There are some real bargains out there to pick up
FOREIGNERS are continuously net sellers of our shares and that is bad news. What do they know that we don’t? They seem to have a lot of confidence in our currency since money is still pouring into the bond market.
They obviously don’t think they can do better than 8.5 percent return in shares. Why are they not interested in our companies? South African business people are rated highly in the international community and a recent Bloomberg study showed that the JSE was the top performing stock exchange over the past 100 years.
The only reason I can think of is that they are worried of further BEE implementations and that current shareholders are diluted.
Like the horrific mining charter. The other reason might be that they think the rand will be strong for a long time, and that our multinational companies will struggle to report earnings growth in rand terms.
They probably believe that the financial herding towards emerging markets still has some legs. Especially if you consider the 100-year bond Argentina placed in the market this week. It was three times oversubscribed and issued at a rate of 8.5 percent.
This is now a country that defaulted on its external debt seven times, and on domestic debt five times, since their independence 200 years ago. Serial defaulters successfully placing bonds at 8.5 percent – makes you think? You will probably never see more clear financial herding than this.
I cannot base my investment decisions on hope, maybe or what if. You should be realistic. Not everyone can invest all their money offshore, and if a bad scenario plays out, you will have no protection in the money market or bond market. On the contrary, I think you will be much worse off.
The previous 4 weeks I recommended companies with great potential and share prices that came down to more decent valuation levels. Since most of them has dropped even further, I want to recommend them again today.
CIL, 1 618c
Very few companies on the JSE trade at a price earnings ratio of less than 10, and have a debt to equity ratio of less than 50 percent. Consolidated Infrastructure (CIL) now earns approximately 60 percent outside South Africa, and is therefore not that sensitive to the low economic growth locally.
CIL services the oil industry active off the coast of Angola and Gamsu, and was impacted by lower volumes in oil production due to cuts enforced by Opec. CIL manage all the waste products from oil drilling for the major oil businesses.
The remittance of foreign exchange remains a challenge, but most of their clients are large international oil companies and contracts are set up in a way to prevent this problem.
In October 2016 CIL acquired Conlog at a very good price – a different business from the rest of their portfolio. It differs in the sense that it requires less capital, and it generates a lot of cash. This acquisitions changed the profile of the company and in a sense, de-risked the business somewhat. The acquisition of Conlog strengthened the foothold of CIL in the African electrical infrastructure market.
FBR, 12 900c
Famous Brands (FBR) experienced spectacular growth for many years, but this year it is different and there are a few changes. They have taken on huge debt, cut the dividend and they have a new chief executive. The share price dropped 27percent from R172 in October 2016 to less than R130 this week.
So far FBR was a franchise business. The most recent acquisition of Gourmet Burger Kitchen transformed the business into a physical restaurant owner.
Since the franchise market in South Africa seems quite mature, and they already owning most of the big chains, the question is whether they can successfully do this transformation?
Bringing FBR skills to the newly acquired businesses can bring more efficiencies and profitability.
Like all entrepreneurial and respectable companies FBR have pursued global food brands to buffer against local headwinds. SA contributed 83 percent of total revenue.
SNH, 6 577c
Steinhoff (SNH) joins the list of companies that forayed into the developed markets and encountered some headwinds. In anticipation of hard currency earnings, and a depreciating rand, speculators chased the share price to a high of more than R95 in March 2016.
Then the doubt kicked in… was the price tag too hefty for their under performing billion-dollar mattress business acquisition? Will they be able to bed it down profitably? Investor’s concern let to the share price dropping a staggering 30 percent the last 12 months.
The core of the company is very good, and what is clear is Steinhoff’s commitment to the discount or value retail model.
And this model is holding its own in the current climate – whether in South Africa, Germany or the UK.
BAT, 5 917c
The net asset value (NAV) of Brait (BAT), and the share price collapsed in the aftermath of Brexit. From being a darling of the JSE, and trading at a premium to the sum of the parts or NAV, it was dumped by foreign and local investors.
The share price reached a high of more than R166 in December 2015. In the middle of 2015 the share traded at a premium more than 50 percent of the published NAV!
The day before Brexit the share price was R157, and this week it traded below R60. A drop of 60 percent. The recently reported NAV is 7 815c per share. Now trading at a huge discount of 25 percent.