Stock picks for 2015

Gregory Katzenellenbogen,

Director

Sanlam Private Wealth’s must-have stocks for next year.Alwyn van

der Merwe,Director of

Investments

Anglo American

2014 was a truly annus horribilis for

commodity producers. Anglo, in particular,

was beset by strikes in the platinum industry,

a plummeting iron-ore price and a lower

growth outlook for China. These all conspired

to send the share down 19% year-to-date.

A focus on cost cutting, improved capital

management, a target return on equity of

15% and the market realising that Anglo has

a ‘gem’ in the form of De Beers could help the

share rerate in 2015.

 

Richemont

The world’s largest jewellery maker with some

of the most glamorous names in luxury, such

as Cartier and Montblanc amongst others,

has weathered the slowdown in China and

the recent troubles in Hong Kong. Swiss

watch exports to the US increased 22% in

October from a year earlier. The US is the

second-largest market for Swiss watches,

accounting for 11% of exports. A recovering

US economy will be an important driver for the

company and shareholders could be rewarded

handsomely.

 

Steinhoff

The proposed listing in Frankfurt (around June

2015) will bring Steinhoff to the attention of a

whole range of European investors who could

see the potential of the company’s European

operations as a significant driver of returns in

2015. The German business is performing very

well and there is progress in Eastern Europe,

both helping to drive a 38% increase in full

year profit. Conforama also continues to gain

market share in France (15%) which makes up

around 70% of divisional exposure. A recovery

in Europe in general could be very beneficial

for Steinhoff.

Last year I applied a value bias in picking

shares for this year; as it turned out, 2014

was a year where cheap shares became

cheaper and expensive shares continued

their upward trend. For next year I have

picked shares that look relatively cheap

and have experienced good short-term

share price performance.

SuperGroup

This group’s successes are closely linked

to that of SA’s economy as they are

involved with logistics locally and in Africa,

freight management services and motor

dealerships. Hardly sounds exciting. The

company has, however, managed to grow

their earnings stream consistently in a

tough environment and still trades at a

healthy discount to the market. We believe

the earnings trend is likely to continue;

therefore there is still some runway left for

good share price performance.

Astral Foods

Last year this company faced serious

headwinds. Not only did very cheap chicken

imports hurt the selling price; high input

costs also weighed on margins for the

chicken producer. Although chicken imports

are still high, feed costs have moderated

and restored margins. We foresee continued

recovery in margins in the coming year as

the full benefit of the lower feed costs is

likely to boost margins further.

FirstRand

Having produced a superior return on

equity (24% in last year) relative to the

other banks, this bank’s capital position

would also allow it to continue double-

digit growth in advances or personal loans.

Similar to the other three big banks, they

also target Africa to grow their footprint;

however FirstRand arguably has a better

track record in terms of execution. Despite

a marginally higher rating than the other

banks, the operational performance

might well support further share-price

appreciation.

Adcorp

This is a cash-generative staffing solutions

business with a five-year average dividend

yield of 5.3%. On normalised margins the

stock trades at 8x historical profit relative to

a global peers average of 15x. Even if there

is no growth in the difficult SA environment,

the growth and higher rating ascribed to

management’s international aspirations

should lead to substantial growth in

shareholder value.

                                                                                                                 

Afrocentric

Medscheme, the group’s largest subsidiary,

is well positioned to capitalise on market

consolidation as one of the three biggest

healthcare administrators in SA. This business

is highly geared towards volumes and

economies of scale from new memberships,

a key driver of profitability. The group

valuation is cheap relative to profitability

and growth prospects.

 

Howden Africa

With 70% of current revenue exposed to

the power sector, this engineering company

is pursuing growth opportunities in Africa

to improve diversification. Despite a strong

balance sheet (net cash equal to 15% of

market capitalisation) and a five-year median

return on equity of 53%, the valuation is very

low based on normalised profit levels.

 

Wilson Bayly

Management has a track record of generating

relatively consistent returns in the notoriously

cyclical construction industry. With low

growth persisting at home, 65% of the

order book is now Australia-based. On a

normalised operating profit margin of 4.7%

and valuation of 11x profit, we see value up

to R170.

Arthur Clayton,Branch Manager

Sizwe Mkhwanazi,

Portfolio Manager

Impala Platinum

The year 2014 was tough for platinum

producers after a five-month strike

and low platinum prices. Nonetheless

Impala currently has a strong balance

sheet and little debt, represented

by a net debt to equity ratio of 8%.

The company is undergoing a cost

rationalisation exercise and will look

to contain unit cost increases below

8% until 2016. The share trades

at a discount to its book value.

Encouragingly, the sale of diesel

cars in Europe – an important sector

for platinum – is slowly starting to

recover.

Attacq

Being a capital focused property

fund, Attacq focuses on net asset

value per share (NAVPS) growth.

Since 2005 Attacq has managed to

grow its NAVPS at 20% per annum.

Adding impetus to its already

impressive local pipeline and core

income-producing assets is the

company’s exposure to offshore

opportunities via investment vehicles

that allow for exposure to both

Europe and Africa. Under current

management, we believe that the

trend of impressive NAVPS growth

will continue over the next three

years given its current and expected

pipeline and would so benefit

investors.

Grindrod

Our liking to Grindrod is largely

premised on our belief that eventually

the shipping division’s profitability

will recover to normal ‘through the

cycle’ levels and continued steady

growth from the freight services

business. Over the last decade

Grindrod has focused on building its

freight services business which has

surpassed the shipping business

in size and is expected to produce

a steadily growing earnings stream

as assets are better utilised and

consumption in Africa increases.

We believe the market is currently

only paying for this division and

pricing the shipping division as if it

will not earn profits again. On our

normalised earnings assumption

we believe Grindrod is trading at

9.5 times normalised earnings, well

below the 15 times we believe it

justifies.

Pieter Fourie,Head of Global

Equities, SPI UK

eBay

eBay’s ecosystem is one of the best positioned

to thrive in the new digital world since only

a small fraction of commerce is currently

occurring online and the growth opportunity is

underappreciated by investors.

eBay’s shareholder return has been lacklustre

in 2014, providing long-term investors with

an opportunity to buy into a secular growth

company at an attractive price. eBay is trading

at 16 times earnings for next year with net cash

of $5 billion on the balance sheet.

We forecast double-digit revenue and

earnings growth for the foreseeable future and

the spin-off of their PayPal business next year

should provide a further boost to sentiment.

Oracle

Oracle is likely nearing an inflection point of

a positive secular growth trend associated

with its database machine line and its core

license sales growth, combined with an

ever-growing opportunity in the software

maintenance division. Even though Oracle’s

most important (and most profitable) business

and infrastructure software (database and

middleware) is experiencing some secular

pressures, we believe these fears are fully

discounted at current share-price levels. Trading

at 12 times earnings with a return on equity of

25% investors, we see an upside for long-term

investors.

Cognizant

We believe this IT service name is well-

positioned to capitalise on market trends,

given its focus on high value and industry-

specialised services. The improving environment

in discretionary IT spending and adoption of

cloud-based applications and solutions will drive

growth over the long term. Cognizant’s clients

are looking for more efficiency, fuelling demand

for its services around core applications,

outsourcing and IT infrastructure. The recent

TriZetto acquisition also strengthens Cognizant’s

position, enabling it to take advantage of US/

global healthcare reforms and provide the Group

with a significant competitive advantage. This

name has excellent balance-sheet strength,

robust and free cash-flow generation and

an attractive growth profile cumulating in an

estimated normalised return on equity of 22%.

Murray & Roberts

This South African-based broadscale

construction and engineering company with

wide geographic representation presents

value after seeing share prices come down

sharply this year.

The company has sold off non-core

assets, has recapitalised and also refocused

on higher-margin business. Trading on a

price earning (PE) of 10, dividend yield of

2% and price to book value of 2 times – I

expect a 20% plus return in the price from

the levels of R21.

Anglo American

I like Anglo due to expected turnaround

in ‘consumer-related resources’, namely

platinum and diamonds. These divisions are

expected to contribute upwards of 35% to

group earnings and with a world consumer

with extra cash, thanks to lower petrol

prices, this bodes well. Trading on a PE of

16, dividend yield of 3% and price to book

value of 1, this unloved company will start to

rerate at some stage. Time to acquire now

and be patient.

Mondi

Mondi has, over the years, transformed

itself from a paper company to a packaging

company. And because packaging is such

an important component of modern-day

commerce, this leaves Mondi in a healthy

position. Trading on a PE of 12, dividend

yield of 3.5% and price to book value of

2 times, this quality company deserves

more attention than it receives. With good

margins and strong cash generation we

can expect another acquisition or special

dividend within 12 months. This company

is essentially European-based now and

a weaker euro should further benefit the

bottom line.

Humphrey Price,

Portfolio Manager