Author: Sanlam Private Wealth
Alwyn van der Merwe, Director of Investments
Last year I applied a value bias in picking shares for this year; as it turned out, 2014 was a year where cheap shares became cheaper and expensive shares continued their upward trend. For next year I have picked shares that look relatively cheap and have experienced good short-term share price performance.
Super Group (JSE:SPG)
This group’s successes are closely linked to that of SA’s economy as they are involved with logistics locally and in Africa, freight management services and motor dealerships. Hardly sounds exciting.
The company has, however, managed to grow their earnings stream consistently in a tough environment and still trades at a healthy discount to the market. We believe the earnings trend is likely to continue; therefore there is still some runway left for good share price performance.
Astral Foods (JSE:ARL)
Last year this company faced serious headwinds. Not only did very cheap chicken imports hurt the selling price; high input costs also weighed on margins for the chicken producer. Although chicken imports are still high, feed costs have moderated and restored margins. We foresee continued recovery in margins in the coming year as the full benefit of the lower feed costs is likely to boost margins further.
FirstRand (JSE:FSR)
Having produced a superior return on equity (24% in last year) relative to the other banks, this bank’s capital position would also allow it to continue double-digit growth in advances or personal loans.
Similar to the other three big banks, they also target Africa to grow their footprint; however FirstRand arguably has a better track record in terms of execution. Despite a marginally higher rating than the other banks, the operational performance might well support further share-price appreciation.
Pieter Fourie, Head of Global Equities, SPI UK
eBay
eBay’s ecosystem is one of the best positioned to thrive in the new digital world since only a small fraction of commerce is currently occurring online and the growth opportunity is underappreciated by investors.
eBay’s shareholder return has been lacklustre in 2014, providing long-term investors with an opportunity to buy into a secular growth company at an attractive price. eBay is trading at 16 times earnings for next year with net cash of $5 billion on the balance sheet.
We forecast double-digit revenue and earnings growth for the foreseeable future and the spin-off of their PayPal business next year should provide a further boost to sentiment.
Oracle
Oracle is likely nearing an inflection point of a positive secular growth trend associated with its database machine line and its core license sales growth, combined with an ever-growing opportunity in the software maintenance division. Even though Oracle’s most important (and most profitable) business and infrastructure software (database and middleware) is experiencing some secular pressures, we believe these fears are fully discounted at current share-price levels. Trading at 12 times earnings with a return on equity of 25% investors, we see an upside for long-term investors.
Cognizant
We believe this IT service name is well-positioned to capitalise on market trends, given its focus on high value and industry-specialised services. The improving environment in discretionary IT spending and adoption of cloud-based applications and solutions will drive growth over the long term. Cognizant’s clients are looking for more efficiency, fuelling demand for its services around core applications, outsourcing and IT infrastructure.
The recent TriZetto acquisition also strengthens Cognizant’s position, enabling it to take advantage of US/ global healthcare reforms and provide the Group with a significant competitive advantage. This name has excellent balance-sheet strength, robust and free cash-flow generation and an attractive growth profile cumulating in an estimated normalised return on equity of 22%.
Gregory Katzenellenbogen, Director
Anglo American (JSE:AGL)
2014 was a truly annus horribilis for commodity producers. Anglo, in particular, was beset by strikes in the platinum industry, a plummeting iron-ore price and a lower growth outlook for China. These all conspired to send the share down 19% year-to-date. A focus on cost cutting, improved capital management, a target return on equity of 15% and the market realising that Anglo has a ‘gem’ in the form of De Beers could help the share rerate in 2015.
Richemont (JSE:CFR)
The world’s largest jewellery maker with some of the most glamorous names in luxury, such as Cartier and Montblanc amongst others, has weathered the slowdown in China and the recent troubles in Hong Kong. Swiss watch exports to the US increased 22% in October from a year earlier. The US is the second-largest market for Swiss watches, accounting for 11% of exports. A recovering US economy will be an important driver for the company and shareholders could be rewarded handsomely.
Steinhoff International (JSE:SHF)
The proposed listing in Frankfurt (around June 2015) will bring Steinhoff to the attention of a whole range of European investors who could see the potential of the company’s European operations as a significant driver of returns in 2015. The German business is performing very well and there is progress in Eastern Europe, both helping to drive a 38% increase in full year profit. Conforama also continues to gain market share in France (15%) which makes up around 70% of divisional exposure. A recovery in Europe in general could be very beneficial for Steinhoff.
Arthur Clayton, Branch Manager
Adcorp (JSE:ADR)
This is a cash-generative staffing solutions business with a five-year average dividend yield of 5.3%. On normalised margins the stock trades at 8x historical profit relative to a global peers average of 15x. Even if there is no growth in the difficult SA environment, the growth and higher rating ascribed to management’s international aspirations should lead to substantial growth in shareholder value.
AfroCentric (JSE:ACT)
Medscheme, the group’s largest subsidiary, is well positioned to capitalise on market consolidation as one of the three biggest healthcare administrators in SA. This business is highly geared towards volumes and economies of scale from new memberships, a key driver of profitability. The group valuation is cheap relative to profitability and growth prospects.
Howden Africa (JSE:HWN)
With 70% of current revenue exposed to the power sector, this engineering company is pursuing growth opportunities in Africa to improve diversification. Despite a strong balance sheet (net cash equal to 15% of market capitalisation) and a five-year median return on equity of 53%, the valuation is very low based on normalised profit levels.
Wilson Bayly Holmes-Ovcon (JSE: WBO)
Management has a track record of generating relatively consistent returns in the notoriously cyclical construction industry. With low growth persisting at home, 65% of the order book is now Australia-based. On a normalised operating profit margin of 4.7% and valuation of 11x profit, we see value up to R170.
Sizwe Mkhwanazi, Portfolio Manager
Impala Platinum (JSE:IMP)
The year 2014 was tough for platinum producers after a five-month strike and low platinum prices. Nonetheless Impala currently has a strong balance sheet and little debt, represented by a net debt to equity ratio of 8%. The company is undergoing a cost rationalisation exercise and will look to contain unit cost increases below 8% until 2016. The share trades at a discount to its book value. Encouragingly, the sale of diesel cars in Europe – an important sector for platinum – is slowly starting to recover.
Attacq (JSE:ATT)
Being a capital focused property fund, Attacq focuses on net asset value per share (NAVPS) growth. Since 2005 Attacq has managed to grow its NAVPS at 20% per annum. Adding impetus to its already impressive local pipeline and core income-producing assets is the company’s exposure to offshore opportunities via investment vehicles that allow for exposure to both Europe and Africa. Under current management, we believe that the trend of impressive NAVPS growth will continue over the next three years given its current and expected pipeline and would so benefit investors.
Grindrod (JSE:GND)
Our liking to Grindrod is largely premised on our belief that eventually the shipping division’s profitability will recover to normal ‘through the cycle’ levels and continued steady growth from the freight services business. Over the last decade Grindrod has focused on building its freight services business which has surpassed the shipping business in size and is expected to produce a steadily growing earnings stream as assets are better utilised and consumption in Africa increases.
We believe the market is currently only paying for this division and pricing the shipping division as if it will not earn profits again. On our normalised earnings assumption we believe Grindrod is trading at 9.5 times normalised earnings, well below the 15 times we believe it justifies.
Humphrey Price, Portfolio Manager
Murray & Roberts (JSE:MUR)
This South African-based broadscale construction and engineering company with wide geographic representation presents value after seeing share prices come down sharply this year.
The company has sold off non-core assets, has recapitalised and also refocused on higher-margin business. Trading on a price earning (PE) of 10, dividend yield of 2% and price to book value of 2 times – I expect a 20% plus return in the price from the levels of R21.
Anglo American (JSE:AGL)
I like Anglo due to expected turnaround in ‘consumer-related resources’, namely platinum and diamonds. These divisions are expected to contribute upwards of 35% to group earnings and with a world consumer with extra cash, thanks to lower petrol prices, this bodes well. Trading on a PE of 16, dividend yield of 3% and price to book value of 1, this unloved company will start to rerate at some stage. Time to acquire now and be patient.
Mondi (JSE:MND)
Mondi has, over the years, transformed itself from a paper company to a packaging company. And because packaging is such an important component of modern-day commerce, this leaves Mondi in a healthy position. Trading on a PE of 12, dividend yield of 3.5% and price to book value of 2 times, this quality company deserves more attention than it receives. With good margins and strong cash generation we can expect another acquisition or special dividend within 12 months. This company is essentially European-based now and a weaker euro should further benefit the bottom line.
FRENCH VERSION
L’année dernière, j’ai appliqué un biais de valeur en choisissant lesactions pour cette année ; Il s’est avéré que, 2014 a été uneannée où les actions bon marchées est devenu moins chers etchers actions ont poursuivi leur tendance à la hausse. Pourl’année prochaine, j’ai pris des actions qui semblent relativementbon marché et ont connu la bonne performance de prix part à court terme.
Réussites de ce groupe sont étroitement liées à celle del’économie de SA car ils sont impliqués avec la logistique sur placeet en Afrique, les services de gestion de fret et lesconcessionnaires automobile. Peine semble passionnant.
Astral Foods (JSE:ARL)
L’an dernier cette société fait face à graves vents contraires. Nonseulement les importations de poulet très bon marché a souffertdu prix de vente ; coût élevé des intrants également pesé sur lesmarges pour le producteur de poulet. Bien que les importationsde poulet sont toujours élevées, coûts des aliments ont animé etrestauré les marges. Nous prévoyons récupération continue dansles marges dans l’année à venir profiter pleinement de la baissedes coûts alimentation étant susceptible de la poussée desmarges supplémentaires.
FirstRand (JSE:FSR)
Ayant produit un rendement supérieur sur l’équité (24 % en l’andernier) par rapport à d’autres banques, position en capital decette Banque permettrait également à poursuivre la croissance àdeux chiffres dans les avances ou prêts personnels.
Tout comme les trois autres grandes banques, ils ciblentégalement Afrique pour cultiver leur empreinte ; Cependant,FirstRand a sans doute un meilleur bilan en termes d’exécution.Malgré une note légèrement plus élevée que ceux des autresbanques, la performance opérationnelle pourrait soutenir biendavantage satisfaction prix de l’action.
Pieter Fourie, chef de Global Equities, SPI UK
eBay
écosystème d’eBay est un des meilleurs placés pour prospérerdans le nouveau monde numérique, étant donné que seulementune petite fraction du commerce se produit actuellement en ligneet la possibilité de croissance est sous-estimé par les investisseurs.
rendement pour les actionnaires d’eBay a été terne en 2014, lesinvestisseurs à long terme offrant la possibilité d’acheter dans unesociété laïque de croissance à un prix attractif. eBay se négocie à16 fois le bénéfice pour l’année prochaine avec une trésorerienette de $ 5 milliards sur le bilan.
Nous prévoyons une croissance du revenu et les gains dans unavenir prévisible et le spin-off de leur activité de PayPal l’annéeprochaine devrait fournir un nouvel élan au sentiment.
Oracle
Oracle est probablement presque un point d’inflexion d’unetendance positive de croissance laïque associée à sa ligne de base de données de la machine et son noyau licence croissance desventes, combinée à l’occasion sans cesse croissante dans ladivision de maintenance de logiciel. Bien que de plus important (etplus rentable) affaires et infrastructure logiciel Oracle (base de données et middleware) connaît certaines pressions laïques, nouscroyons que ces craintes sont entièrement actualisés aux niveauxactuels de prix de l’action. Négocie à 12 fois la rémunération avecun rendement des capitaux propres de 25 % des investisseurs,nous voyons une hausse pour les investisseurs à long terme.
La récente acquisition de TriZetto renforce également la positionde Cognizant, lui permettant de tirer parti des États-Unis / soins de santé mondiale des réformes et fournir au groupe un avantageconcurrentiel important. Ce nom a l’excellente résistance de bilan,génération de trésorerie solide et libre et un profil de croissanceattrayant cumul dans un rendement normalisé estimé avoir de 22 %.
Gregory Katzenellenbogen, directeur
Anglo American (JSE:AGL)
2014 a été une véritable annus horribilis pour les producteurs des produits de base. Anglo, en particulier, a été assailli par des grèvesdans l’industrie de platine, un prix chute de minerai de fer et unebasse perspectives de croissance pour la Chine. Tous ceux-là ont conspiré pour envoyer de la part en baisse de 19 % year-to-date.Mettant l’accent sur la réduction des coûts, amélioration de lagestion capital, un cible de retour sur fonds propres de 15 % et lemarché réalisant que Anglo a un « joyau » sous la forme de Beerspourrait aider la part rerate en 2015.
The proposed listing in Frankfurt (around June 2015) will bring Steinhoff to the attention of a whole range of European investors who could see the potential of the company’s European operations as a significant driver of returns in 2015. The German business is performing very well and there is progress in Eastern Europe, both helping to drive a 38% increase in full year profit. Conforama also continues to gain market share in France (15%) which makes up around 70% of divisional exposure. A recovery in Europe in general could be very beneficial for Steinhoff.
Arthur Clayton, Branch Manager
Adcorp (JSE:ADR)
This is a cash-generative staffing solutions business with a five-year average dividend yield of 5.3%. On normalised margins the stock trades at 8x historical profit relative to a global peers average of 15x. Even if there is no growth in the difficult SA environment, the growth and higher rating ascribed to management’s international aspirations should lead to substantial growth in shareholder value.
AfroCentric (JSE:ACT)
Medscheme, the group’s largest subsidiary, is well positioned to capitalise on market consolidation as one of the three biggest healthcare administrators in SA. This business is highly geared towards volumes and economies of scale from new memberships, a key driver of profitability. The group valuation is cheap relative to profitability and growth prospects.
Howden Africa (JSE:HWN)
With 70% of current revenue exposed to the power sector, this engineering company is pursuing growth opportunities in Africa to improve diversification. Despite a strong balance sheet (net cash equal to 15% of market capitalisation) and a five-year median return on equity of 53%, the valuation is very low based on normalised profit levels.
Wilson Bayly Holmes-Ovcon (JSE: WBO)
Management has a track record of generating relatively consistent returns in the notoriously cyclical construction industry. With low growth persisting at home, 65% of the order book is now Australia-based. On a normalised operating profit margin of 4.7% and valuation of 11x profit, we see value up to R170.
Sizwe Mkhwanazi, Portfolio Manager
Impala Platinum (JSE:IMP)
The year 2014 was tough for platinum producers after a five-month strike and low platinum prices. Nonetheless Impala currently has a strong balance sheet and little debt, represented by a net debt to equity ratio of 8%. The company is undergoing a cost rationalisation exercise and will look to contain unit cost increases below 8% until 2016. The share trades at a discount to its book value. Encouragingly, the sale of diesel cars in Europe – an important sector for platinum – is slowly starting to recover.
Attacq (JSE:ATT)
Being a capital focused property fund, Attacq focuses on net asset value per share (NAVPS) growth. Since 2005 Attacq has managed to grow its NAVPS at 20% per annum. Adding impetus to its already impressive local pipeline and core income-producing assets is the company’s exposure to offshore opportunities via investment vehicles that allow for exposure to both Europe and Africa. Under current management, we believe that the trend of impressive NAVPS growth will continue over the next three years given its current and expected pipeline and would so benefit investors.
Grindrod (JSE:GND)
Our liking to Grindrod is largely premised on our belief that eventually the shipping division’s profitability will recover to normal ‘through the cycle’ levels and continued steady growth from the freight services business. Over the last decade Grindrod has focused on building its freight services business which has surpassed the shipping business in size and is expected to produce a steadily growing earnings stream as assets are better utilised and consumption in Africa increases.
We believe the market is currently only paying for this division and pricing the shipping division as if it will not earn profits again. On our normalised earnings assumption we believe Grindrod is trading at 9.5 times normalised earnings, well below the 15 times we believe it justifies.
Humphrey Price, Portfolio Manager
Murray & Roberts (JSE:MUR)
This South African-based broadscale construction and engineering company with wide geographic representation presents value after seeing share prices come down sharply this year.
The company has sold off non-core assets, has recapitalised and also refocused on higher-margin business. Trading on a price earning (PE) of 10, dividend yield of 2% and price to book value of 2 times – I expect a 20% plus return in the price from the levels of R21.
Anglo American (JSE:AGL)
I like Anglo due to expected turnaround in ‘consumer-related resources’, namely platinum and diamonds. These divisions are expected to contribute upwards of 35% to group earnings and with a world consumer with extra cash, thanks to lower petrol prices, this bodes well. Trading on a PE of 16, dividend yield of 3% and price to b
