Saturday, January 22

Top Market Watchers Share Their JSE Stock Picks (Part II)

Last week, Moneyweb highlighted the top three picks from the six money managers who participated in the first of two YouTube live sessions hosted by the JSE this month.

Sasfin’s David Shapiro had openly challenged JSE CEO Leila Fourie to host a webinar with stock picks from those who follow the market. The first session took place on August 3 and the second a little over a week later, on August 11.


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Read: The Best Money Managers Share Their JSE Stock Picks (Part I)

While there were no overlaps from the six fund managers that were part of the first session, two participants chose three Afrimat stocks, Combined Motor Holdings (CMH) and City Lodge in the second session. Another participant chose Sibanye-Stillwater, which had been chosen by a fund manager in the previous week’s session.

Each participant had less than 10 minutes to provide their top three selections of actions, with the rationale for each.

Session Two Highlights

Anthony Clark, Independent Analyst at SmallTalkDaily Research

Clark chose three very different actions. The first, small-cap, is Combined Motor Holdings, where the “owner, Jebb McIntosh, remains the CEO … remains the majority shareholder.” This business “cut dramatically when Covid-19 hit and profits and revenue only went down modestly” despite the lockdown. “Half of the market value is in cash and it has been trading at a deep discount for quite some time.” Clark values ​​it at about R35 per share.

Next up, a “slightly higher cap” is Afrimat “blue chip”, which Clark has been hedging since its listing in 2006. It has consistently “bought distressed assets cheaply, moved into industrial minerals and lately into commodities. bulk basics [iron ore and coal] … It is run and owned by extremely competent managers who know how to allocate capital ”and is busy transforming itself into a diversified mining-related company.

Clark says he is “known for highlighting special situations” and one has cropped up at York Timber.

He bought Global Forestry Projects in 2007 for R1.7 billion, took on too much debt and the share price has done nothing for 12 years, up to two weeks ago. “An activist shareholder has taken advantage of the CEO’s unfortunate passing” and the share price has risen dramatically. Clark says there is “a lot more work to do to unlock value and capital,” but this shows once again that “JSE still has value in certain small caps if you know where to look for them.”

Simon Brown, Director and Founder of JustOneLap

Brown, who is also a presenter for Moneyweb Radio, has Murray & Roberts as his first pick. He admits that “typically [doesn’t] like construction stocks, but Murray & Roberts is no longer in this space: it has moved to oil and gas and has moved to mining. ” In addition, says Brown, it kept its infrastructure division in SA, which gives it optionality, especially with the recent publication of the liberalization of the electricity generation market.

Sibanye-Stillwater is Brown’s pick of platinum group metal (PGM) prices. He sees PGM prices “stabilize” in the coming years. Why Stillwater? He admits that he likes the palladium business in North America, and although he has exposure to “a little bit of gold,” he is not “in the least bit interested.” It is at a “forward PE ratio of about four” and is expected to pay “big dividends” in the near term.

Brown says the “most frequently asked stock” is Purple Group.

Easy Equities is the most attractive part of the business. It has one million registered accounts, of which more than 520,000 are active and funded. “It has passed that tipping point and is profitable. One could see some disappointment with the following set of results: We see it in daily volumes on the JSE, where volumes are down. ”This could be an opportunity to add to one’s portfolio.

Chris Reddy, Portfolio Manager, All Weather Capital

Reddy takes care of the equity and fixed income listed space. His first choice is the “best interpreter of the JSE in the last 10 years”, Afrimat. He says that Mohnish Pabrai’s quote “Good management gives you positive options for free” describes Afrimat perfectly. It has a “truly exceptional management team” and with the switch to other raw materials, it is “working from a very low base … acquiring a mine, for example, may double its production capacity.”

Reddy says that “there has been a tendency for global miners to dump their coal assets and that this creates an opportunity to acquire these assets at a discount.” A situation like this arose with Thungela Resources, which “recently parted ways with Anglo American. It fell to R21 on the first day when investors abandoned it. That put it in less than once PE [price-earnings] multiple. “Reddy still sees strong fundamentals in demand and even with” higher discount rates “he still sees” a significant rise. ”

The last of his picks, Lewis Group “has had a rough few years, but its debtor book has improved significantly in the last 18 months.” The company has a “very strong management team, with no debt on its balance sheet and it continues to buy back shares.” “We are a happy starter and we see more advantages.”

Piet Viljoen, Manager of the Counterpoint Value Fund

Viljoen started with principles that he applied when choosing stocks.

“The process of making decisions in an uncertain domain is key.”

He explained: “Today I am going to choose three stocks, but I have no idea if they will be good options or not. [I] I like to look at it as a bunch of twigs. Each broth or twig is quite brittle, it can break. If you put them together in a bundle, in other words a wallet, you get something pretty solid.

“I try to search for hidden gems, I look where no one else is looking. You probably fish where everyone else is fishing. I also try to find good management and, as long as you don’t pay too much, let them do the work for you. ”

The first, Sabvest Capital, is led by Chris Seabrooke. Viljoen says that for the past 10 years, the JSE All Share Index has returned 11% annually (compounded). Sabvest has managed to increase in value at a rate of 22% per annum (compounded) over the same period. “Today, you can buy that R74 for R46 per share [since increased to R48]So why would you want to buy the index? This thing is on sale! ”

Viljoen also chose CMH, which “has grown earnings faster than average on the JSE for the past 20 years … You can buy that earning power with a 9 PE today.” He says he finds two aspects of this business attractive. “When you enter, you are buying an aspirational product and you are in a weak bargaining position.” This makes car buyers price takers. Furthermore, he says, “car dealerships are mini-monopolies” due to geographic rights granted by OEMs (original equipment manufacturers).

Given the popularity of his original third option, Afrimat, Viljoen replaced it during the session with Hosken Consolidated Investments (HCI). This investment company owns deals worth R144 per share and trades at around R60. At first, “the market was very concerned about debt levels and potentially diluted shareholders,” but it navigated the lockdown without diluting shareholders. This attributes to the management of the company that they are “proven capital allocators.” There is “upside optionality” with its small platinum asset, as well as with offshore oil and gas exploration blocks.

Viljoen describes his three picks as “nothing sexy, just some proper hidden gems”

Olwethu Notshe, CEO and Portfolio Manager, Sentio Capital

Notshe characterizes his selections as “South African Covid recovery plays.”

Its first choice, Capitec, has a “great management team” and has two growth engines: it has steadily increased the number of active clients (at a rate of more than one million per year), and its “second growth vector is the foray into the SME space through the acquisition of Mercantile Bank. ”Notshe points out that, historically, this segment has not had a good service.

Before closing, City Lodge had occupancy rates above 54%. He has restructured the business and “should be able to navigate the next few years after a rights issue last year.” This is a “payback play” and “needs 40% occupancy rates to cover expenses.” Currently, these are around 30%.

Similarly, Tsogo Sun Gaming was also hit hard by the lockdown. Management correctly sized the cost base and there was a “significant and rapid recovery in gaming revenue as lockdowns eased.” Notshe admits that “there is risk in stocks, and that focuses on the financial leverage of the company.”

Rajay Ambekar, Founder and CIO of Excelsia

Ambekar decided to focus on three smaller capitalization opportunities, each of which “could easily double in the next three years.”

Metair is a two-part business: energy storage (batteries) and automotive components. The “last is the most exciting part,” says Ambekar. The new contracts won in South Africa will see volumes grow between 30% and 40%, making the current valuation “very attractive given the strong expected earnings growth.”

Aveng is Ambekar’s second pick; He admits that he did consider M&R. “The balance has been fixed” and on a valuation basis, it has a market capitalization of R3 billion with revenues of R25 billion. “It could generate normalized profits of one billion rand,” which makes it very attractive.

Finally, the price of City Lodge has dropped from R30 to R4 in the last three years. Ambekar highlights its “poorly structured BEE deal.” The business does not “need occupancy levels of 60% to obtain good returns.” He notes that “the replacement cost of hotels is more than double their current market capitalization.” Normal earnings would bring this business to a PE of seven, he says. This is “very attractive compared to hotels around the world, which are priced between 14 and 20 times.”

JSE’s Fourie says these live stock picking sessions “will be a regular feature in the future.”

Fund manager Stock selection Market capitalization* Price change to date Current PE *
Anthony Clark CMH 1.6 billion rand Four. Five% 9.33
Afrimat R8.7 billion 40% 13.48
York woods 1.1 billion rand 89% -9.19
Simon Brown Murray and Roberts R4.6 billion 26% -7.12
Sibanye-Stillwater R186.9 billion 2% 6
Purple group 1.5 billion rand 62% 62.61
Chris reddy Afrimat R8.7 billion 40% 13.48
Thungela Resources 7 billion rand 8.47
Lewis Group R2.8 billion 86% 6.75
Piet Viljoen Capital sabvest 1.97 billion rand 64% 6.77
CMH 1.6 billion rand Four. Five% 9.33
HCI 5.2 billion rand 7% 10
Our Notshe Capitec Bank R210.7 billion 28% 45.95
City lodge R2.4 billion fifty% -2.37
Tsogo Sun Gaming 9.7 billion rand 91%
Rajay ambekar Metair 4.9 billion rand 3. 4% 16.76
Aveng 3.7 billion rand 200% -1.88
City lodge R2.4 billion fifty% -2.37

* As of August 17, ProfileData data

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