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Property

by Joan Muller

Last year started with much promise for the Financial Mail ’s property pick, Hyprop Investments, which owns some flashy shopping centres, such as Hyde Park and Canal Walk.

Overall, the share price was up 32% between January and October. But then a spike in bond yields and finance minister Nhlanhla Nene’s shock axing wiped out most of the gains.

Still, Hyprop ended 2015 with a total return of 6.4%, which would have been closer to zero but for a generous dividend payout. This was marginally below the returns of the entire JSE-listed property sector, which returned 8% for the year. Again it showed how vital property investments are for a portfolio, as this trumped the returns from the JSE’s all share index (5%), cash (6.5%) and bonds (-3,6%).

Some may argue that it’s too late to hitch your wagon to a rand hedge proposition, particularly given the spectacular run that offshore property plays enjoyed last year. This included Romanian mall owner New Europe Property Investments (NEPI), London’s Capital & Counties Properties and German-focused Sirius Real Estate, which all shot the lights out.

But the Financial Mail is betting on offshore counters to continue to outperform their SA counterparts in 2016, with newly listed Schroder European Real Estate Investment Trust (Sereit) our top pick for 2016.

The choice isn’t based purely on further potential rand weakness but rather on supply and demand, and European funding costs versus acquisition yields. Throw in UK and eurozone growth prospects and it looks pretty compelling.

Besides, Schroders is one of Europe’s biggest asset managers and has an extensive track record in European real estate markets.

Sereit’s share price rose 30% in the three weeks following its listing on December 9 and there’s more upside as management deploys a R3bn cash pile to acquire office, retail and industrial properties across major European growth cities over the next six to 12 months.

 

AltX

By Marc Hasenfuss

The JSE’s nursery, AltX, scored seven new counters last year, ensuring it wasn’t left out of the mini-listings boom. Three of those were Spacs, or special purpose acquisition companies: Renergen, M-Fitec and GFlash.

Until now, there’s not been much interest in the four JSE-listed Spacs (Vivian Immerman’s Sacoven listed in 2014). However, the presence of Renergen, with a market capitalisation of more than R1bn, gives a hint that this specialist segment may yet capture the market’s imagination.

Two further listings involved specialist asset management companies seeking to capitalise on the success of Anchor Capital, which also listed in late 2014.

Anchor’s offshore cousin Astoria enjoyed a brisk debut, buoyed largely by the calamitous collapse in the rand against major international currencies at the end of 2015. And, albeit a far more low-key affair, the Eastern Cape-based N-Vest also fared nicely, its market capitalisation edging close to the R1bn mark.

AltX also secured two new specialist real estate contenders in the form of International Hotel Group and Lodestone. The collective market capitalisation of these two offsets the loss of international property group Stenprop, which was promoted to the JSE’s main board.

It seems likely that at least one more international property company will be promoted to the JSE’s main board this year. The most likely is either the Germany-focused industrial parks specialist Sirius (market cap: R6bn) or Atlantic Leaf (R2bn).

But you can bet that we’ll see more than a handful of new international real estate listings on the AltX this year — especially (riskier?) fledgling funds that should find it easy to tap local investor enthusiasm for global assets.

 

Banks

By Phakamisa Ndzamela

SA banks appear to be on a hiding to nothing, if this year’s grim start is anything to go by. In the first two weeks Standard Bank has fallen by 11.5%, Barclays Africa by 11.4%, FirstRand by 10.1% and Nedbank by 9.6%.

It’s no secret why: there’s the threat of a downgrade to the country’s sovereign credit rating; a weakening rand has raised fears of interest rates rising; job layoffs loom; and a debt default is threatened in the struggling agricultural sector.

Though a rise in interest rates tends to swell the income that banks generate from interest payments, there is a tipping point at which this is dwarfed by bad debts.

In theory, this means bank shares are now going for a song. In practice, it remains to be seen how much further they will fall.

Even Investec and Capitec shed around 10% in the opening days of the new year.

“There is a lot of risk in anything in the banking space simply because the [macro environment] is not looking good,” says one analyst.

But analysts aren’t calling the banking sector a wholesale “sell” just yet. Investec, in particular, remains favoured as it provides hard-currency earnings from its overseas operations.

Says one analyst: “Even if earnings [in the SA-based banks] disappoint, the banks have enough cash and capital to keep up with dividends. Dividend payments will still be there.”

 

Financial Services

By Stephen Cranston

It was certainly a year of contrasting fortunes in the financial services sector. The whole of the asset management subsector had a negative return, with the exception of (almost untradable) Lonfin and Peregrine Holdings. Even after a 17% gain over the past year Peregrine remains an undervalued share (see box) with some promising underlying businesses.

The two gorillas of the sub-sector have seen big declines, with Coronation down 55% and Alexander Forbes 45%. Both shares can be considered to be bull market shares, and it is unlikely that there will be a full-blown bull market in 2016 as interest rates increase and commodity prices continue to fall. Coronation, arguably, should never have been valued on a market cap of R34bn, and it still has a larger market cap than large industrial businesses such as Barloworld.

Alexander Forbes had disappointing results and its revenue is directly linked to the number of jobs in the formal private sector, which continue to decline.

The winners for the year were holding companies with a number of underlying businesses: AEEI (previously Sekunjalo) doubled to 275c as it indicated it would list some of its businesses separately (perhaps including Premier Fishing). Brait also doubled as it is seen as more of a rand hedge since it sold Pepkor and bought into UK-based Virgin Active and New Look. Another winner is PSG, which gained 50% to R195 and now sits on a multiple of 21. PSG is now on a premium to its underlying investments, which even Remgro has rarely managed to do. A share for the long term. Last year’s pick, the JSE, lost just 3%, proving itself to be an all-weather performer.

 

Food and Beverages

By Stafford Thomas

SABMiller ended its last full year as a listed company in style, a 55% share price gain making it 2015’s top performing food and beverage stock. SA shareholders have more than just Anheuser-Busch InBev’s successful bid for SABMiller to thank. Better reflecting SABMiller’s showing was its performance on its primary listing market, the London Stock Exchange, where its price ended 2015 up 21.1%. For SA shareholders, the biggest chunk of performance was driven by the rand’s slump.

Generally food and beverages was not an exciting sector in 2015. There were exceptions, including Distell, up 20.9%. The biggest upsets were among food producers. Of the heavyweights the best showing was from the Financial Mail’s 2015 pick, Pioneer Food Group, which ended the year up 11.2%. AVI ended flat while Tiger Brands lost 14%.

The big food sector story in 2015 was small cap Rhodes Food Group, the Financial Mail’s food and beverage sector hot stock pick for 2016. Listed in October 2014, Rhodes’ 54.7% share price gain in 2015 all but equalled SABMiller’s. Managed by one of the astutest teams in the game, Rhodes is building on strong first or second positions in niche sectors through product innovation and bolt-on acquisitions.

In Rhodes’ year to September 2015 sales lifted 23.7% with 9.4% of the rise driven by acquisitions and 14.3% by organic growth. Expect more of the same in Rhodes’ current year. Five acquisitions in 2015 totalling well over R400m will kick in, adding at least 20% to sales.

 

Industrials

By Sikonathi Mantshantsha

Brian Joffe’s Bidvest took the honours in the sector last year, beating not only Barloworld and Remgro but also our pick, Invicta.

Bidvest’s share price rose 8.9% between January and December. In another era, it could have done much better. But it was a brutal year: Invicta dropped 54% to R44.91. And in the first few days of this year it fell even further, to R39/share.

This, however, is more the turmoil in stock markets globally than Invicta’s own prospects. In fact, Invicta’s net income rose 9% in the half-year to September.

Still, Bidvest was the undisputed winner, thanks largely to its hugely diversified operations (geographically and by services) which gave it 8.6% headline earnings growth in the year to June. Bidvest’s R320 share price gives it a rather demanding p:e of 17.07, with Remgro close on 15.13. By contrast both Barloworld and Invicta are on a give-away p:e of just over six times historical earnings.

These are all great stocks and should make for an interesting choice.

We’ll stick with Invicta, which has been nibbling away at a few minor acquisitions. Our faith in the share is based on not only its resilient financial performance but also the management team’s acquisitive spirit.

Since September Invicta has concluded at least three bolt-on acquisitions, including the SA business of Hansen Industrial Transmissions from Sumitomo. They were not the biggest acquisitions it could have made but they came at a time when many smaller industrial companies were gasping for air.

With commodity prices still plummeting, it is difficult to see where industrial growth will come from. In such circumstances investors need a trusted jockey in charge of their assets. Chairman Christo Wiese and CEO Arthur Goldstone have proven track records.

 

Retail

By Stafford Thomas

To win in the retail sector, stock picking proved vital in 2015, a year in which share-price performances ranged from excellent to awful. Taking honours with an 82.7% price gain was Cashbuild, a small cap transformed by its CEO, Werner de Jager, into a growth stock. Also putting in solid showings were Woolworths (up 29.9%), Pick n Pay (23.5%), Holdsport (19.8%), Truworths (18%) and the Financial Mail ’s 2015 pick, Spar Group (14.1%).

Taking the biggest hits were Massmart (down 30%), Lewis (25.8%), Shoprite (14.8%) and Mr Price (14.9%).

Stock picking is again crucial in 2016, a year in which GDP growth is set to slump and inflation rise sharply. It is an environment which places Mr Price’s value fashion model in a strong defensive position.

However, it is also an environment for which The Foschini Group (TFG), with 17 brands spanning all income segments, is well prepared. One deciding factor in the Financial Mail’s choice of TFG as its retail hot stock is valuations. While Mr Price’s rating has eased to a 21.7 p:e it does not appear to offer as good value as TFG, which is on a 14.9 p:e. The deciding factor is TFG’s foreign diversification through Phase 8, a UK-based fashion retailer operating in 23 countries and acquired in January 2015 for £140m. Phase 8 added R1.7bn to TFG’s R8.1bn SA and African sales in the six months to September. In TFG’s sights is Phase 8’s entry into a further eight countries.

 

Health Care

By Nicky Smith

The health-care sector has long been a haven for investors seeking a defensive position to mitigate risk when times are bad. It makes sense: as one wag said, “when you’re half dead, you can’t not go to hospital”.

And while there is cause for pause, given SA’s corroding economic framework, private hospitals are still relatively well-placed to weather the headwinds from low growth and likely job shedding.

State hospitals are still unreliable and in many cases provide poor service. So for those who can afford it, private hospitals remain the destination of choice.

In a recent investment note, JPMorgan reassured investors that the ever-increasing age profile of those who have health insurance means private hospitals aren’t likely to see any discernable dip anytime soon.

One risk is that the local hospital groups — Netcare, Mediclinic and Life Healthcare — all have a large exposure to the same constrained growth picture. But Netcare and Mediclinic are making great strides offshore, which will not only reduce this risk, but also provide a rand-hedge component. Netcare remains cheaper than Mediclinic on a p:e of 18, and 72% of the analysts still have it as a buy. But still, Mediclinic is our pick for 2016, given its better global positioning and strong management team.

Last year our pick was pharmaceutical company Aspen but, disappointingly, it lost 23% last year. Still, Aspen remains popular with analysts, with nearly two-thirds still calling it a “buy”.

There are numerous well-valued prospects in the sector. As ancient Roman poet Virgil is reported to have said: “The greatest wealth is health.”

 

Oil and Gas

By Charlotte Mathews

Brent crude oil’s decline from US$114/barrel in June 2014 to below $40/barrel by the end of last year was good for global inflation, but disastrous for shareholders in oil companies.

Sasol’s stock fell from about R630 to R413 in the same period, and at one point even touched R375 — a level last seen in early 2013.

Still, SP Angel’s oil and gas team believe that oil prices will rise from current levels over the next two years, because oil is a finite resource and investment in new production has been cut back. The question, though, is when will this happen.

Last year’s Financial Mail pick was a small oil company, SacOil Holdings, which edged up 1c to 34c on a 12-month comparison, though it went as high as 50c in October.

Oil stocks have always seemed like a safe bet because the world needs energy, but the sector is changing. BP’s Energy Outlook predicts demand for primary energy will grow 37% between 2013 and 2035, with the fastest growth in renewables. Increasingly, countries are seeking to diversify their energy sources. Coal, oil and to some extent gas and nuclear are old generation. Solar, wind, battery storage and biomass are the future.

The problem for investors is that technologies are still developing, so the risks are higher. There is a shortage of listed companies in new energy sources, particular for investors based in SA.

Over the next few years more energy company are likely to list on the JSE but investors will need to be discriminating.

 

Resources

By Charlotte Matthews

Few bright spots stand out as prospects in the resources sector for 2016.

China’s demand for iron ore, copper and metallurgical and thermal coal shows no sign of revival as its economy battles to make headway. The large mining companies have dragged their heels on cutting production to address surpluses, adapting debt levels to weather a further possible downturn in prices, and moving away from over-ambitious dividend policies.

As a result, their share prices have been punished.

Banks have cut lending to both explorers and miners, so equity issues are being offered at massive discounts.

The spot price of platinum has fallen 26% over the past year and, at US$840/oz in early January, was close to seven-year lows. Spot gold, at $1,085/oz, was close to five-year lows, having shed 9.4% over one year.

For SA resources companies, the pain was partly offset by rand weakness, though they still face above-inflation demands for wage increases and utilities tariff hikes.

The Investec global resources team’s “mining clock” shows the industry is well into the phase of stabilising metals prices and industry recapitalisation that precedes the start of the next boom. But as far as the Liberum mining team is concerned, the necessary supply curtailments have not yet occurred.

Last year’s stock pick, Wesizwe Platinum, fell 49% from 81c to 41c, which was similar to the performance of the sector heavyweight, Anglo Platinum.

 

Construction

By Larry Claasen

Not so long ago, SA’s construction companies used to be the bluest of the blue chips on the JSE. Murray & Roberts and Aveng were fixtures of the JSE Top 40.

Fast forward to 2016, and most now border on being small caps in a struggling industry — forgotten or avoided.

This underscores the fact that the construction industry has taken an almighty fall since the 2010 Fifa World Cup. There are many reasons, not least of which are a poor economy and a collusion investigation which led to most construction firms having to pay the competition commission a cumulative R1.5bn in fines.

The sector is taking strain, but it still has (a few) star performers. One of those has been development company Calgro M3.

Calgro’s formula has been to run residential projects, which generate strong cash flows at decent margins. It helps that by putting together large housing projects, Calgro operates in the one part of the construction sector that remains robust. The group estimates that about 4m households fall into its market segment, and that the shortage in this segment is about 700,000 homes and growing at 100,000 a year.

Calgro is an impressive firm but investors looking for undervalued shares should also take a look at Group Five. In a recent report, Morningstar noted that it was undervalued and in strong financial health.

Group Five’s move to do more work around Africa has, to some extent, mitigated the problems in SA. “Group Five’s order book growth of 13% is mainly a result of new cross-border work. Their African cross-border order book is now at 39% of their total order book,” PwC says.

 

Telecoms

By Thabiso Mochiko

Last year was dire for MTN, thanks to the US$3.9bn fine it incurred in Nigeria.

Within days, MTN’s investors lost more than R60bn, as the share price tanked to its lowest in years. MTN ended 2015 40% down at R132.89. The stock is expected to recover ... eventually.

Vodacom had a much better year. Its stock rose 18.67% to end the year at R152.41. Performance was strong in all its five markets as demand for data continued.

Telkom’s stock fell 7.6% despite impressive strides in its quest to reduce costs.

The challenge with Telkom — our 2015 stock pick — is finding enough growth to offset the decline in voice revenue. The bulk of its business is fixed-line voice, which is in decline. And its mobile business, though showing strong traction, needs scale to take on bigger competitors. But Telkom is spending billions of rand to increase sales of data by extending fibre to homes.

However, 2016 could change the competitive landscape entirely. Vodacom aims to make Neotel’s radio frequency spectrum available to rivals as part of its revised takeover deal of the fixed-line business. Blue Label Telecoms, the biggest distributor of prepaid airtime and starter packs, is entering the mobile network market with its proposed acquisition of 30% of Cell C. Its entry could be a threat to rivals.

Though overall share prices of IT companies didn’t exactly soar last year, they all showed strong operational performance.

And while a number of IT companies delisted, there are still some quality operations, including EOH, Pinnacle and Datatec. There are also smaller companies climbing the ladder, such as Adapt IT.

 

Transport

By Mark Allix

As the economy slowed last year, the transport sector had a particularly tough time.

Even Imperial, the blue-chip logistics company headed by Mark Lamberti, suffered a 35% tumble in its share price.

In this context our pick for last year, Super Group, did well to end in the green — up 10% over the year. CEO Peter Mountford has worked wonders since taking over the company at its nadir in 2009.

One company that did particularly well last year was logistics firm Santova, whose stock rose 50% as its overseas logistics businesses, particularly those in Holland and Australia, pumped out the cash.

Another company that stands out is the small, black-owned Labat Africa, which has been reinvented so many times it almost defies description.

Led by former rugby administrator Brian van Rooyen, Labat soared on the JSE last year thanks to its R560m reverse takeover of Reinhardt Transport Group. Its stock, which began the year at 15c, popped the champagne at year-end at R1.50. Reinhardt is a savvy deal for Van Rooyen: it moves commodities of about R1.5bn/year, but lost a lot of business in recent years because it didn’t have solid empowerment credentials. Labat gives it that, and more.

It’s a welcome return to form, considering that in recent years Labat has been in the media for all the wrong reasons, including linking up with Aurora Empowerment Systems in 2010 to try to obtain a JSE listing.

Now Labat has refocused on logistics in sub-Saharan Africa.

 

Life Assurance

By Stephen Cranston

After a stellar 2014, the past 12 months have proved to be a struggle for life assurers. The sector is still seen as a geared play on the equity market, as it earns a large part of its revenue as fees on investment products.

Only two shares, Discovery and Old Mutual, had a positive return for the year.

The long-time sector leader, Sanlam, has come down to earth with a 20% decline. When it reported interim results in September, net operating profit was up 5%. They were hit by transport equipment finance losses from its Indian business, Shriram Capital, indicating that Sanlam might be getting too broad in its international footprint: it is invested in 50 companies outside SA. New CE Ian Kirk has said the focus will henceforth be on organic growth, though he could not resist a 30% stake in Morocco-based Saham Finances. Sanlam is a promising share on a five-year view.

Discovery also looks like a great one to lock away for the long term. It plans to launch a bank soon and its UK life and health business is becoming a major contributor to group earnings, not to mention its China and US businesses.

MMI has been subject to the biggest fall in the sector — 34% over 12 months. Losing two of its largest health clients, Bankmed and Polmed, would not have helped and it is hard to see what would change perceptions.

Liberty would be a second choice, as it has the best quality life business at the top end of the market, but still needs to prove it can grow profitably in the mass market and in the employee benefits market.

Both these areas are sweet spots for Old Mutual, which helps make it the number one pick in the sector.

 

Media

By Larry Claasen

The media industry has fallen on hard times in recent years, so it’s no surprise that when it comes to the JSE-listed players, there really is only one company making waves. In terms of share price growth, Naspers has left its rivals behind, largely thanks to its foray into online businesses, notably Tencent.

SA’s media groups have been struggling to adapt to the Internet age. This isn’t unique: media houses worldwide have the same challenge. The traditional ways of consuming music, movies, books, magazines and newspapers have been upended and media houses have to reinvent themselves.

PwC’s entertainment and media outlook 2015/2019 says the SA market is “approaching a significant tipping point” as the total digital share of entertainment and media spending was 33% in 2014 and is expected to reach 49,6% in 2019. This means that by 2020 digital revenues from entertainment and media could be in the majority.

But, so far, the performance of this sector has been unconvincing. A number of video-on-demand services were launched, but struggled — and the arrival of Netflix in SA only makes this more tricky.

PwC does see a silver lining, however. “Consumer spending on all mass media products is growing and is forecast to continue doing so, with newspapers proving no exception.”

This trend is expected to boost advertising, which PwC says “suggests a high degree of long-term confidence in newspapers’ ability to convert readers into consumers”.

 

Investment Companies

By Marc Hasenfuss

Investment counters Brait and Jannie Mouton’s PSG Group were star performers on the JSE last year. Unusually for investment companies, PSG was even at one stage trading at a hefty premium to its portfolio of investments ( including Capitec, Curro, PSG Konsult and Zeder).

Both Brait (courtesy of the sale of its stake in Steinhoff International) and PSG (thanks to a smart book-build when its share price was at a premium) are well capitalised to make new investments in 2016, a fact that should keep investors interested.

By contrast, other investment heavyweights, notably Johnny Copelyn’s Hosken Consolidated Investments (HCI) and Johann Rupert’s Remgro, endured a worse 2015.

HCI saw sentiment dissipate for its two largest investments, Tsogo Sun and e-Media Holdings. Remgro, which now holds debt for the first time in decades, was dragged down by its large exposure to financial services and banking counters. Remgro still has plenty of irons in the fire but HCI probably needs to get back on the deal horse, pronto.

The year ahead could throw up a few surprises. Stellar Capital Partners, spearheaded by whizz kid Charles Pettit and the wily Christo Wiese, is freshly (and comprehensively) capitalised. Empowerment group Brimstone is leading operating subsidiary Sea Harvest into Australian waters.

A thrust into private education by Trematon Capital Partners, a property-focused investment house, might be worth watching.

Two companies to look out for are the newly listed Gaia (headed by former Government Employees Pension Fund boss John Oliphant) and Capital Appreciation.

 

Tourism

By Marc Hasenfuss

It wasn’t exactly a picture postcard year for the travel and tourism sector — despite a tumbling rand.

The lingering aftereffects of the Ebola outbreak, frustrating changes to visa regulations and bouts of xenophobia put a big damper on inbound travellers.

Hotels, especially at the top end of the market, still battled with overcapacity, while the gaming sector suffered from a drop in discretionary spending and increased “internal” competition as more limited payout machines and electronic bingo terminals came on stream.

Corporate activity also fizzled. A proposed “diplomatic” carve-up of the Western Cape casino segment between rivals Sun International and Tsogo Sun was torpedoed after prolonged deliberations by the competition authorities impinged on the viability of any deal.

Sun International also appears to be facing strong resistance from the competition authorities for its proposed takeover of Peermont, despite Sun’s promise to sell off some of its smaller casino properties.

This year Sun International may well be left to focus on its expansion in Latin America (and elsewhere), while it might be worth pondering if debt-laden Peermont may not opt to list on the JSE (again).

But Tsogo Sun’s efforts to unbundle and separately list its property portfolio — possibly after a link-up with other property entities — could be the 2016 highlight.

Elsewhere, the JSE-listed restaurant groups had a fairly quiet year.

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