There are some real bar­gains out there to pick up

The Star Early Edition - - NEWS - Amelia Mor­gen­rood

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.

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