Learn about some interesting investment opportunities
With the festive season on our doorstep, our investment research and fund management teams have drawn up a selection of local investment opportunities for the whole family. Here’s to a prosperous and happy 2018!
Zeder has experienced a difficult operating environment over the last two years because of the severe drought in South Africa. This resulted in the share price coming under pressure. The agricultural cycle has however bottomed, and is starting to improve. Most of the country has returned to expected rainfall levels and, apart from the Western Cape, dam levels have been restored. Following a bumper maize crop, maize prices have normalised, which should benefit Zeder’s largest investment, Pioneer Foods. Zeder’s investment portfolio is likely to benefit from an improving agricultural cycle in 2018. Combined with an attractive valuation, it provides an interesting investment opportunity going into the new year.
The Foschini Group (15 490cps)
The Foschini Group (TFG) has proven to be a good retailer in tough conditions, with internal levers to pull. In addition, approximately 30% of its revenue comes from outside South Africa (with the target being 50% in time), which will provide some protection in the event of a currency blowout. Locally, TFG is managing to generate volume growth in a tough consumer environment (unlike some of its competitors). It has a good balance of credit and cash sales (50:50) and has managed to grow its debtors book as well as to retain the quality of its book, with the bad debt charge declining 4.3% according to the recently reported interim results. While brick and mortar stores in the UK are struggling, online sales are not. TFG London’s online sales grew 20% year-on-year for the half-year ended 30 September, and represent 28% of sales. Clearly the product offering is relevant and attractive to consumers. Bolstering the TFG London presence is the recently announced acquisition of Hobbs, a contemporary women’s apparel brand, which gives TFG access to Bloomingdales in the US. Lastly, TFG has also acquired RAG in Australia, predominantly a men’s offering, which is typically less volatile than women’s fashion. TFG will continue to improve working capital management across the Group, continue to roll out space in all geographies successfully, and appears to be able to defend and grow market share in tough operating conditions.
Naspers (363 437cps)
Naspers has a unique portfolio of businesses as well as strong rand-hedge components, with less than 5% of its valuation from South Africa. The contribution from its video entertainment (VE) business has shrunk relative to the size of Naspers’s overall profitability and valuation. Naspers continues to build valuable platforms as evidenced by the more than 2.2x value uplift within its classifieds portfolio, amongst others. It continues to demonstrate its sound capital allocation capabilities, actively managing its ‘rump’ assets by seeking out opportunities to extract value for shareholders. These include consolidating markets, exiting low-growth geographies, and restructuring some of its portfolio. Tencent (Naspers’s most valuable investment to date) remains extremely robust, entrenching itself further in the daily lives of its consumers. Recent initial public offerings (IPOs) of investments such as China Literature, gave investors additional insight into the profitability and scale of Tencent’s underlying portfolio. Looking forward, VE remains a strong cash flow contributor and as such the trends in this business unit remain very important. The Sub-Saharan African business should start normalising as currency volatility stabilises, while Naspers’s defensive strategy within South Africa protects it from the increased competition on its home turf. We expect Naspers to continue to show solid progress on its ecommerce businesses.
Adapt IT (610cps)
Adapt IT is on sale! Adapt IT provides niche software solutions to clients across five industries in 40 countries, with services ranging from consulting to implementation and support. The Group has embarked on a ‘buy-and-build’ strategy, targeting a threefold revenue increase to R3 billion by 2020. Management owns more than 10% of the Group, so you can be rest assured that your interests are well aligned. So add some Adapt IT to your portfolio and help spread the festive cheer!
Rebosis A (2 250cps)
Rebosis A is the perfect gift for investors looking for safety in an uncertain world - it has a preferential claim over the distributable income that Rebosis generates and offers guaranteed dividend growth of 5%. It currently trades at a forward yield of approximately 11%, which is an attractive entry point for a stock that offers investors fairly good visibility on expected returns. Why sit in cash when you can earn a decent yield and achieve inflation-like growth on your assets? Rebosis A is the ideal gift this festive season!
Tongaat Hulett (10 365cps)
After another turbulent year, we think the family can do with an extra spoonful of sugary sweetness this festive period. With one of the most intense El Niño events in recent history finally behind us, we believe Tongaat is well positioned to benefit from a recovery in sugar production over the medium term. In the 2017 financial year, Tongaat used only about 50% of its sugar milling capacity. And with most of agricultural and milling costs largely fixed, we think improved capacity usage could significantly boost future profits. It is important to note, though, that it will take some time for yields to fully recover. In addition, better rainfall and lower fuel ethanol demand (due to lower oil prices) is resulting in stronger sugar production from a number of regions around the world. This is currently depressing sugar prices globally, and could offset some of the benefits of our anticipated volume recovery. Coming back to the positives, Tongaat also owns an immensely valuable portfolio of land in the KwaZulu-Natal area. While it’s hard to predict exactly which parcels of land will be sold and when, we are comfortable that the value of this portfolio will continue to be realised over time. So don’t wait too long to participate in the recovery… May 2018 be a year filled with sugar and spice and all things nice!
City Lodge (12 553cps)
The City Lodge share price has come under significant pressure over the course of 2017 as economic growth stalled and political uncertainty unnerved the markets. The knock to business confidence and the slide into a technical recession in the first quarter of 2017 saw City Lodge report a 3% decline in hotel occupancies. While the local economic and political outlook remains uncertain in the short term, the hotel operator’s prospects are not solely reliant on South Africa. City Lodge will open four new hotels outside of South Africa in the year ahead - in Kenya, Mozambique, Namibia and Tanzania - which we expect will contribute meaningfully to earnings
growth over the next few years. The Group could be given a further boost from a return in business confidence locally and a resurgence in its mainstay business travel. We’re checking in to City Lodge this festive season!
Ascendis (1 599cps)
Ascendis is recognised as a leading healthcare brand manufacturer and distributor in South Africa. The range of products, most of which are household names, range from vitamins (SOLAL), health supplements (EVOX) and skincare (NIMUE), to animal healthcare (MARLTON), medical devices (OLYMPUS) and a range of generic medicines. The Group also has global operations that produce and distribute healthcare products (SUNWAVE) and generic medicines (ibuprofen). These operations are based in Spain (Farmalidier), Cyprus (Remedica) and Hungary (Scitec). The local and international operations are well established and Ascendis will continue to make complementary bolt-on acquisitions to further grow the company. Organically, the Group seeks to cross-sell brands and develop existing brands in new regions. Management has set aggressive growth targets, which indicate that the best is still to come.
Famous Brands (9 600cps)
Famous Brands is a quick service restaurant share with a portfolio of highly recognised brands and is well represented across the different income groups. The Group’s strategy of acquiring, developing and turning smaller brands into good businesses while diversifying its income streams has been a success, and has supported its growth trajectory over the years. Although the recent Gourmet Burger Kitchen (GBK) acquisition has proven to be challenging, we are positive that Famous Brands has the capability to turn this business around. The Group continues to focus on growing its representation in existing and new markets through store expansions and to enhance its online platform through the addition of new offerings. These initiatives are likely to drive growth in future years.
Old Mutual (3 662cps)
Times are tough! This festive season, value for money is top of mind for all family members. Luckily, Old Mutual offers just that. The long-awaited managed separation is due to be completed at the end of 2018. Shareholders will be gifted with two attractive dual-listed businesses over the next 12 months. The Old Mutual Emerging Markets business is a dominant player in South Africa and should, over time, become an African financial services champion. The Old Mutual UK Wealth business is very well positioned to capitalise on the retirement reforms taking place in the UK. On listing, it should re-rate in line with its peers, which will reward shareholders handsomely. In addition, the Nedbank unbundling will take place as soon as possible after the managed separation – another gift to look forward to! This will be a very special 186th festive season for Old Mutual, and we look forward to celebrating the value unlock over the coming months.
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