Fund managers pick BAT, Sasol
BULLISH STOCKS: TRUFFLE, BATALEUR MAKE THEIR BETS
They have fallen a little out of favour, but still offer interesting buying opportunity.
British American Tobacco (BAT) and Sasol are two of the largest listings on the JSE. Both have been staples of investment portfolios for many years, but have fallen a little out of favour more recently.
In the case of BAT, concerns about regulatory action in the US and the growth of next generation products, such as vapour, have led to a sell-off in the stock over the last eight months. From trading at more than R940 per share in mid-November last year, the counter has fallen back to current levels of under R730.
However, Truffle Asset Management chief investment officer, Iain Power, believes this has created an interesting buying opportunity. “You were paying 20 times to access one unit of BAT cash flow, now you are paying 12.7 times just a couple of months later. This is an attractive entry point from a rating point of view.”
Kevin Williams of Bataleur Capital says that if you consider that BAT is a staple company like beer and spirit producers or fast-moving consumer goods companies, it is also attractively priced relative to this peer group.
Williams adds that the outlook for BAT is also better than other businesses in this space. “The bigger companies like Proctor & Gamble, Nestlé, or Unilever have very unexciting prospects for growth, but their ratings are still very high. Even though there are massive changes taking place in the cigarette industry globally, you are not paying for any of BAT’s earnings growth.
“The valuation is providing you with a nice margin of safety.”
Power adds that tobacco companies have faced concerns about the sustainability of their earnings for decades, but they have continued to be profitable.
“The bottom line is that tobacco is an addictive substance,” he points out. “Secondly, of the average price of a box of cigarettes, 70% is tax. So the amount that the tobacco companies are getting is 30% of the pack price.”
He acknowledges the validity of the argument that with falling volumes at some point the cost of cigarettes will be too expensive, but Truffle believes that is still some way off.
“In the US over the last 30 years, the number of cigarette sticks smoked has fallen by 40%,” says Power. “Yet the profit pool of the entire tobacco industry has grown three times ...” Sentiment towards Sasol has also been less than positive, but for quite different reasons. Lower oil prices have impacted on its profitability at the same time that the company has been spending billions on its ethane cracker project in Lake Charles, Louisiana.
“We bought this share aggressively late last year on the thesis of Lake Charles,” Power says. “They have spent $11 billion (R145 billion) on this chemicals project and it was not reflected in the Sasol share price at all.”
If anything, the market was only seeing the negative impact of the investment on the company’s cash flow and income statement.
Power says that when one adds Lake Charles into a valuation of Sasol, the stock looks to be trading at a very appealing level.