Source: Bloomberg
  • Following a particularly bad start to 2020, so-called "SA Inc" shares are starting to look cheap, according to some stock pickers.
  • Some of the shares that feature on their lists are the taxi financier Transaction Capital, the freight company Grindrod, and retailer Shoprite.
  • But the coronavirus fallout could still get uglier, one expert warned.
  • For more stories, go to Business Insider's home page.

Following another week of turbulence, global markets are still in the midst of the worst sell-off since the financial crisis.

Investors took fright as the economic impact of the novel coronavirus started to emerge across the world, with companies warning that their profits will be hit as manufacturing in the Chinese economy fell off a cliff. Apart from companies like Apple (which depend on components from China), retailers, and tourism and travel companies in many countries have been bleeding as coronavirus fears kept people at home, and killed travel and spending.

The world’s biggest machine – Chinese manufacturing – has been turned off, says Petri Redelinghuys, trader at Herenya Capital Advisors. This will have a big impact on all companies with supply chains that have a Chinese link, for many months.

An iPhone for example, has hundreds of components. If only one of those components can’t be sourced from China, it means that the phone can’t be completed, says Redelinghuys. Already in Europe, some of the largest vehicle factories are on the verge of shutting down as they are struggling to source parts.

In a worse-case scenario, the virus behind Covid-19 will spread further and disrupt more industries, also in South Africa.

“If the coronavirus hits South Africa’s platinum belt, for example, it will close mines,” says Redelinghuys.

SA's stock market carnage

Hit by the virus fears, as well as load shedding and local economic malaise, the JSE’s all share index has lost almost 10% of its value so far this year. But the real picture is far uglier, as rallies in gold and platinum miners mask the true extent of the damage.

Dozens of shares, including major companies like Nedbank, FirstRand, Sanlam, and Woolworths, hit their weakest levels in more than a year this week, according to data from to the market information platform TimBukOne.

Shares are starting to look cheap, according to the key measure used to judge how expensive stocks are. The price earnings ratio (the share price divided by company profit per share) has fallen to almost 20% below its average level over the past decade.

A report by the market blog South African Market Insights shows that the JSE All Share's average PE ratio is now at around 14.62 times from an average of 17.66 over the past decade.

The red line is the rolling 13-month PE, while the blue line tracks the actual PE ratio. Source: South African Market Insights

Peter Little, a fund manager at Anchor Capital, believes “once-in-a-decade” investment opportunities are surfacing. He says that even before the coronavirus crash, the so-called SA Inc portion of the JSE (businesses that earn most of their money in South Africa) was already trading at extremely low valuations – with many big companies at 5-year lows or worse. 

While Schalk Louw, portfolio manager and strategist at PSG Wealth, says the novel coronavirus is expected to disrupt markets and businesses for some time – especially if the virus mutates – he is optimistic about the prospects for SA Inc stocks.

This is because of the likelihood that there will be more consumer spending in the economy in coming months, thanks in part to R2 billion worth of cuts in personal income tax, announced in last week’s Budget.  

Louw expects local interest rate cuts of at least 50 basis points, especially after the Fed announced an emergency cut of 50 basis points this week in an effort to boost the US economy.

He also believes that President Cyril Ramaphosa has the expertise and experience to secure a deal with public sector unions to ensure the necessary savings in the wage bill – which will help to stabilise the fiscal environment.

These are the expert stock picks right now

Against this backdrop, PSG's Louw likes retailers Shoprite and Mr Price. And after a massive sell-off in local property stocks – which gave up over 15% in February – he is looking at Growthpoint and Redefine, which are both trading at a current average historic income yield of 15%.

He is also positive about banks, particularly Standard Bank and Nedbank. “Why put money in a savings account at a bank and earn 6% interest, if you can earn an average dividend yield of 7.2% if you invest in local banks? Naturally one should always consider the risk of equities versus money market, but the risk/return payoff is becoming increasingly attractive”

There are some ridiculously cheap stocks out there that will turn fast if our economy turns,” tweeted Vestect Asset Management director Byron Lotter on Wednesday. “At least I won’t have any regrets if that happens.” He recently bought Ascendis, AdvTech, Balwin, Discovery, Grindrod, Long 4 Life, PSG Group, Remgro, Shoprite and Transaction Capital. The independent analyst Johann Biermann also likes Grindrod, Long 4 Life, Shoprite and Transaction Capital.

While Redelinghuys remains cautions about the full impact of the Covid-19 virus, he also favours Transaction Capital, which owns a debt collection company in Australia as well as SA Taxi, which sells, finances, and insures minibus taxis here. “While Transaction Capital may be affected by the Chinese manufacturing disrupted [the company finances the bulk of Toyota’s Sesfikile taxi production], it is a really solid good business which has cornered the market.”

He also bought Reinet, whose interest in UK-based company Pension Insurance Corp, an insurance company that buys pension fund liabilities, excites him. Reinet also owns a stake in British American Tobacco.

Drikus Combrinck, CEO of the asset manager Capicraft, favours the freight company Grindrod, which this week reported 9% growth in headline earnings and has strong cash flow. The company unbundled or sold a number of its businesses (including shipping, agriculture and marine fuels) over the past two years, and the rest of business is now picking up thanks to strong capital investment over the last five years, especially in its ports company. “Local investors these days have shut their ears to long-term capex stories.”

He is also an investor in Curro, which is trading at less than the replacement cost of their existing schools. “The investment case for Curro didn’t change much, only shifted out into the future, but that’s not good enough for the myopic SA investor.” Combrinck believes that Curro is managing the economic slowdown quite well, adapting its pricing model and student retention strategy.  

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