IS THERE STILL GAS IN THE JSE’S TANK?
The JSE paid out handsomely in 2021 for punters who were in the right sector at the right time. It’s early days yet, but the market looks trickier to predict in 2022
For the JSE, last year was a tale of contrasts, as SA’s largest stock market grew and shrank at the same time. First, the good news: the all share index (Alsi) soared
24%, with the top 40 skittering up at about the same rate. It was welcome relief after Covid laid sentiment low in 2020, and caused further jitters with its variants.
That the JSE rose was all the more remarkable considering that the share price(s) of the exchange’s largest constituent, Naspers and Prosus, fell markedly.
Other “global heavyweights” enjoyed a mixed performance. Luxury brands conglomerate Richemont glittered, with a 65% gain, but British American Tobacco only managed a smouldering low-digit increase, and beer maker AB InBev leaked 10%.
This speaks of a broad recovery in sectors most ravaged by Covid initially, such as resources, construction, gaming, hotels, retailers, fast food, property and even banks.
But the bad news is that while the stocks listed on the JSE recovered, the exchange itself shrank, as the number of listed shares plunged. The JSE’s 601 shares in 2001 have been whittled down to an anaemic 325.
More companies chose to delist last year, frustrated that their stock prices failed to reflect their value. This included a slew of small-cap companies that no longer needed a platform to raise fresh capital, or found the cost of maintaining a listing to be onerous.
Last year’s delistings, or planned delistings, included stalwart small-cap Value Group (which was consistently profitable and paid superb dividends), Vivo, ARB Holdings, Onelogix, Adapt IT, Long4Life and Alaris. And more obscure counters, including NVest, Spanjaard, CSG Holdings, Stellar and Trustco all appear to be packing their bags.
The worry is that two of the JSE’s top second-line stocks — liquor group Distell and logistics group Imperial — are also subject to buyout offers from global competitors that will lead to their delistings. The premium prices offered by Heineken and DP World respectively also show a disconnect between the value perceptions of local investors and knowledgeable international buyers.
The problem for JSE CEO Leila Fourie is that new listings, to replace those leaving, were scarce. Nor is there much talk of private companies heading for the JSE in the short term, though it was encouraging to see two property counters list at the tail end of 2021.
Fourie has big plans to boost the JSE’s relevance, including capitalising on private equity activity. But whether this can reverse the one-way traffic of those leaving the bourse is unclear.
ClucasGray portfolio manager Andrew Vintcent says one problem is that many good companies remain materially undervalued.
“Public companies have to contend with an ever-increasing raft of regulations and costs to remain listed,” he says. “Management teams … spend an inordinate amount of time dealing with queries on why their share price continues to languish, and what they plan to do about it.”
Still, he says many management teams can unlock significant value for shareholders. “Failing that, we would expect them to become the subject of corporate takeovers.”
In this context, the JSE’s 24% rise last year can only be positive. If it were repeated, a wash of positive sentiment could keep listings afloat, and attract newcomers to the red-hot sectors.
Last year, astute stock-pickers would have made a fortune. Some popular standouts were Shoprite, which gained 55%; Transaction Capital more than doubled; cement maker PPC’s stock soared threefold; and Glencore grew 50%.
Sectorally, the beleaguered investment trust sector, which has been trading at gaping discounts to intrinsic value, made a strong comeback. Sabvest Capital doubled, African Rainbow Capital soared 80%, PSG Group was up 57%, Brait 40%, Ethos 30% and Hosken Consolidated Investments 30%.
Property stocks also rebounded, but punters might have preferred dabbling offshore: MAS was up 75%, Hammerson 47%, Industrials Reit 53% and Irongate about 33%.
Corporate action helped Royal Bafokeng Capital’s share price to more than double, leaving other platinum plays in the shade.
The FM’s hot stocks portfolio — the 17 top shares picked by this magazine’s investment writers from each sector — did even better than the wider JSE, rising 40.6%, and 44% if dividends are included.
The FM portfolio scored strongly from the rebound in bombed-out Tsogo Sun Hotels (up close to 140%), but it also saw a 93% gain from energy giant Sasol, 88% from construction group Raubex and 80% from an inspirational pick in specialist logistics group Santova. Our surprise packages were Vukile Property (up more than 72%) and recovering retailer Woolworths (up 32%). Investment behemoth Remgro surprised with a 36% gain — before factoring in its reliable dividend flows.
The FM also cashed in on corporate action with Liberty Holdings (subject to a buyout from Standard Bank) and RMI Holdings (in the throes of unbundling its interests in MMI and Discovery). Liberty was up more than 50% and RMI more than 40%, outstripping their insurance peers.
The JSE’s searing performance fuelled much excitement too. It was not uncommon to see 100%-plus gains in various stock-picking contests on social media.
But with that in mind, the deeper question is whether the easy money has already been made off the low Covid-inflicted base. That’s far trickier to answer.
Higher interest rates and inflation in the US look certain, and the recent pullback in high-growth tech and fintech stocks looks ominous for those who fear a correction on
What it means: Good commodity prices may lead to a supportive environment
the Nasdaq. China could also put a spanner in the works, with property developer Evergrande squeezing itself into a tight corner.
Politically, there is worrying sabre-rattling by China and Russia, and SA’s sociopolitical arena is dangerously fraught. Also, the world might still not be out of the Covid woods.
Yet Aeon Investment Management CIO Asief Mohamed believes that it would be a “reasonable expectation” for the JSE to provide a total return of 5%-15% in 2022.
Mohamed says the broad consensus is that developed-market stocks and bonds are relatively overpriced right now. But he still sees the JSE as relatively cheap on an estimated forward p:e of 11 — and if heavyweights Naspers, Prosus and Richemont are excluded, that falls to 9.
Adrian Saville, Genera Capital investment specialist, says sweeping statements about markets are probably not appropriate for the year ahead. “It’s tough to suggest all markets are overvalued, but it is difficult to justify some valuations in the US market,” he says. “But emerging markets, like China, Russia and Latin America, look well priced.”
Saville believes higher volatility could see an appetite for investment risk replace a raw appetite for risk. “There will be a more sober lens with which to assess markets, and investors should be looking to build positions on a five-year horizon rather than a five-week or even five-day horizon.” He adds: “It’s worth remembering the Roaring Twenties ended with the market 90% down.”
Momentum Investments’ Herman van Papendorp points out that whereas SA equity market returns were spurred by a strong profit rebound in 2021, that’s likely to reverse this year. He expects pressure on company profits from slowing economic momentum (global and local), on top of the high profit base set last year.
Van Papendorp says stock market returns will have to come from a rerating in market valuations. “Fortunately, the SA equity market picture looks quite favourable. Even assuming negative earnings growth of 15% in the next year, the SA equity market is now one-quarter of a standard cheaper against the average since 1999. Also, SA equities still trade at huge valuation discounts to the rest of the world.”
All things considered, 2022 could be the year the value investor returns to the fore.
The pros’ picks
Global stock prices will be helped, says Mohamed, by the fact that China is once again on a path of stimulating economic growth for its economy, albeit at a measured pace and mindful of deflating the property bubble in a responsible way. “China’s projected GDP growth of 5%-6%, and limited supply growth, will support commodity prices,” he says.
Mohamed singles out Anglo American, BHP and Impala Platinum. But Naspers is Aeon’s preferred overweight position, trading at more than a 50% discount to the sum of its parts.
“Tencent is a big driver of the value of Prosus and Naspers,” he says. “All three shares underperformed significantly over 2021. The consensus earnings growth for Tencent over the next five years is 20% per annum. If Tencent … surprises to the upside, one could expect Naspers, Prosus and Tencent to outperform the Alsi over the next five years.”
Mohamed’s speculative play is takeover candidate Metrofile, for which he expects a buyout offer at an attractive price.
Ninety One fund manager John Biccard believes the market hasn’t shifted decisively to favour value investors just yet. “But there are always things to buy”, he says — “especially defensive shares like Oceana, Tiger Brands and Spar.”
Spar, for example, has fallen from about R210 to less than R170, and offers a lower-risk entry into the retail sector. “If Spar can clean up its investment in Poland and improve the core SA business, we could be looking at cash earnings of around R14 a share, and a nice dividend yield of 5%.”
Biccard’s two other picks are commodity firms: AngloGold Ashanti and Gemfields.
For a market cap of $200m, Gemfields offers a gemstone mine in Zambia and a ruby mine in Mozambique that generate annual revenue of about $250m and pre-tax earnings of $80m, he says — along with the Fabergé luxury brands business and Sedibelo Platinum Mine. With emerald and ruby prices rising, he believes Gemfields — with reduced debt and a new anchor shareholder in Assore — could start paying dividends.
Biccard says AngloGold is trading at half its 2020 peak. He likes gold, even if it’s said to lose its shine as interest rates rise. “If interest rates in real terms go up slower than inflation, then gold still looks good,” he says. “Gold shares are at 20-year lows ... and are as cheap as they were in 2000, when the bullion price was $300.”
Smalltalkdaily Research analyst Anthony Clark picks helium business Renergen as his “wild card” for 2022. With phase 1 of its Virginia project set to come into commercial operation in April, he expects “the potential of the deposit will be seen physically by the market in a revenue stream”.
However, Clark cautions that the larger second phase of the project could require capital of as much as R12bn (a good deal more than Renergen’s R4.1bn market cap).
Aside from Renergen’s heady earnings forecasts for 2025/2026, there are “whispers of a Nasdaq listing, investment from overseas interests and strong demand for the recently launched innovative crypto-styled helium token to aid funding”, he says.
“Helium is currently the talk of the town,” he says, given the space race between billionaires Elon Musk and Jeff Bezos. “Renergen
sits on some of the richest, lowestcarbon-intensive helium in the world. Any knock on the door from a space pioneer could take the stock to the moon.”
ClucasGray portfolio manager
Brendon Hubbard says energy will be a global theme in 2022, as environmental, social and governance issues have contributed to energy shortages and record power prices.
“You can cut supply, but not demand,” he says.
Hubbard believes Reunert is well-positioned for energy demand, supplying cables for wind turbines, and providing switches and circuit breakers. And it’s got exposure to solar through Terra Firma, and to renewables via its joint venture with AP Moller Capital.
He also likes offshore property play MAS
(it plans to double its euro earnings by 2025), Master Drilling (which he reckons will be debt-free in six months), automotive group Metair and logistics group Grindrod.
Hubbard’s colleague, Vintcent, lists Metrofile (share buybacks, dividends and bolt-on acquisitions can enhance earnings); Caxton & CTP (cash and the value of its Mpact stake is worth more than its market cap); and Ethos Capital (significant discount to NAV with underlying investments performing well).
Of the larger stocks, Vintcent highlights
Old Mutual (trades at extremely attractive valuation multiples); Absa (trades at a very undemanding multiple); African Rainbow Minerals (the sum of its parts is attractive, with levers to unlock value); and Massmart (could grow profits materially over the next few years).
Saville believes strong commodity prices will translate into a supportive economic environment where there should be infrastructure spend, even if growth is moderate.
In his view, local building firms have shown their resilience over the past 10 years. “If a construction business is still standing and the balance sheet is strong (like WBHO) then that speaks volumes about the business model and management,” he says.
Saville believes cement maker PPC should benefit from import restrictions and an improved balance sheet, while also scoring from a revised geographic footprint.
He adds that Aveng — the most traded stock of 2021 — has been taken out of the pennystock bucket after a recent share consolidation. “Both core businesses in SA and Australia have done well, and Trident Steel might come off the selling block.”
Saville is also fond of industrial equipment businesses Hudaco and Invicta — “great quality businesses with diversified revenue bases”. For the slightly more adventurous, he suggests Argent Industrial, which is building an impressive engineering niche in the UK.
John Slauck, director of Integrated Managed Investments, says higher global interest rates will put pressure on emerging-market currencies. Slauck recommends picking “pockets of excellence ... companies with strong numbers and those quality counters likely to be targets for low-base takeouts.”
In terms of potential winners, Slauck is betting on Master Drilling, a buyout at junior platinum miner Wesizwe, a corporate restructuring at Metair, Merafe (banking on a generous special dividend) and Tradehold (a separate listing of the industrial portfolio).
Armitage’s Anchor Capital likes resources business Afrimat, which has an excellent capital allocation record and several sources of growth, including the Nkomati anthracite mine, iron ore mine Jenkins and the Gravenhage manganese deposit.
Anchor cites technology group Alviva as a small-cap value play that is worth far more than its current share price. “While it is a small cap, it is quite a big business, with annualised turnover of about R20bn at present. We think it can make over R1bn ebitda over the next year and the market value is R1.8bn.”
Anchor likes two financial services businesses: Investec, which is “starting to generate good performances and its investment case now hinges on earnings growth and operating profit”; and Transaction Capital, where about R1.35bn in profit after tax next year is possible — 35% up on this year.
Anchor also suggests watching MultiChoice, which is now much more than just an SA pay-TV operation. “We believe that in the next year or so, investors are going to be forced to start ascribing value to the other parts of the business — most importantly the currently loss-making African business.
“At the time MultiChoice was listed separately, management [said] MultiChoice Africa would reach operating profit break-even in this next financial year. As that date rapidly approaches, we believe things will get interesting.”