Dozens of SA’s biggest companies – including Old Mutual, Sasol and Pick n Pay – have hit new lows. Professional investors think these shares may be bargains
- Some 27% of all listed companies on the JSE fell to their lowest levels in a year over the past week.
- The list includes Discovery, FirstRand, Sasol and Sappi.
- But not all of the shares on the list are bargain buys - professional investors share their picks.
- For more stories, go to BusinessInsider.co.za.
In the past week, 45 of the 164 companies on the JSE fell to their lowest levels in a year.
That’s 27% of all listed FTSE/JSE All Share companies – and a frightening statistic, says Schalk Louw, a portfolio manager at PSG Wealth.
His list of companies that are now trading at new 52-week lows include:
- Arcelormittal SA, the largest local steel producer
- AVI, owner of I&J and Spitz
- The hotel group City Lodge
- Curro, the largest for-profit school group in Africa
- The pharmacy giant Dis-Chem
- FirstRand, owner of FNB
- The Foschini Group, which also owns brands like @home and Totalsports
- HCI, owner of eTV
- The industrial company Hudaco, which focuses on automotive and electrical products
- Hyprop, owner of the Hyde Park, Canal Walk, Rosebank Mall and CapeGate,
- Italtile, which also owns CTM
- JSE, manager of Africa’s largest bourse
- Mondi, the global paper company with operations in 30 countries
- Mr Price
- Nampak, Africa's largest diversified packaging manufacturer
- Netcare, SA’s second-biggest hospital group
- Old Mutual
- Pick n Pay
- The paper group Sappi, world's largest producer of dissolving wood pulp
- Sasol, the world's biggest maker of fuel from coal
- Super Group
- Tsogo Sun, owner of Montecasino, Sandton Sun and other hotels and destinations
They were hammered due to many reasons. Some were company-specific, like Sasol, which is continuing to pay for the fact that its massive Lake Charles chemicals project in Louisiana in the US will cost billions more than expected. Others, like Discovery and Netcare, were also hit with specific bad news – in their case, uncertainty about the new NHI bill.
But much of the damage was caused by investor fears about the trade war between China and the US, and emerging market troubles, particularly in Argentina.
In truth, however, the local market has been suffering for some time due to South Africa’s own set of problems: political infighting, the very weak state of the local economy and problems with Eskom that have undermined investor confidence.
The probable Moody’s downgrade of SA to junk has now been priced into the rand and the bond market, says Jean Pierre Verster, portfolio manager at Protea Capital Management. But talk of an IMF bailout has added new pressure on SA assets. Even if there’s only a 5% chance of IMF intervention – which will come with punitive prescriptions for South Africa - the market has to reckon with the fact that there’s still a chance, says Verster.
Foreign investors have now sold R47 billion more in South African shares than they bought this year. (Last year this time, they were net buyers of R8 billion in local shares.)
Selling has left the local market at its cheapest level in years – the JSE is currently trading at a price earnings level of 11 times. (The price earnings ratio calculates what investors are willing to pay for a rand of the company’s profits). The JSE’s historical average PE is 14 times – and as recently as 2015, SA shares were trading at 17 times.
At these levels, providing South Africa won’t jump off an Argentinian-type cliff, there are inevitably bargains to be had.
“We’ve become used to a roller-coaster ride in our country – this year investor sentiment has been shaken by, among others, the general elections and more recently, disappointing GDP figures. It’s an unfortunate reality, however, that investors tend to extrapolate a negative narrative into perpetuity – while it’s in many cases understandable, it’s certainly not rational,” says Alwyn van der Merwe, Director of Investments at Sanlam Private Wealth
The key is to be able to spot investment opportunities when they arise.
“When we analyse individual companies, we can see quite significant upsides on some of these. In our view, cautiously adding to such assets when value is apparent will – as it normally does – pay off over the longer term.”
Van der Merwe prefers “defensive” companies – firms who make essential products or services, which remain relatively stable during both economic upturns and downturns. This includes British American Tobacco and Mondi, which is featured on the year-low list.
Louw's preferred investment on the list is also Mondi, also because of its good defensive qualities.
Another of his picks is Glencore. The world’s largest commodity trader and a large mining trader (also, the second-largest company in Switzerland) offers opportunities at these levels, he says.
He also thinks Truworths has been unfairly punished. The company, which apart from its local outlets also owns the UK retailer Office, has been sold off due to Brexit fears. But Louw says Office is not as integral to Truworths as, for example, Woolworths’ embattled Australian venture David Jones.
Louw also likes Reinet, which holds a 3% stake in British American Tobacco, Old Mutual and the logistics firm Super Group at these levels.
Hudaco, which imports and distributes branded industrial, automotive and electronic consumable products, is also a buy, according to Louw.
Verster agrees, and thinks Hudaco, which also supplies the mining sector, will benefit from an expected boost to the sector from stronger metals prices and the weak rand. Mining companies sell their products in dollars, but pay costs in rands.
Verster also rates AVI as a “high quality company” which should recover in the long-term as consumer spending improves.
Similarly, if you have the patience to remain invested for the long term, Mr Price (a “best-in-class apparel retailer”) should pay off, says Verster.
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