By 19 March, the JSE was trading 30% lower than it was in January and despite some gains, by early December the FTSE/JSE Capped Swix Index was standing at a miserable -1%. At the same time, global indices shot the lights out, driven by a handful of technology stocks whose share prices exploded.
But it looks like the stars may finally be aligning for the local equity market, with the global stimulus finding its way to local shares as global investors become more comfortable investing in riskier emerging market assets.
In addition, the interest rate environment is expected to remain benign – encouraging investment and growth, while local profits are expected to recover in 2021.
And if South Africa’s fiscal position remains relatively stable and GDP growth improves, then even better for the JSE, where opportunities aplenty will be found in 2021 and beyond.
As for which stocks to pick, those likely to benefit from any recovery include banks, Bidvest, retail counters such as Cashbuild, Italtile, Woolworths and Pepkor, construction stocks like PPC and Raubex and, for the brave, Sasol and bombed-out property shares such as Hyprop.
The Business team has picked a few local shares they believe bear watching in 2021, and just one global stock for luck.
Italtile (R14.40 on 17 December)
Italtile, the manufacturer and retailer of tiles, bathroomware and related products in South Africa, is a conservative bet for 2021.
The company, which has been listed for 22 years, believes demand for home improvements will be more robust in early 2021.
The group plans to invest R800-million over the next 12 to 18 months, which includes a R250-million upgrade of its tile factory near Hammanskraal, north of Pretoria, and the addition of another 10 to 15 stores to its retail network.
The result for the year-end to June 2020 shows the inevitable impact of the lockdown, with sales and profits falling. However, it maintained its dividend, paying out R1.5-billion and retaining R830-million in cash at year-end. Although this cash balance is a 28% decline from the prior year, it is testament to the cash-generative nature of the business that it has remained positive.
According to a recent trading statement, sales for the period July to November bounced back, growing on average by 15% across the retail and manufacturing business. Management says this is due to the fact that more people are working from home, while low interest rates are supporting homeowner spend on their primary asset – their homes.
For predictable, dependable performance one needs to look no further than the last decade, which saw the group grow its trading profit from R389-million in 2010 to just under R1.8-billion in 2019, a compound annual growth rate of 18.5%. The dividend yield is a modest but consistent 2.3%.
The share price has rerated along the way, rising from R4.16 in December 2010 to the current R14.40. As we say, hardly fireworks, but one of SA Inc’s most solid and dependable companies that should benefit from a modicum of growth in 2021.
Impala Platinum (R189.21) and Sibanye-Stillwater (R56.39)
South Africa’s platinum sector has undergone a dramatic turnaround. Just a few years ago, at least two-thirds of the shafts were lossmaking, waylaid by surging costs, falling prices and bouts of often violent labour unrest. The Marikana Massacre and the ascendency of the Association of Mineworkers and Construction Union in 2012 marked the start of the decline. In 2014, the three biggest platinum producers grappled with a five-month strike. One of them, Lonmin, never recovered and would eventually be swallowed by a new kid on the platinum block, Sibanye-Stillwater. But overall, the sector has recovered, boosted by rising prices, falling labour militancy and productivity improvements, which have included pivots to mechanisation and digitisation.
Sibanye and rival Impala Platinum (Implats) have had stellar earnings seasons and reinstated dividends. And they remain on a profitable footing heading into 2021.
Sibanye also produces gold, which was its original raison d’etre when it spun off from Gold Fields. The precious metal’s price hit record highs of more than $2,000 an ounce earlier this year and prices remain at elevated levels of more than $1,800 an ounce as of mid-December. Its status as a safe haven for investors in times of turmoil has shone brightly in this year of the pandemic, and there is enough turbulence out there – from Brexit to the crazy finale of the Trump administration to the pandemic’s new global waves – to keep bullion bulls charging for a while.
It has also been a good year for platinum group metals (PGM) producers, especially those with exposure to palladium and rhodium, used as catalysts in the petrol engines which are gaining regulatory favour over diesel in key markets such as Europe. Palladium’s price is near record highs above $2,000 an ounce, while a kilo of rhodium is fetching close to $500,000, making it many times more valuable than cocaine or rhino horn.
Implats’s fortunes have also been lifted hugely by surging prices, which have flowed to its bottom line. The company’s full-year 2020 earnings soared more than fivefold to more than R16-billion and dividends were reinstated, with R4.2-billion to be paid to shareholders.
Sibanye’s headline earnings for the six months to the end of June roared to almost R9.4-billion from a loss last year of R1.26-billion. And Sibanye and Implats’s share prices, as of 14 December, were up more than 50% and 30% in the year to date. Both have outperformed Anglo American Platinum, which has battled with issues at its processing plants this year.
New Woolworths CEO Roy Bagattini has started to fix the mess left by his predecessor, Ian Moir. Under Moir’s watch, Woolworths bought Australia-based department store chain David Jones for R21.5-billion in 2014. The deal has become ill-fated, as Woolworths has written down the acquisition value by R13-billion. Since his appointment in February 2020, Bagattini has promised Woolworths shareholders that they won’t be asked to inject more money into David Jones through a rights issue (raising money through the issue of new shares). Bagattini has freed up cash in David Jones by selling its properties in Australia – the proceeds of which will be used to pay down Woolworths’ in-country debt of A$360-million (about R4-billion). He has also started cutting costs, as the David Jones store network will be cut by 20% through the closure of underperforming stores. Bagattini expects a turnaround in David Jones’s fortunes in the next 12 to 18 months.
Metrofile’s shares have gone absolutely nowhere over the past year. That could be viewed as positive, as it reflects the relative resilience of its business against the extreme disruption caused by Covid-19 and the resultant lockdowns in the countries it operates in across Africa and the Middle East. What it doesn’t yet reflect is the potential bidding war for the records storage and information management specialist, with not one but two suitors now in the wings.
Just over a year ago, Metrofile’s shares shot up from R2.30 to R2.85 after it told investors that a private equity consortium was mulling a R3.30 offer to take it private. That’s after a near doubling in its price from a few months earlier, when it first cautioned the market of the approach by the Housatonic Consortium.
It looked like the consortium was getting cold feet earlier this year as Covid-19 set in across the globe, affecting companies across a number of sectors. While it was still keen on pursuing a deal, it said it wanted to scrummage through Metrofile’s accounts again to see how it had recovered from the severe lockdown measures implemented in April. Trouble is, its executives still haven’t been able to get here. However, Metrofile says it has been assured of its continued interest. In the meantime, it has received a second unsolicited approach from another international corporation.
Metrofile is a lot more solid than it was two years ago after restructuring its debt and disposing of or closing non-core and underperforming businesses. It has largely predictable earnings owing to the income it receives for the physical storage of documents and confirmed this week that its annuity revenue continued to produce good results. Total revenue for the six months to end-December is likely to be slightly down from last year but it’s seen an improvement in its profit margins. It’s also secured a few key deals that will provide a healthy pipeline going into next year. Combined with an extensive cost reduction exercise, it says its profitability is protected despite ongoing economic challenges. With healthy levels of cash generation, it will continue to reduce debt – and its interest bill.
Don’t just take our word for it; it’s also a favourite of SmallTalkDaily Research’s Anthony Clark, who quipped on Twitter that the company had more suitors than a Venezuelan beauty queen. An exaggeration, perhaps, but it’s clearly in play.
With two companies now courting Metrofile, and two dominant shareholders in the form of investment company Sabvest and the Mineworkers Investment Company, which will want to extract the maximum from their investment, R3.30 per share may just be the opening gambit. The risk, of course, is that neither offer materialises and the share loses its underpin.
Don’t laugh off this gases group. There’s no shortage of innovation at Renergen, the emerging natural gas and helium producer that holds the only onshore petroleum production right in SA.
Its shares have already been given a boost by its recent announcement of a logistics solution to transport Covid-19 vaccines to far-flung corners of the country and keep them at ultra-cold temperatures for up to 30 days using cryogenic cases filled with helium. It says it’s been designed specifically for Africa and Southeast Asian countries where the logistics and supply chain means it takes a lot longer to get to a destination.
And it’s just the latest medical use for helium, with magnetic resonance imaging already accounting for 20% of global supply of the gas. Renergen believes one of the richest helium concentrations globally is under the ground at its Virginia Gas Project in the Free State. Helium offtake agreements with African Oxygen and parent company The Linde Group are already in place.
Helium aside, Renergen also expects to produce liquefied natural gas (LNG) of outstanding purity with an average of greater than 95% methane and almost zero higher alkanes.
This would make its product an ideal substitute for liquid fuels, as it would burn cleaner and release fewer emissions. It’s partnering with French energy giant Total to become the first distributor of LNG at filling stations in the country – a good move owing to pressure for the energy mix to shift to greener alternatives.
There is the risk of further dilution if it goes back to shareholders following last January’s share placement with investors in Australia, in which it raised about R56.5 million.
Firstrand (R51,60) and Netcare (R11,93)
South African banks and private hospitals are trading at the cheapest levels in years, we are talking single-digit forward price-earnings ratios.
The healthcare groups include Netcare, MediClinic and Life Healthcare. The banks are the big five of Firstrand, Nedbank, Absa, FNB and Standard Bank, and adding Investec and Capitec for good measure.
There are some extremely attractive opportunities among these South African companies, if value investing is the strategy of choice. Both health and banking services have been negatively impacted by the Covid-19 lockdown and economic slowdown, but this has been captured in current share prices.
And despite the immediate earnings outlook being negative with the possibility of rising bad debts and a weaker economy come 2021, offsetting this, however, are valuations, which were last this low during the 2007-2008 global financial crisis, or the 1980s before that.
Previous periods of similarly low valuations, especially banks, led to very high subsequent returns for investors who were brave enough to buy amid the uncertainty.
In both the case of health groups and banks, it is hard to know when earnings of these businesses will recover and start growing again. But when one is paying a sufficiently low price for a decent business, predicting exactly when a recovery will happen is less important, analysts advise.
Benjamin Graham, the father of value investing, describes this principle as follows: “The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future”.
Steve Minnaar, portfolio manager at Abax Investments believes FirstRand is the gold standard of the banking sector. “There are good opportunities to buy great quality businesses at bargain prices. We are sticking with our investment philosophy and are attracted to companies that are not just resilient, but antifragile. We see an anti-fragile company as having a growing profit pool, being a great capital allocator, having a strong track record of financial health and culture as a sustainable competitive advantage,” he says. FirstRand falls into this pool. It is trading 22% lower than its 52 week high of R66,19, but is already up over 65% from the low point.
FirstRand’s 12-month expected EPS according to Bloomberg is R4.25, which is a forward multiple of around 12 times. The argument is that if all goes as it should, the 12 price earning over 24 month EPS (R5.20) can deliver a R62,50 valuation in the upcoming year. That is 25% higher than the latest trade value, and 12% annual capital growth.
“Doesn’t sound very exciting, but add 5-7% prospective dividend payment next year, and the rate of return for the year goes up to over 15% for an excellent and great quality company, says Meintjies.
Furthermore, RMB Holdings announced earlier this year that it is going ahead with the unbundling of its 34% stake in FirstRand in a move it says will unlock about R5.41-billion in value for shareholders.
Netcare also pays dividends.
The second stock pick that could prove good for your financial health or wealth, in the next year or two, based on the same investment logic applied above, is Netcare. “R1.50 on a forward multiple of 12 times (higher than today’s’ price-earnings ratio of 10), but still less than the average over the last few years, you could get 50% in value over 24 months, which could amount to a 22% gain a year,” Meintjies says.
The medical aid regulator recently ordered Netcare – together with Discovery – to stop selling vouchers for appointments for general practitioners. The vouchers costing R300-R350 and launched this year, were a way to make access to private doctors more affordable for all people, including those without medical aid.
The registrar for the Council for Medical Schemes stated that the hospital group and administrator were breaching the Medical Schemes Act and behaving like health cover providers without approval from authorities.
This is an oversight that will be rectified in the near future.
Farfetch Ltd ($62,80)
This year the investment opportunity has been all about US equities, which delivered an annual return of 16% in dollars, according to Anchor Capital. While many analysts say the US market is now overheated, the reality is that outsize returns have been driven by a handful of technology stocks which benefitted from the Covid-19 lockdowns. But among the overheated stocks whose price equity ratios have gone stratospheric are pockets of value that are worth exploring.
While the team at Vestact is excited about the latest results of Lululemon Athletica, in which the firm is invested, it is Farfetch Ltd, the British-Portuguese online luxury fashion retail platform, that caught the BM team’s eye.
In November Richemont and Alibaba invested $1.1-billion in Farfetch China, to support the online retailer as it moves to expand its high-fashion network into the most populous nation on earth.
Farfetch’s niche is high-end fashion, very high end. Designers represented on the site include the likes of Alexander McQueen, Fendi, Balenciaga and Prada to name a few of the 700 designers on its platform.
While it dominates in this niche, what is more important, according to investment website Motley Fool, is its “e-concessions” business model. This model involves helping numerous high-fashion houses move their business online. It’s not surprising that high fashion would gravitate to the internet – their customer base is wealthy and geographically diverse. So Farfetch is helping its designers find these customers, while it simultaneously helps international customers find their upscale brands in one place. It is very much a networking stock, says The Fool, which is very difficult to compete against. This may be why Amazon’s announcement that it was entering the high-fashion business was a nonstarter.
Farfetch had a market cap of $3.5 billion back in January, and a share price of about $11. Today its market cap is closer to $20-billion and its share is about $62,80, with more room on the runway. BM/DM