Don't disregard the dogs

2010-07-23 11:16

Johannesburg - While the recent performance of Telkom [JSE:TKG] and Harmony Gold Mining Company [JSE:HAR] suggest the shares are out of favour with the market, one of the country's best regarded fund managers believes they may be offering good value.

Piet Viljoen, head of investment firm RE:CM, in a recent communication to clients argued for inclusion s of both stocks in a value portfolio.
On Telkom and international counterpart Vodafone, which are prominent in RE:CM portfolios, Viljoen said: "At the kind of cash flow returns that these businesses are currently yielding to shareholders, we anticipate very satisfactory long-term returns from these holdings."
Viljoen argued that telecommunications businesses are reliable cash flow generators, capable of delivering dividend yields of between 5% and 6%. "One does not need much in the way of growth from these initial dividend yields to achieve very attractive long-term yield returns," Viljoen said.

The telecommunications sector also has high entry barriers which render it less vulnerable to competitors, although wireless technology is levelling the playing fields to some extent.
Viljoen is not the only value manager to have been quietly picking up shares in Telkom. Highly-regarded counterparts Allan Gray and the Investec Value funds have been buyers of the company's shares in the first half of the year.
However, not everybody is convinced of Telkom's merits.
Analysts at stockbrokerage Imara SP Reid have retained a "hold" recommendation on the share, reminding investors that Telkom still faces the prospect of a R3bn fine for anticompetitive behaviour to be decided upon by competition authorities.
The share has slipped from 3 700c to 3 300c. This ties in with views of some analyst reports, which believe it is too early to buy Telkom purely on its potential dividend yield.

XXXEternal allure of the yellow metal
Gold shares have also been receiving much attention from asset managers and stockbrokers in the last few months, with many upgrade recommendations being made.

However, these stocks have also delivered a muted performance since January. Harmony and AngloGold Ashanti [JSE:ANG] are in exactly the same place they occupied at the start of the year, and Gold Fields [JSE:GFI] is off 3%.
"Owning gold and gold stocks is an insurance policy against financial catastrophes in the world," Viljoen said.

"While this particular insurance policy is not as cheap as it has been at times in the past, our assessment is that it is still a prudent allocation of capital, given the tumultuous state of global government finances and the likely longer-term impact of global fiscal and monetary activities over the past two years."
The big question mark which could light a fire under gold shares though is the European debt crisis, which has had a knock-on effect on currency markets, including the dollar and euro.

Indebted European nations - including Portugal, Italy, Greece and Spain - have been under pressure as debt levels have risen sharply during the financial crisis, while income has slipped.
"If the tail risks in the global economy (which most financial market participants tend to disregard) come to pass, gold will probably be the last man standing, just as it has been through the ages," concluded Viljoen.

  • Chase - 2010-07-23 15:47

    Well, Telkom can make up R3bil in three years. Telkom Mobile launches in September,the triple play strategy of voice, video, data is only in its infancy. Telkom has also launched an ICT business called DCO (internally at first), but they already have the all important telecomms client list; upon which they can grow an IT business easily. Also guesse who has the best telecomms infrastructure in RSA and who matches MTN,VOD in terms of client facing businesses. Too much of wind in the telecomms market to discount TKG stocks.

  • whips excite me - 2010-07-23 18:25

    I got a check of R3 a share for my TKGs which are trading at R33. With a yield in excess of 8%, all I need is a capital return of 5% for the year to get the long term equity return of inflation + 8% p.a. - the bad news that people speak of is in the price!

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