Cape Town - What stocks will offer investors the most value in the coming year? A clutch of analysts from Sanlam Private Wealth present their picks for 2016.
Alwyn van der Merwe, director of investments, explains their approach:
"Over the years we’ve learnt that the one-year investment outcome of a limited list of shares can be very random. Sometimes the selected shares might have a good start, only to fade towards the end of the period. Sometimes a share that looks attractive on valuation grounds might be a non-starter as investors take longer to recognise the value.
"Because of these uncertainties I follow a particular approach to ensure we can at least explain the methodology in picking these shares. Last year I followed an approach where I picked shares on valuation criteria in combination with so-called momentum criteria – price momentum and earnings revision. I’ve followed a similar approach to select shares for 2016."
Here are his choices:
This share trades at the same price it did in 1989! It was a company that operated in a very competitive industry where it had little influence on the price of the products it sold and where the returns on the assets were particularly small. However, the valuation looks attractive as the share trades on a 9.5 times forward earnings multiple, which is a steep discount to the rest of the market.
The company has been on an efficiency drive and these improved efficiencies are likely to provide impetus to improved earnings performance. The latter should lead to a higher rating from investors and therefore outperformance for those who believe management will deliver on its promises.
Since the lows recorded in 2009, the share price has displayed a clear bull pattern. The risk is always that one is too late into the action as the share trades on quite an elevated earnings multiple of 17 times.
However, this is a classic case of the management team transforming a company. The result has been a business with higher margins and a better return on capital. We assume that although the low-hanging fruit has been harvested, management can still squeeze out further efficiencies, which is likely to support the share price.
This company screens very well on value but not on momentum as it struggles with substantial headwinds in the industries in which it operates. As it is largely exposed to resources markets, the earnings stream is more cyclical and of course, given the current slump in commodity prices, new orders are significantly down. In addition, Barloworld’s operations in Russia will do little to boost investment confidence.
Management, however, has divested from some non-performing businesses. The increased focus and the limited downside of the operations in the resources area should turn the fortunes for the share price from very depressed levels.
Nedbank is another share selected largely on valuation criteria. The share trades at an attractive earnings multiple of 9.7 times and on a price to tangible book value of 1.6 times. It has delivered steady earnings yet the share price has lagged the sector average.
Nedbank might be boring but we’re comfortable with a bank that doesn’t produce negative surprises. It recently bought into Ecobank – operating in Africa – which should also be earnings accretive. With no negative surprises and a low rating, this one is likely to provide a good return relative to the risk one takes on board when investing in this bank.
Portfolio manager Emile Fourie presents his choices for the local market:
Sasol’s earnings remain very sensitive to both the rand-dollar exchange rate and the oil price.
We view the current low oil price as unsustainable over the longer term. Our long-term normal estimate for the oil price is $85. Additionally, the oil price is likely less susceptible to a Chinese economic slowdown as China only accounts for about 10% of global oil demand compared to the 30% to 40% of most base metals.
Sasol’s balance sheet remains very strong, with a net cash position. At consensus earnings of R38, it trades on an 11 price to earnings – undemanding when compared to the market’s 19 PE on arguably higher earnings.
Impala Platinum [JSE:IMP]
Like other mining industries, the platinum industry is cyclical. Platinum group metal (PGM) prices are currently very low and below normal prices required to sustain the industry. The near-perfect storm that has hit the platinum industry has forced companies to follow various strategies.
Implats’ strategy has been to raise a further R4bn by way of an accelerated book build. The money will allow it to continue its strategy of replacing older, costlier shafts in the Implats lease area with newer, more efficient ones.
It’s important for a cyclical business such as Implats to invest through the cycle – it will allow the company to deliver lower-cost ounces when PGM prices recover one day.
Implats, trading 90% below its 2008 peak price, has quality assets and a balance sheet to see it through until the tide turns.
Standard Bank [JSE:SBK]
Over the past few years Standard Bank’s Global Markets business outside Africa has suffered heavy losses and tied up capital, which has hurt the group’s profitability. After heavily investing in Africa over the past decade, and several years of strong increases in earnings, the group’s growth has slowed. The African franchise remains in good shape, however, despite lower oil prices and difficult operating environments in West African countries.
Over the longer term, our expectation is that economic growth will recover and continue to exceed the economic growth rate in South Africa, which will be good for Standard Bank. The bank is currently trading on a forward P/E of 9.2 and a dividend yield of 4.69%, and has historically been an excellent dividend payer.
Portfolio manager Humphrey Price has two domestic stock picks for 2016:
Sun International [JSE:SUI]
With a major weakening in our currency this year, the first thought that comes to mind is tourism. It’s simply too expensive to travel, so expect inbound and inland tourism to benefit. One company that should benefit is Sun International. This business underwent major restructuring in 2014/15. It has streamlined its African operations, taken control of catering, refurbished hotels and focused on its South American operations.
The company trades on a reasonable PE of 13, an earnings before interest, taxation, depreciation and amortisation margin of 30%, and dividend yield of 2%. But the balance sheet gearing levels are stretched after all these deals, including the latest Peermont merger. Expect solid growth in time from all the significant strategic transactions.
I’ve always liked this little winner. With the recent sale of PostNet and acquisition of core logistics businesses I expect a rerating in due course.
Here’s why: the company is now fixated on what it does best – logistics. Onelogix’s three segments are abnormal logistics (vehicle delivery services), where it’s a market leader, primary products, and other logistics. Onelogix is well entrenched as a niche business. It has a sound delivery track record and management under Ian Lourens is solid.
The company trades on a PE of 14 and dividend yield of 3%. Keep an eye out for all those Onelogix delivery trucks on the road.
Johan Strydom, head of SA Equities, offers the following selection:
Standard Bank [JSE:SBK]
This long-time stalwart of the local market has underperformed over the last number of months, with the weak returns achieved in some of its offshore ventures counting against the company. Now the company has sold off a number of the underperforming assets and is investing the capital in higher-returning assets.
We expect relatively strong earnings growth in the next 12 months and an improving return on equity in the coming years. Trading on a historic PE of 11.4 times, dividend yield of 4.7% and a price-to-book ratio of 1.5 times, the company offers good longer-term value.
For the last few years, this company has continued to expand and enhance its global platform. As far as the offshore operations go, Mediclinic now has exposure to the Swiss, United Arab Emirates (UAE) and UK private hospital markets. The global division’s contribution to revenue currently amounts to 70%.
This diversification strategy has been driven further with the recent reverse takeover of Al Noor, a meaningful player in the private hospital space in the UAE. The transaction will lead to the ultimate listing of Mediclinic on the UK stock market.
The benefits from an international listing – cheaper access to funding – as well as the increased exposure to the fast-growing private hospital industry in the UAE should lead to attractive earnings growth over the coming years.
Although the share price is not cheap at current levels, we believe the earnings growth potential will result in share price outperformance.
Mr Price [JSE:MRP]
This winning clothing retailer’s share price has been under pressure over the last couple of months as the market was disappointed with the latest earnings growth produced relative to the company’s high PE. Its PE ratio has come down and it now looks more attractive relative to the market.
We believe the company is well placed to continue delivering above average earnings growth from both the local and African operations. The current weakness in the share price is giving long-term investors a buying opportunity.
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