Moneyweb Investor JSE Rating - Tawana 3rd
What a cursory examination of the JSE’s swallows and salamanders of 2017 will tell you is that Naspers is not the best-performing stock of the year.
Having said that, it’s not difficult to see how its growth has been the biggest contributor to the 10.5% that the JSE All Share has advanced this year, well ahead of the 2.7% gain in 2016.
Looking at the swallows, what is clear is that there is no rising tide lifting all boats. Retailers are not trending, nor are quick service restaurants - once a favourite with investors. Instead we have a mixture of cheap shares that are being rerated; shares where there is corporate action or the possibility of corporate action; and shares with a good growth story, substantiated by recent trading updates.
And where there is a rising tide, for instance resurgent commodity prices are driving improved earnings, companies like Anglo Gold, Lonmin and East Plats are having a torrid time.
The year’s biggest winners and losers on the JSE
The salamanders are far more numerous than the swallows and provide visible evidence of an economy in distress. While small caps are feeling the sharpest losses, it is evident that mid caps, at the heart of the economy, are in distress.
Common themes among the salamanders include: exposure to the sluggish domestic economy, increased exposure to government business where margins are lower and getting paid is a dream, rand strength, and overpriced shares being derated as a result of slowing earnings growth.
The slow economy cannot be blamed for all ills. A theme that runs through some of these companies is poor management and poor decision-making. Arguably the likes of Taste, DAWN (prior to management changes), Basil Read, Stellar, Advanced Health and even Brait fall into this category.
A company that has run hard is not necessarily a buy at current levels. And the same goes for a company that has rerated, such as AdaptIT. Many of these companies are now offering value. It truly is a stock pickers market.
#1 & #4 African Phoenix
African Phoenix, formerly African Bank Investments (Abil), resumed trade in February after shares were suspended in August 2014 following curatorship proceedings instituted against African Bank. African Phoenix’s only operating entity is Stangen, once the insurance arm for African Bank.
The company’s assets include R1.8 billion in cash, a small insurance company called Stangen, and a R24 billion tax loss.
The share performance since listing has been driven by a rerating. “The shares were suspended at very low values and the business rescue practitioners did a good job preserving value,” says Andre Steyn, a director of Steyn Capital and one of the biggest investors in Phoenix.
The combined market value of the ordinary shares and preference shares is about R1.35 billion, well below the cash value of the business.
The reason for the discount lies in the fact that preference shareholders hold most of the capital in the business, but don’t get dividends; ordinary shareholders have most of the votes and have a say over the dividend rights of preference shareholders. For this reason, preference shares are trading well below par value of R85.
“This is an investment holding company with a classic shareholders’ conflict of interest dilemma that needs to resolved, and some capital allocation decisions to make,” he says.
Ecsponent invests in companies that offer a range of financial services in South Africa, Botswana, Swaziland and Zambia. The company reported profit growth of over 200% and a surge in cash flow from operations in the 15 months to March. This strong growth is necessary to service the interest payments on its R5 billion preference share programme. While management is comfortable with its funding structure, it also plans to look at third party debt facilities to reduce the cost of capital.
#3 Tawana Resources
The JSE- and ASX-listed exploration firm hit pay dirt last year with the acquisition of several projects that will see it jointly explore for lithium and other minerals in Western Australia. Initial results have proven positive. Lithium is used in the batteries of electric cars.
#7 Murray & Roberts (M&R)
The restructured and refocused M&R anticipates improved results in the new financial year having transformed itself into a multinational engineering and construction group. It has settled its disputes related to the construction of the Gautrain, announced the closure of the Middle East business, and the increase of its stake in the Bombela Concession Company from 33% to 50%.
A lot has been said and written about Naspers. The bottom line is that its holding in Tencent is worth more than Naspers, as a result investors acquire the other assets for nothing. Tencent is well run and is growing strongly. Chairman Koos Bekker may have the last laugh when some of the unlisted e-commerce ventures grow wings.
The US company which produces renewable gas and electricity from landfill sites, and was spun out of HCI in 2014, reported a 65% rise in revenue on the back of a 10% increase in renewable gas volumes in the year to March. The company declared a 39.5c per share maiden dividend after pre-tax profits rocketed 579% to $15.7 million.
This company should be renamed very cyclical. That said investors won’t complain about results for the year to February where profits after tax increased by 184.7% to R37.3 million. It is worth noting though that even after a 90% share price rise for the year, the share is still trading at 2012 levels.
# 9 Greenbay Properties
Greenbay is listed on the JSE, with a primary listing on the Stock Exchange of Mauritius. It owns retail assets in Slovenia and Portugal and owns stakes in listed assets from the US to Australia. The company raised R4 billion via a bookbuild process in August and in the process advised shareholders that it expects 25% growth in dividends per share for the 2018 financial year.
#10 Mix Telematics
Mix provides fleet and asset management software to customers in more than 120 countries. It is listed on the JSE and on the New York Stock Exchange in the form of American Depositary Shares. In April the company announced it had won a new global key account to provide premium fleet solutions with an anticipated rollout of 20 000 units over a possible 40 countries.
In May it announced a share repurchase plan to buy back up to 12.9% of its shares through open market purchases. Such plans can indicate that the board believes its shares are undervalued