Cape Town - Overberg Asset Management share analyst Kirk Swart looks at shares that are expected to flourish after the budget, in this week's share watch.
Warren Buffett's Berkshire Hathaway is known for investing in US airline companies. Buffet used to be sceptical of airline shares. However, ever increasing global air traffic and lowering oil prices convinced Buffett to invest in the airline industry in 2016 after describing airlines as having “a bad first century”.
For South African investors wanting to invest in the airline industry, Comair is the answer. Lower oil prices and the stronger rand will increase margins. Comair operates as a British Airways franchise which is an affiliate member of Oneworld Airline Alliance.
For the first half of the 2018 financial year, Comair delivered a profit after tax of R203m. The comparative period last year saw a profit after tax of R199m. Earnings per share increased to 43.6 cents from the previous period's 42.8 cents.
If the estimated growth rates of the 2019 budget can be achieved, expect Comair to do very well. In an environment of low oil prices, stronger rand and a growing economy, Comair is in a sweet spot.
In his recent Budget Speech, Malusi Gigaba announced that South Africans will be paying more for their sins. Excise duties on a 340ml can of beer, cider or alcoholic fruit beverage will increase to 161.5c; up from 146.9c. Wine drinkers will be paying 30c per litre more at R3.91 per litre. The excise duty of hard liquor will also increase by 8.5%.
Taxes like these will influence companies like Distell, which owns household alcoholic beverages like Savana, Klipdrift, Hunters and JC le Roux. The company recently released its unaudited results for the six months ending 31 December 2017.
Revenue increased by 9% with volumes only increasing by 3.7%. Earnings before interest tax dividends and amortisation (EBITDA) was up 11% and when adjusting for foreign exchange movement it increased by 7%.
RCL Foods [JSE:RCL]
RCL Foods is looking to expand its product range with the aim of a diversified revenue stream. With that in mind, RCL Foods recently completed a R124m expansion at its pet food plant. With this move, RCL is trying to increase earnings from outside poultry (Rainbow Chickens) which has been hit hard by cheap imports and the drought.
The pet food sector in South Africa is a R5bn per year industry. RCL argues that the pet food industry is less exposed to individual commodities.
RCL Foods has seen a nice run in its share price following the ANC’s elective conference in December 2017. Before the conference it was trading at around R14.50. By middle February, the share touched R18.65. Since then the share price has come back to around R17.20.
City Lodge Holdings [JSE:CLH]
City Lodge will be a direct beneficiary of an economic recovery in South Africa. Occupancies in South Africa fell to 64% from 66% in the six months ending December 2017. The company cites depressed business confidence levels as the reason for the drop. Group revenue decreased by 0.5% to R787m with normalised headline earnings (NHEPS) decreasing by 11.6% to R174m.
Despite the poor numbers, investors are buying City Lodge shares. The share was trading at R115 in December 2017 and by the end of February 2018, the share was trading at R178. It seems that investors are looking beyond the current economic conditions in South Africa.
Italile is South Africa's largest tile retailer and manufacturer. The company is starting to see a revival in the building supplies sector. According to CFO, Brandon Wood, “high income earners who last year held back on spending are back in the market.” Italtile sells its products via three brands, namely CTM, Italtile Retail and TopT.
For the year ending December 2017, headline earnings per share (HEPS) increased by 5% to 48.6c. Adjusted headline earnings per share also increased by 5% to 46.5c. Due to acquisitions made, trading profit increased by 21% to R716m.
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*Kirk Swart is an analyst at Overberg Asset Management, an Authorised Financial Services Provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
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