Value funds nibble at PPC and Lewis
Most of the larger shares on the JSE lie above their long-term averages. STRONGEST SHARES*
although the JSE’s All Share Index as well as the Top40 have not been going anywhere for some time, it is somewhat encouraging that the number of shares lying above their 200-day exponential moving averages (EMAs) are in the majority – as is apparent from the accompanying tables. There has, however, been a change in gear since the previous tables were published in the beginning of February: the list of strongest shares is no longer dominated by resources shares. Half of the top 10 now vary from Murray & Roberts (corporate activity) and Barloworld to Adcock Ingram.
An interesting aspect of the latest tables is that some stepchildren of the JSE have lately been subject to accumulation as measured by their price/ volume trends**.
Two that catch the eye are PPC and Lewis Stores, which both suffered with drops of 89% and 72% respectively since their historical highs. Both have been trying for some time to get their house in order, with PPC reopening its discussions on a merger with AfriSam, a major competitor. Both PPC and AfriSam are under pressure owing to the weak economy and a merger would give them greater pricing power, instead of them attempting to retain market share through price-cutting. Both are wary of the Competition Commission and a merger is likely to enable them to push up prices to a more profitable level.
PPC is in the process of expanding into other African countries, and according to a joint statement, a merger would result in a stronger balance sheet to boost this trend, while there will also be greater technical depth to improve operational productivity.
Value funds that have already begun buying a substantial amount of PPC shares include Investec and Prudential. Prudential Core Value has been particularly active.
That an improvement is expected at the group is confirmed by the consensus predictions of analysts who track the share: four regard PPC as a buy, one as a hold and only one as a sell.
Lewis Stores suffered greatly, among other things, because of its undesirable insurance practices (for example, it levied unemployment insurance on accounts belonging to pensioners), which led to findings against it by the National Consumer Tribunal, as well as against its insurance subsidiary, Monarch Insurance. In its trading update for the December quarter, it complains that the stricter credit requirements imposed by authorities is hampering the group greatly. At the same time, it feels the pressure caused by the drought. Many of its 444 branches are in rural towns. It has reduced its interim dividend by more than half.
But at the moment Lewis’s share price derives advantage from value funds’ policy to invest in companies when their circumstances appear to be at their darkest, but where there’s potential for recovery. One of the unit trusts that invest in Lewis is Allan Gray’s Optimal Fund, while an Absa fund has also nibbled.
Gold shares are still among some of the weakest issues, while Bidvest – after its latest uninspiring set of figures – has moved up in the table (which means weakened). Of the shares that have broken through, Old Mutual and Investec plc look interesting.