Top fund man­agers’ stock picks

Finweek English Edition - - INSIDE - By JACO VISSER

South Africa’s bench­mark stocks gauge, the FTSE/JSE Africa All Share In­dex, has gained 4.7% since the start of the year, touch­ing a new record high of 42 342.30 on 10 Fe­bru­ary. The coun­try’s top fund man­agers share their top picks.

Africa’s largest me­dia com­pany, which owns a 34% stake i n China’s Ten­cent Hold­ings, re­turned 41% (share price growth plus div­i­dends) to in­vestors over the past 12 months. There is more up­side to the share price, ac­cord­ing to bou­tique as­set manager at Old Mu­tual In­vest­ment Group SA and head of Old Mu­tual Eq­ui­ties Peter Lin­ley.

“The com­pany is very well placed in terms of in­ter­net devel­op­ment with a fo­cus on mo­bile in­ter­net,” he said. “In­ter­net us­age has been shift­ing to mo­bile phones and Naspers’s busi­nesses are well placed for this.”

As China’s econ­omy is shift­ing from a man­u­fac­tur­ing-based to a con­sumer-driven one, Ten­cent’s scope to mon­e­tise mo­bile phone us­age, pri­mar­ily from mo­bile phone ap­pli­ca­tions and games, is in­creas­ing.

The po­ten­tial for fur­ther growth in Naspers now also lies in its own e-com­merce, or on­line shop­ping, busi­ness that has largely been ig­nored in the past, ac­cord­ing to Lin­ley.

“Un­til two months ago, in­vestors placed a neg­a­tive value on the com­pany’s e-com­merce busi­ness,” he said. That means that the share price only re­flected the value of Naspers hold­ing in Ten­cent, dis­count­ing the other units, he ex­plained.

Naspers has been pur­su­ing on­line clas­sif ieds in emerg­ing mar­kets, no­tably through its OLX brand in In­dia, In­done­sia and Brazil where it has the largest mar­ket share, ac­cord­ing to com­pany fi­nan­cial pre­sen­ta­tions. In SA, it plans to merge its Kala­hari.com and Takealot.com brands.

Europe’s largest maker of cig­a­rettes re­turned 23% to in­vestors over the past 12 months as its mar­ket cap­i­tal­i­sa­tion reached R1.18tr.

As pres­sure from health au­thor­i­ties in Europe mounts, the com­pany is di­ver­si­fy­ing its mar­ket to de­vel­op­ing coun­tries, in­clud­ing Turkey, Brazil, In­done­sia and Bangladesh. Dur­ing the nine-month pe­riod end­ing Septem­ber, the com­pany only saw an in­crease in cig­a­rette vol­umes in its Asia-Pa­cific unit, with stag­nant vol­umes in Eastern Europe, Africa and the Mid­dle East. Vol­umes de­clined in West­ern Europe and the Amer­i­cas.

“Bri­tish Amer­i­can Tobacco [BAT] is a very solid core hold­ing in any port­fo­lio,” Lin­ley said. “It pays good div­i­dends and is a use­ful cur­rency hedge.”

The com­pany re­turned £15bn (R270.9bn) to in­vestors in the five years through 2013 in share buy­backs and div­i­dend pay­ments, ac­cord­ing to an­nual f inan­cial state­ments.

“Bri­tish Amer­i­can Tobacco gen­er­ates a lot of cash,” said Simon Rauben­heimer, a fund manager at Al­lan Gray.

BAT’s free cash f low, or the amount of money it gen­er­ates from op­er­a­tions sub­tract­ing the cash it rein­vests, ap­prox­i­mates its earn­ings, he said. As the vol­ume of cig­a­rettes sold re­mains stag­nant, the com­pany’s in­vest­ment need, into new pro­duc­tion ca­pac­ity, re­mains con­stant.

The com­pany pays out two-thirds of its free cash f low in div­i­dends and in ad­di­tion, it also has a share buy­back scheme.

Peter Lin­ley

Simon Rauben­heimer

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