory, but would be coming off a high base. As a result, it may be too early to invest.
Ricco Friedrich, a value fund manager at SIM, said there are certain defensive stocks which he believes offer some value. One of these is food retailer Pick n Pay.
He also agrees that Imperial offers some opportunities for investors. "The share price has fallen dramatically and is now already discounting the tough earnings outlook that it is likely to experience in the short term," he said.
Other companies which Friedrich believes offer value are banking stocks, Woolworths and furniture retailer JD Group.
- Fin24.com
