HOT STOCKS 2017: Sweet deals on the JSE shelves

Stock pickers would do well to brace themselves for further volatility this year. But for savvy investors, there might be some special opportunities.

AltX

The AltX, which was launched in 2003, seems at first glance to be very much the gangly and surly teenager. There are many blemishes (15 listings are under suspension) and some of the "older" listings — such as WG Wearne, Imbalie and Nutrition — are still battling for viability.

But, truth be told, the AltX is fulfilling an important function as a receptacle for newer and more entrepreneurial listings. The platform’s role in nurturing promising businesses until these are ready for the JSE’s main board can also not be underestimated, considering how many AltX companies have been promoted in recent years.

New listings in 2016 include substantial counters such as Spear Reit, Transcend, Greenbay and Newpark (all real estate inclined) as well as investment company Universal Partners. Even long-suspended building supplies company Brikor looks set for a re-listing shortly.

But most encouraging is that there are a handful of AltX listings that have started to look like genuine contenders, generating consistent profits and, in some instances, paying dividends. These include services specialist Workforce (which has shown a huge surge in its share price over the past couple of years), niche software developer SilverBridge, technology security specialist ISA Holdings, railway infrastructure group Ansys, Oasis Crescent Property and black-owned financial services counter Vunani.

Unfortunately, our share pick for 2016 — private day clinics group Advanced Health — did nothing to perk up our portfolio’s overall returns. The share lost almost 35%; the much battered Mediclinic International’s share price performance looks rosy by comparison. Advanced, which has operations in Australia, still looks an interesting prospect, as it slowly rolls out its clinic network in SA. Whether Advanced is targeted for a takeover before profits start flowing strongly remains to be seen.

In retrospect our share pick was perhaps premature, as the Advanced share is now trading at a far more compelling valuation than before. - Marc Hasenfuss

Banks

Do not read too much into the strong performance of banking shares in 2016. They came off their lows in the wake of the dismissal of finance minister Nhlanhla Nene.

Our pick for last year, FirstRand, was in the middle of the pack. It has a devoted following among some fund managers. Its 25.5% return (excluding dividends) was ahead of Barclays Africa’s 17.6%.

Barclays Africa did well, considering the shock news early last year that the UK-listed Barclays Plc would be disinvesting. It also had some unusually high bad debts in its June interims, so it’s probably best avoided.

Standard Bank had the best performance, up 33.7%, but it was also the most severely punished during Nenegate.

The bank’s stock has benefited as more investors accept that the rather odd dual CEO structure with Ben Kruger and Sim Tshabalala is working.

Standard Bank is in a stronger position but this is already reflected in the share price of more than R150. FirstRand should have a decent year but it is expensive, outpaced only by Capitec. Given the price, it is certainly the wrong time to board the Capitec train.

All of which leaves Nedbank, a solid business undervalued by the market for years. And it has remained quite modest, avoiding the insufferable arrogance of the advertising put out by FirstRand’s FNB unit. Maybe it will be Nedbank’s year. - Stephen Cranston

Construction and building

When it comes to stock performance, Afrimat emerged at the top of a struggling construction sector last year. It provides a range of construction materials and services including mining and quarrying, ready-mix concrete and industrial minerals.

Most of its rivals, the big JSE-listed construction groups, have trodden a rocky road since the end of the 2010 soccer World Cup. There are numerous reasons, including a lack of government spending on infrastructure projects, and a bad relationship with the state over everything from collusion to empowerment.

However, the tide may be turning. A "settlement agreement" between the industry and government has smoothed relations. Large groups like Murray & Roberts and Aveng have sold off chunks of their businesses to empowerment groups and, with WBHO, have promised to accelerate transformation. But some conditions, such as the SA National Roads Agency withdrawing its claims against the companies for collusion, have still not been met.

The cement industry is struggling with overcapacity. New entrants, including Nigerian-backed Sephaku, have made life difficult for PPC, which is a bellwether supplier of cement to SA and the region.

PPC, SA’s biggest cement maker is laden with debt and had to raise R4bn in a rights offer. Its share price almost halved in 2016. - Mark Allix

Energy companies

The JSE’s energy sector is expanding, which can only be good for investors.

Three of the shares — Sasol, Oando and SacOil — offer some exposure to the oil price. But the likelihood of crude oil returning to above US$100/barrel soon is remote, as analysts expect that as soon as prices exceed $60/bbl there will be a surge of new production from US shale. The consensus seems to be for crude oil prices to trade at between $60/bbl and $70/bbl over the next couple of years

Though Sasol remains a good long-term investment with a commitment to paying dividends, its immediate future depends on its Louisiana chemicals project.

Share price moves for Renergen depend on its offtake agreements with specific customers rather than gas prices. Hulisani is investing in renewable energy projects, while Montauk Holdings (our pick for last year) generates power from landfill methane in the US and benefits from renewable energy credits. Consolidated Infrastructure Group specialises in energy infrastructure.

After a phenomenal performance in 2015, Montauk Holdings did well last year too, adding about 60%. But there is uncertainty about how renewable energy incentives will fare under the incoming US administration so it might be time to take some profits. - Charlotte Matthews

Financial services

It might not be much compensation for readers who bought shares in Peregrine on the Financial Mail’s recommendation last year and received a 2.5% return, but it was by no means the worst return in this sector.

A number of the JSE’s past darlings — Investec, PSG and Brait — all lost money, as did recent high-flyer Anchor. The best performers came off a low base. Alexander Forbes was the top performer with a 34.1% return, followed by Coronation, up 33.3%. Asset manager Sygnia gained 31.7%.

They say it always makes sense to bet with the house, so it is no surprise that the JSE, which earns money on every chip we bet on equities, had another excellent year with the share price up 28.3%.

Yet, many businesses in the sector looked to the UK for expansion, and then came unstuck by the Brexit vote. Brait (down 47.6%) took the largest beating, though it was also hit by the poor quality of one of its acquisitions, fashion chain New Look.

Investec also suffered. Its share price slid from R110 to R91, even though the value of its sterling-denominated bad loans has fallen in rand terms. Investec’s UK bank has a lot of holes, and a high cost-to-income ratio. But its asset management and wealth and investment businesses are underrated on a sum of the parts basis. Even the SA bank isn’t rated highly enough. For this reason, Investec is our pick for 2017, cheap on a p:e of 10.4.

Peregrine looks cheap on almost the same multiple, but has not been as severely punished for its UK interests. It’s a long-term holding, but hold tight for the short term. - Stephen Cranston

Food and beverages

It was Tongaat Hulett all the way in 2016, as the sugar giant’s share price roared up to end the year 40% up.

Of course, it wasn’t the only sector player to bring joy to its shareholders. Tiger Brands also put on a credible showing, finally free of its Dangote Flour Mills albatross and now headed by the highly experienced Lawrence MacDougall. Overall, Tiger rose 25.7%.

The Financial Mail’s pick for last year, Rhodes Food Group, also acquitted itself well to end the year with a 15.1% price gain.

There were disappointments, not least of which was Pioneer Foods, Tiger’s closest rival. Pioneer, which ended 2016 flat over the year, is the Financial Mail’s pick for 2017.

The drought and its impact on one of Pioneer’s key input commodities, maize, worked against it. To hedge against a maize production slump, Pioneer bought maize forward and though prices have fallen, forward contracts bought at higher prices have to unwind. That will take some time. After that, expect a big profit boost.

Tiger is in the same position. However, its exposure to maize is lower and its ability to outflank Pioneer in other areas, such as groceries, is questionable. - Stafford Thomas

Hospitals and health care

While health-care stocks have always been considered must-have shares for investors, government policies and rapid innovations in drugs and technology mean not every health counter is safe. Expect some big winners and losers this year.

Last year, the JSE’s health-care index finished 13.04% lower, far worse than the all share, which ended flat.

It’s no surprise. There are some big issues the sector must tackle, including National Health Insurance (NHI), which proposes a single, compulsory medical scheme for all. So private medical schemes will be reduced to offering complementary services — and will have to rethink their funding models.

If there is one thing investors like, it is companies that can plan well for events that haven’t yet materialised. Last year’s Financial Mail hot stock in the sector, Mediclinic, is doing just that, after bedding down a deal with Al Noor that increased its exposure in The United Arab Emirates and another with the Spire Healthcare Group, which spread its presence in the UK and Switzerland.

Strategically it may have been a savvy move, but it doesn’t mean there aren’t teething problems. In Mediclinic’s half-year results in November, it said it expected revenue from the Middle East to grow by low-to mid-single digits up to March.

Of the seven members in the JSE’s health-care index, only two finished the year on a positive note. Well-known players such as Netcare, Life Healthcare and Aspen all ended 2016 having lost some of their value.

Though the sector is in for some stick in 2017, it does have plenty going for it. When people get sick, they still go to the hospital and buy drugs. And the companies benefit. - Colleen Goko

Industrial companies

The relative fortunes of industrial counters last year show just how tough times are for those seeking to eke out growth in a stagnant economy. But many listed companies in the sector have done fantastically well to fend off challenges. The good news is that 2017 promises to be better.

The Financial Mail’s pick for 2016, Invicta, soared 53% as it reversed a steep drop for the year to March by pushing profit up 7% to R270m for the half-year to September.

Equally, Barloworld climbed 90.3% and Brian Joffe’s Bidvest grew 77.4%. Bidvest delinked from the group’s new JSE-listed food services group, Bidcorp, last year.

But it wasn’t all one-way traffic. Nampak’s foreign currency challenges in Nigeria and Angola took the gloss off a 12% jump in its trading profit for the rest of Africa in the year to September. This led to its stock falling 25.3% last year.

Fellow packaging maker Mpact’s brightly shining star also waned (down 39%) for the first time since it split from Mondi in 2011.

Meanwhile, Argent, a steel-based beneficiation group, says restructuring of the company has paid dividends.

Diversified industrial group KAP Industrial Holdings, led by CEO Gary Chaplin, has survived bleak trading conditions and continues to grow. The company, which provides logistics, timber products, plastics and industrial resins used in building, is the Financial Mail’s pick for 2017. Its good health reflects the restructuring process of three or four years ago, when noncore operations were sold. Instead, KAP shifted to businesses where it could develop a strong competitive advantage through technology and scale. - Mark Allix

Investment companies

It was not a memorable year for investment companies, with the bulk of the JSE-listed counters taking strain. Brait, with substantial UK-based investments, was the biggest casualty after its market valuation was smacked by Brexit. Johann Rupert’s Remgro was dragged down by a decline in the value of its biggest investment, Mediclinic International. Jannie Mouton’s PSG Group lost 2.2% and Johnny Copelyn’s HCI

gained 17%.

The smaller investment companies endured a torrid time, with Grand Parade Investments, Sabvest and Brimstone putting in mixed performances. The standout performer was Iqbal Survé’s African Empowerment Equity Investments, which attracted some market interest near the end of the year with plans to separately list its food business, Premier Fishing.

In terms of new activity, Universal Partners listed quietly on the AltX — but no deal flow has materialised yet. Recent listing Capital Appreciation has also not managed, as yet, to bring any new deals to book, and the JSE’s first Spac, Sacoven, disappointingly threw in the towel after failing to find a suitable investment. - Marc Hasenfuss

Life insurance

Life insurance shares did not suffer as badly as banks during Nenegate — so the mediocre returns they produced last year need to be assessed in that context.

Our pick for last year, Old Mutual, was the worst performer, down 16.9%. A year ago, it seemed so promising, with new CEO Bruce Hemphill expected to restructure the business. He did so, even more decisively than many thought — splitting the business into four, with a plan to close Old Mutual Plc’s head office in London.

Unfortunately, the share was a victim of the post-Brexit panic, as it has a large asset and wealth management business in the UK, which could lose business to counterparts in Europe. And the separation of Old Mutual seems to be taking an awfully long time. Expect 2017 to be just as frustrating.

It was also a poor year for Discovery, down 13.9%, partly in reaction to the group’s entry into the overcrowded banking market. Discovery is still far from cheap on a multiple of 20, so it is no pick for the short term. That strange pantomime horse MMI (with Momentum on the front legs, Metropolitan on the back) was the best performer with a 7.2% return.

Liberty could have been the choice: it is cheap and CEO Thabo Dloti is a savvy strategist, but the business needs time.

So our choice is Sanlam. It used to trade at a big premium to its peers but as the price has gone sideways, it is no longer so pricey. Sanlam under Ian Kirk has good diversity, and its 46% stake in the Moroccan-based Saham Finances is promising. - Stephen Cranston

Media and entertainment

The global media industry is undergoing some pretty radical changes. In the past, media companies used to dictate how people interacted with news, video, films and games; now, the consumer is in the driving seat. Many companies are floundering.

On the domestic front, traditional media businesses whose revenue relies on newspapers and magazines have hit speed bumps. Many have had to rethink how they package content to make themselves relevant and have had to tinker with pricing models. It hasn’t always been successful. As a result, few media companies are in great shape, with many downsizing.

The few remaining JSE-listed media companies — Naspers, Caxton, and Tiso Blackstar (which owns this magazine as well as titles like the Sunday Times) — are likely to find 2017 as challenging as recent years, given these structural headwinds.

Still, it’s not all doom and gloom. The long-term prospects for the sector remain attractive, as PwC’s recent analysis shows that spending across the media sector is expected to grow by an average of 9.4% a year until 2019 to R176bn. As consumers continue to share more about themselves, it will become easier for content producers to give them exactly what they want. Smart operators will be able to cash in on that. - Colleen Goko

Listed property

Property stocks seesawed for most of 2016, with an unexpected mini-rally in December pushing total returns to 10.2% for the year (against 8% in 2015). This is not too shabby, compared with the all share index’s meagre 2.63% total return in 2016.

The sector’s generous dividend payout rate saved the day. However, performance has been negatively skewed by the number of rand hedge stocks that were heavily sold down last year. Many who betted on the continued outperformance of offshore property counters last year — including the Financial Mail — no doubt lost a packet. Only four of the JSE’s growing tally of rand hedge real estate counters (about 18) managed to deliver a positive total return as Brexit jitters, concern around the eurozone’s economic recovery and a stronger rand took their toll on UK and European-focused stocks.

The JSE’s offshore loss makers were led by the likes of Capital & Counties, Redefine International, Intu Properties, Schroder European Real Estate Investment Trust (Financial Mail’s pick for 2016) and Stenprop.

One could argue that it is a good time to buy rand hedges as a number are now trading at what appear to be bargain basement prices. Nevertheless, there is money to be made in our own backyard, so our pick for 2017 is SA-based industrial play Equites Property Fund. The JSE’s only specialist industrial property play had a good run in 2016, with a total return of 24%. But there’s further upside in the offing given the deal-making prowess of the company’s highly regarded management team. - Joan Muller

Retail stocks

Last year was all about stock picking in a retail sector that again dished up a mix of fortunes, ranging from steep gains to gruesome losses. Investors with the broadest smiles followed our lead and picked TFG, which ended 2016 with its price up a hefty 30.7%. Also elated were investors in Massmart (up 29.1%), Clicks (28.9%), Italtile (21%) and Shoprite (20.6%).

Taking the biggest hits were investors in Woolworths (down 28.2%), Mr Price (down 20.9%) and Steinhoff (down 9.3%). We believe 2017’s winner is lurking among these three heavily oversold stocks. We’re betting on it being Woolworths.

Woolworths has been hammered, its share price is down a third since peaking in October 2015 and its rating has been cut by a half to a p:e of 15. This seems overdone, even given the disappointing trading update for the 19 weeks to November. Results from its SA clothing and food operations were below expectations, as were those of Australian divisions Country Road and David Jones. No doubt group CEO Ian Moir, who has overseen Woolworths’ impeccable performance since 2010, will be cracking the whip.

Woolworths’ share price has already lifted 11% off its early-December three-year low. Any sign of an improvement in its fortunes would be likely to send its price flying. - Stafford Thomas

Mining and resources

By the end of last year, the momentum of the commodities surge had slowed, raising doubts about how sustainable this rally really was. While there were some phenomenal 12-month share price gains, such as Tharisa’s 310% and Glencore’s 124%, the trend started to flat-line from November.

Investment bank Macquarie says the factors that spurred gains in 2016, including a manufacturing recovery and China’s commitment to 6.5% growth, will persist into the first half of this year. Macquarie prefers commodities with production constraints such as nickel and copper, and believes most prices will fall in the second half of this year.

As the US Federal Reserve moves into an interest-rate tightening cycle, the dollar has strengthened, which is negative for commodities. But Capital Economics says demand for industrial metals is strong.

Gold investment surged before the election of Donald Trump as US president on hopes his stimulus policies would boost inflation. But a strengthening dollar has dampened demand. AngloGold Ashanti, our stock pick last year, had risen almost two and a half times by August but gave up most of those gains by year-end. - Charlotte Mathews

Technology and telecoms

There was no shortage of new year cheer for the tech sector as 2017 sleepily kicked off. Mobile heavyweight MTN, networking giant Datatec and prepaid experts Blue Label all recorded gains in the first few days of trading. Experts are also predicting big things for other heavyweights in the sector, including EOH, Telkom, Pinnacle and Adapt IT, which are expected to build on their growth from recent years.

Last year, Blue Label and Telkom outperformed Vodacom and MTN. It may surprise many, but Telkom has been on a steady rise since 2013 despite the continued decline in its fixed-line voice business. At least its mobile business has turned the corner and is no longer burning cash. The company even surprised the market by declaring its first interim dividend last year.

After a hideous 18 months, MTN’s share price ended 5% lower last year, while Vodacom’s was marginally unchanged. This trend for the mobile firms will continue this year, as they are set to report weaker earnings growth in the first half. The reasons aren’t hard to find: weaker economies, increased competition and a stronger rand.

The Nigerian debacle still looms over MTN and it also failed to woo black investors for its BEE deal, MTN Zakhele Futhi. Still, its stock is so low that analysts expect it to gain. The oil price rise will improve fortunes in some of MTN’s countries, and it trades on a good dividend yield, says Mergence Investments analyst Peter Takaendesa.

But new competition looms. Telecoms infrastructure group Liquid has bought fixed-line group Neotel with plans to revive its fortunes, while Blue Label’s purchase of 45% of CellC could also be a game-changer. - Thabiso Mochiko

Transport companies

In the transport sector, Super Group, the FM hot stock in 2015, has come out top again. It beats out Imperial Holdings, which managed to raise turnover to a whopping R119bn in financial 2016, despite rocky markets.

However, Imperial’s profits in the year were hit by soft volumes in manufacturing, commodities, fuel and chemicals. More pertinently, CEO Mark Lamberti publicly pronounced that business confidence in SA was being hit by "serious political interference" in core public institutions and state-owned enterprises. This included "unconstitutional behaviour and corruption", which hampered growth.

Defying the economic and political headwinds, Super Group CEO Peter Mountford won the EY entrepreneur of the year award last year. Mountford’s group even bucked the trend in SA vehicle sales, reporting solid results for the year to June. Super Group has also substantially increased its international footprint in the past two years, which has boosted revenue and profit.

Elsewhere, small logistics group Santova continued to grow. But Trencor, which owns, leases and manages marine cargo containers worldwide, was hit by the demise of South Korea’s Hanjin Shipping Company.

The frailty in global shipping markets hurt Grindrod as well, which sold its locomotive assembly business and had to raise an impairment of R675m in the rail businesses.

Unfortunately, the Financial Mail’s pick for 2016 was Brian van Rooyen’s Labat, which had a horrid year. Its share price sank 81% as it cancelled a R560m takeover of Reinhardt Transport Group. The idea was good, but it shows how difficult it is to make profitable empowerment deals. - Mark Allix

Tourism and leisure

It would have taken pure luck to have picked the tourism and leisure hot stock in 2016. It turned out to be the perennial sector dog, Gooderson Leisure, which leapt 60% on a buyout offer to minorities.

Of the mainstream players, Famous Brands did not disappoint, ending 2016 20.3% up. It trounced Spur Corp, the Financial Mail’s pick, which lost 4.5%. Only two other shares generated double-digit price rises: Tsogo Sun (14%) and Phumelela (10.5%).

The sector faces another tough year as discretionary spending is likely to come under more pressure. Expect corporates to penny-pinch on travel budgets, which isn’t great for players in the top-end hotel sector. But it should play into the hands of no-frills City Lodge, the Financial Mail’s pick for 2017.

City Lodge was far from a great performer in 2016, its share price losing 1.4%. But this and a 13% rise in EPS in its year to June reduced its rating from about a 20 p:e in late 2015 to a 16.8 p:e. This is low for the group, which has an average p:e of 19 over 10 years. Earnings growth of about 15%/year seems to be in its grasp for the next two years. Add a modest rating recovery and it will put smiles on shareholders’ faces. - Stafford Thomas