There won’t be too many investors on the JSE emerging from the wreckage of 2022 with broad grins and bulging purses.
It was a year to forget. The spectre of high(er) inflation and a lingering recession was already enough to give investors indigestion, but after Russian President Vladimir Putin’s invasion of Ukraine in February, and China’s brutal response to Covid flare-ups, markets became a minefield.
South Africans had it even worse: the fractious politics — including President Cyril Ramaphosa’s near-resignation — compounded the power and service delivery crisis.
The response was swift: markets tumbled, with Wall Street’s benchmark S&P 500 index losing 19.1% during the year. South Africa’s JSE got off comparatively unscathed, dribbling down 0.9%. But, still, it was a blistering reversal after a thumping 2021, where the JSE rose 24% and the S&P 500 climbed 28.7%.
The FM’s Hot Stocks portfolio for 2022 — our top 17 picks — didn’t escape the calamity. Our portfolio lost 1.8%, but when dividends were packed back in, our return was a positive 2.7%.
Our star performers included hospitals group Mediclinic (up 50%), gaming investment firm RECM & Calibre (up 48%), ferrochrome miner Merafe Resources (up 36.2%) and banking group Absa (up 35%). But our portfolio was hit hard when Steinhoff tanked on news its debtors will take over the scandal-plagued retailer. Equally, we were hurt by our positions in Quilter (down 37%) and construction firm Raubex (down 28%).
Can 2023 be any better? Experts surveyed by the FM are wary.
Investors with authoritative opinions on the trajectory for 2023 are either “lying, marketing or ignorant”, says Keith McLachlan, CIO at Integral Asset Management. The best strategy, he says, may just be “some solid fence-sitting”.
McLachlan says the JSE is likely to be even more volatile as the country heads to the 2024 general election. “The ANC is under pressure to retain a majority, and it might be hard to fathom the political truth among increased infighting,” he says.
Asief Mohamed, CIO of Aeon Investment Management, says the next 12 to 18 months could be a tale of two halves.
In the next six to nine months, Mohamed says global interest rate hikes are likely to stifle consumer spending, leading to “lower profit margins and an earnings recession”.
The US may already be in a recession, which means stock markets are likely to fall or remain flat in those months.
But after that, says Mohamed, the clouds could clear. “Once we see a steady decline in interest rates to the targets set by global central banks, equity markets may start appreciating,” he says.
Cash is king
How does that translate into investment strategy?
Fenestra Asset Management CEO William Meyer says cash is now king. Protecting portfolios from capital losses and hoarding cash to buy assets at distressed prices later may be the savvy play.
Meyer points to two advance indicators: oil and copper. The oil price has fallen from $125 to $77 a barrel, while the price per ton of copper has fallen from $10,500 to $8,400, and may be headed for $7,600.
“The two leading activity indicators are signalling a very bleak 2023,” he says.
After the past year, this is a diagnosis no-one wants to hear.
It didn’t help that last year several of the “poster stocks” — such as 120-year-old Murray & Roberts (down 79%), Barloworld (down 43%), Coronation (down 41%) and Spar (down 32%) — were carved up. Even the JSE’s mining sector finished the year down a sliver — a disappointing finish, as it was up 18%-23% in May.
Of course, investments are meant to be judged over the long term, but the bad news is that the JSE has produced single-digit returns over both five and 10 years. This makes a mockery of the adage that what counts is “time in the market, rather than timing the market”.
And yet, had you backed a quartet of left-field stocks, it was possible last year to register “address-changing gains”: coal miner Thungela, investment firm Hosken Consolidated Investments (HCI), construction group Stefanutti Stocks and logistics group Grindrod.
Thungela, arguably the most talked-about stock on the JSE, soared 239%; StefStocks climbed 222% as its efforts to cut debt paid off; HCI rose 111% amid hype over its lucrative oil strike off the Namibian coast, its coal assets and a recovery in its gaming assets; and a restructured Grindrod gained 101%.
Other large firms ended in the green too, including Naspers (up 16%), Tiger Brands, Sun International, Woolworths, Absa, Exxaro, Southern Sun and Standard Bank.
Of the smaller firms, printing group Novus surged 65%, logistics group Santova notched up a 55% gain, packaging group Transpaco climbed 44%, investment firm Sabvest rose 42%, and tertiary education specialist Stadio gained 34%.
Yet there was considerably more pain than gain, underscoring that it was, as one commentator quipped, “a year of investing dangerously”.
Popular stocks including Telkom (down 41%), pharmaceuticals giant Aspen (-41%) and cement group PPC (-55%) were lashed. Former market darlings crashed, including Transaction Capital (down more than 30%), Clicks (-14%), Dis-Chem (-17%), food conglomerate Famous Brands (-20%) and schools business Curro (-26%). Retailers Mr Price (-18%), TFG (-16%) and Pepkor (-10%) all lost ground, while industrial firm Nampak (-73%) crashed.
A glance at the most-traded list of EasyEquities — a proxy for the retail investor — is instructive.
Purple Group, the owner of EasyEquities, heads that list, followed by Sasol, Capitec, Thungela, Shoprite, MTN, Renergen, Sibanye-Stillwater, Naspers, RMB Holdings, Steinhoff and Old Mutual.
Yet of those, only Thungela, Shoprite (up about 10%), Naspers and Sasol (up 2%) gained ground. There were significant pain points: MTN and Old Mutual both tumbled more than 20%, Capitec and Sibanye were down more than 8%, while Purple lost about 40%.
‘An unbelievable discount’
This illustrates that, as Genera Capital investment specialist Adrian Saville argues, it’s an environment ripe for picking individual stocks.
Saville tips investment company Sabvest (“one of the best capital allocators on the JSE with exposure to great global assets that can be bought at a discount, and which has been compounding at 20% a year”) and property group Stor-Age (“well-structured balance sheet and well managed with an attractive yield”).
Counter-intuitively, he reckons SA’s stock market will be more resilient than most, even as global central banks become “more strident in curbing inflation”.
Given the rolling blackouts, and chaos in almost every municipality, it’s an unusually upbeat prognosis. Saville concedes as much: “This is difficult to argue without being mistaken for a naive optimist ... what with absent growth, deeply entrenched unemployment, inequality, governance challenges [and] administrative hurdles.”
But he cites a number of arguments, including the fact that South Africa was one of the first countries to begin hiking interest rates to curb inflation, while the windfall from soaring commodities helped the country “emerge stronger today than we estimated two years ago”.
Saville says it’s also positive that Ramaphosa hung onto power. “He has very important work to do if corruption is to be weeded out. If Ramaphosa does not square up to this challenge, then we can take corruption as a permanent feature of the SA landscape.”
Inflation remains the single-most critical factor globally, with the potential to raise risks for firms with debt, hike the threshold for cost of capital, and asphyxiate consumers.
Professional investors surveyed by the FM believe US stocks remain too expensive, which means the focus will shift to Europe, and emerging markets such as South Africa.
John Biccard, portfolio manager of the Ninety One Value Fund, says the JSE remains overwhelmingly cheap compared with other emerging markets. “The discount of the SA market to other emerging markets is almost at a record ... there is a lot of unbelievable value,” he tells the FM.
Biccard points to the number of “jackpot” stocks that can still be bought on the JSE: those trading for less than seven times their earnings, and offering a 7% dividend yield.
“There are so many JSE counters close to this combination,” he says. “Yes, structural problems will impede gains, but if you can buy a good business on a 7% yield, you generally make money. You will make a return that beats inflation.”
Biccard plans to hike his exposure to quality defensive shares. His high-conviction picks are retailer Spar (hammered by controversy of late) and paper and pulp business Sappi (which has slashed debt markedly).
Other analysts agree that there is an unusual abundance of quality stocks on sale.
Mohamed points to global mining giants BHP and Anglo American as two companies set to benefit from burgeoning demand for electric vehicles and China’s reopening, thanks to their production of copper and other minerals.
As China opens up after Covid, you can expect Naspers and Prosus to bounce back too, as their largest investment remains Hong Kong-listed gaming company Tencent.
‘Invest in energy’
ClucasGray senior fund manager Brendon Hubbard believes energy will be a big theme this year.
He tips three local stocks likely to benefit: Reunert, which has interests in alternative power generation; HCI; and Master Drilling, which could benefit from minerals mined to fuel electric vehicles.
Graeme Korner, director at Korner Perspective, believes growth will be harder to find in 2023, but agrees there are “one or two unbelievable bargains”.
“The real opportunities lie in smaller and largely unfollowed companies on the JSE,” he says. Korner is eyeing investment holding companies with solid underlying investments, which are trading at large discounts to their net asset value.
His pick is private equity firm EPE Capital Partners (Ethos), which recently sold some of its investments at prices exceeding the book value. But he’s also watching fund managers Coronation and Ninety One, which could score if the market does well. “The yields are good and geared market plays might not be a bad place to be,” he says.
Smalltalkdaily analyst Anthony Clark says this year will belong to those able to find the juiciest fruit on the field — and there will be no shortage of “special situations” and buyouts. “Despite the recovery in the small-cap sector and moves in prices, many counters remain saddled with low p:e ratios, despite solid earnings profiles,” he says.
His specific buyout target is Mustek, which trades on a multiple of four times earnings and a fat discount to NAV. “The stock looks ripe to delist,” he says.
Clark’s “high-conviction” stock for 2023 is private education company Curro, where he has set a “bold target” of R16: nearly double its current R8.73 a share.
Other asset managers, however, seem less convinced.
Says Charles Boles, manager at Titanium Capital: “When we speak to entrepreneurs who own businesses, there is zero appetite to list. The fact that nobody can sell and there are no buyers is reflecting in prices.”
Boles says this is “not the environment in which you want to be in high-risk stocks”, so investors ought to hoard quality assets cheaply. “Remgro, Reinet and HCI [have] good quality assets in their portfolios, at meaningful discounts.”
He says education business AdvTech and Tsogo Sun Gaming are compelling prospects over five to 10 years, with strong cash flows.
Still, while there are strong arguments to be made for all those shares, nobody knows how the variables of inflation, Ukraine and South Africa’s brittle economy will play out.
Sanlam Private Wealth director Greg Katzenellenbogen says even if the US Fed stops hiking interest rates, this doesn’t imply rates will fall. This could “still lead to a difficult time for investors”, so buying “defensive equities could offer some protection”.
Once central banks do start cutting rates again, however, oil and higher-risk stocks are likely to bounce.
Still, Katzenellenbogen reckons 2023 will be better for investors. “It won’t be plain sailing, as Ukraine could continue to drag on sentiment and, in South Africa, there is always the possibility of some problem rearing its head specifically affecting our currency and market. But the JSE should be powered by resources,” he says.
The bottom line, experts argue, is that investors need to be nimble. With car wrecks around every corner, a spot of defensive driving is the best way to navigate right now.
AltX
A number of market-watchers have been pondering the relevance of the AltX — especially with some alternative stock exchanges having been set up specifically to lure the few entrepreneurially minded ventures that might be mulling a listing.
That said, punters would have had way more fun on the AltX in 2022 than on any of the alternative exchanges. Officially, the index shifted down from 1,298 points to 1,050 — a serious retreat of about 19% and a noticeable disconnect from the JSE’s small-cap index, which finished 2022 positively.
Some larger, resource-aligned AltX listings drifted back, including metals group Jubilee (down more than 30%), helium group Renergen (more than 20% down) and tin miner Alphamin (-8%). But the real “fun” was elsewhere. Brikor and alternative energy group Kibo both plunged more than 60%. In fact, Kibo might well encapsulate the AltX in 2022, given that in August the share was up 175%.
The significant gainers were small tech group ISA Holdings (up more than 35%) and investment company Astoria (+40%). Advanced Health (+27%) and Etion (+50%) scored from their respective value-unlocking initiatives. Small software group SilverBridge scored from a premium-priced buyout, and was subsequently delisted.
While some “zombie companies” remain on the AltX, others found new life — including Buka (a footwear business stepping out of the old Imbalie listing) and Buffalo Coal, which managed a rights offer.
Marc Hasenfuss
Tourism & Leisure
If the difficulty of securing a holiday rental was in any way indicative, South Africa’s tourism sector (other than in KwaZulu-Natal) had a much better 2022 than the year before. December, in particular, looked good in comparison with 2021, when Omicron ripped its way through travel plans.
The year overall was far easier for major operators such as Southern Sun (formerly Tsogo Sun Hotels) and Sun International, whose financials look that much better after savage and unprecedented cost cuts during the worst of the pandemic in 2020. That’s evident in their share prices: over a year, Sun International and Southern Sun both gained about 30% in value, with Sun International resuming dividends after a six-year drought.
That makes Southern Sun, the FM’s preferred stock pick in the sector, something of a risk. How much can the stock appreciate further, after a year of heady recovery?
For a start, the recovery in its financial position may not yet be fully reflected in its share price; by its half-year to end-September, Southern Sun’s room sales were at an average 83% of pre-Covid levels over the interim period, with gains across all regions and market segments, including leisure, the government, corporates and groups and conferencing. Occupancies hit 59.2% and the group — South Africa’s largest in the leisure sector — had managed to cut its debt by almost R1bn, which should go a long way towards bumping up full-year earnings.
Giulietta Talevi
Investment companies
Investment holding companies endured another year of torment as discounts to intrinsic portfolio values remained stubbornly wide. Twenty years ago discounts of 15%-20% were regarded as “normal”; today 30%-40% is quite common.
One of the saddest events of the year was seeing PSG Group shuffle off the JSE after unbundling the bulk of its investments and buying out the remnants. The group had long been frustrated by the lingering wide discount on its mostly listed investments, and probably had no other option.
No other investment counter tried anything quite as dramatic, but stalwart listing Remgro made good its intention to hold mostly unlisted assets when it partnered with the Mediterranean Shipping Company to buy out Mediclinic International, after steering liquor group Distell towards an unlisted venture with Heineken.
EPE Capital cashed in a few smaller investments at a marked premium to book value, but was not successful in getting its associate Brait to float its highly profitable subsidiary onto the JSE. Hosken Consolidated Investments benefited across a number of interests — a recovery in the gaming sector, a robust coal operation and its much mooted participation in oil and gas exploration off the Namibian coast. Sabvest Capital continued its steady upward chug, with NAV growing reassuringly and new deals ticking over.
Perhaps 2023 will be the year that one or two new investment counters come to market. The FM has already noted that a number of large empowerment investment companies must be mulling a listing and capital raise.
Marc Hasenfuss
Building
If there’s one industry that’s borne the brunt of SA’s broken government promises, it is construction. Repeated vows to spend on infrastructure have amounted to zip, while the clown show that is Bheki Cele’s “police service” has allowed construction mafias to spring up without so much as an askance glance from the authorities.
Throw in blackouts, strikes and fuel hikes, and it’s no wonder that once-mighty firms like Group 5 and Basil Read have crumbled, while 120-year-old Murray & Roberts has given the local industry the big swerve.
Still, those with the greatest Darwinian abilities have kept inhaling oxygen. Afrimat remains a cornerstone of portfolios, not least because of Andries van Heerden’s unerring capital allocation, a sturdy return on equity of 29.4%, and return on capital of 24%. Another is Raubex, which has earned kudos for increasing its margins in recent years.
Regarding Murray & Roberts, risk-minded investors might consider it worth a speculative punt, after a year in which its stock price plunged 80%. Especially as SBG Securities and Chronux expect the share price to more than double from its current R2.85 and its net debt of R1.1bn looks manageable.
Aveng is another favourite, but it has done little to repay this faith so far.
Ultimately, the industry remains hostage to a power-starved economy, in which the construction sector has posted a negative growth rate for five consecutive years. The strongest will muddle through, but don’t expect any Cambrian explosion in profits until the government sorts itself out.
Rob Rose
Hospitals
Last year was not the rosiest for the broader health-care plays, and perhaps a bit disappointing after the uncertainty about the lingering pandemic was largely cleared up.
The big bright spot was private hospitals group Mediclinic International, which scored from a buyout offer by Remgro and shipping giant Mediterranean Shipping Co (MSC). It seems the family owners of MSC took a sudden liking to private health care, and opted to partner with the Rupert family in reboosting London Stock Exchange-listed Mediclinic (which had been enduring a long convalescence from the strain incurred by the Al Noor takeover). The buyers were even elbowed into paying a higher price than initially tabled, which must say something about two influential families’ longer-term view of private health-care prospects globally.
But Mediclinic’s takeover hardly improved sentiment for the other major private hospital groups. Life Healthcare was down about 20% and Netcare about 8%. The illiquid shares of RH Bophelo, which owns a few private health-care facilities and other aligned health-care services, dropped more than 50% and were well off the last stated NAV.
Redoubtable pharmaceutical group Adcock Ingram showed a slight weakness, but looked comparatively robust against larger rival Aspen. Much-diminished health-care play Ascendis — at least now not suffocated by debt — still provided more entertainment value to shareholders and investors than tangible value. But perhaps 2023 will be the year the slimmed-down business will show its recovery potential.
Marc Hasenfuss
Financial services
South Africa’s listed financial services sector was marked by diverging performances in 2022. Take the two listed fund managers. Coronation’s share price almost halved, and it is trading at an eye-watering dividend yield of almost 12%. Its prospects are tied to the domestic economy, where most of its fees are generated. Ninety One, which banks on its offshore units for about two-thirds of its earnings, is trading at a tamer 7.4%, and had a less harrowing year in share price terms (down 35%).
Both companies’ profitability is tied to the performance of stock and bond markets. With the threat of rising inflation and the second-round effects of the war in Ukraine, the outlook for asset prices remains volatile.
More traditional brokerage services, such as Quilter Plc and PSG Konsult, are having to work hard to convince investors to hand over money. Still, both companies managed to attract net inflows — though sour markets did weigh on assets under management.
Two issues have arisen in the corner that includes listed short-term insurers Santam and Outsurance. First, increased flooding, combined with municipal failure, are pushing up reinsurance premiums for short-term insurers (these will undoubtedly feed through to consumers). Second, consumers’ already strained wallets could affect their cover: they may opt to insure only essential items at the cheapest price, or give up on insurance altogether.
Jaco Visser
Life insurers
South Africa’s major listed life insurance players (bar Liberty) seem to have survived the Covid fallout intact. Insurers coughed up R1.4-trillion in claims and benefits in the 24 months through to the end of June last year, with payouts still relatively high in the six months to end-June, according to the Association for Savings & Investment South Africa. The companies also wound down most of the provisions set aside to cover Covid-related claims.
Amid this, the largest listed player went on an expansion drive. Sanlam, which operates in more than 30 African markets, said last year it would team up with German insurer Allianz in several countries. It also concluded the buyout of Absa’s asset management unit.
Old Mutual, meanwhile, decided to re-enter the lower-income end of the banking market. The jury is still out about the strategy, but the insurer’s huge footprint in the low-income market does stand it in good stead. It could offer some transactional services, along with funeral and life policies, to that market.
Discovery irked investors by withholding its dividend to bolster capital-intensive units such as its bank, and its share price was down more than 12% over the year. At the same time, Momentum Metropolitan brought in an outside investor to shore up capital for its Indian business. Finally, Standard Bank bought out minority shareholders in Liberty and delisted the life insurer.
With the market looking gloomy, South Africa’s life insurers are clearly continuing to diversify their operations.
Jaco Visser
Banks
Bank shares continued their recovery in 2022, with all prices up at least 10% except those of dearly valued FirstRand and Capitec. FirstRand saw a modest decline of about 1%, while Capitec gave back more than 12%.
Last year’s pick, Absa, was the best performer, gaining 27% against Investec’s 24%. Absa made several key executive appointments to stabilise its business operations, and its share price mirrored investors’ confidence in the leadership of new CEO Arrie Rautenbach.
Nedbank, on the other hand, is still valued cheaply, on a historic p:e of 7.74 and forward multiple of 7.37. Combined with its attractive dividend yield of 7.37%, the bank may yet be an outperformer in 2023.
Standard Bank, which also trades at an attractive forward p:e of just over eight, said in late November that it had seen “robust average balance sheet growth” in the first 10 months of trading last year.
FirstRand, on a relatively cheap forward p:e of just over nine, is another lender to watch. Historically, the stock has traded at a premium to its peers because of the perceived higher quality of its business, including loans.
Capitec’s push into life insurance, especially in the lower-income market, may stand the lender in good stead. But at a valuation of almost 24 times earnings, the bank’s shares remain expensive.
In short, local banks continue to battle a lacklustre economy, weighed down by poor government policy. But higher interest rates to tame inflation will remain a tailwind to lenders.
Jaco Visser
Tech & telecoms
Last year was a mixed bag for telecoms operators. The year started on a high note, with regulator Icasa moving forward with its first auction of spectrum to mobile operators in more than a decade. The bidding process raised more than R14bn — and Vodacom and MTN, with their deep pockets, were the obvious big winners.
But while the auction was meant to improve service, progress was overshadowed by load-shedding, which added billions in costs for generators, batteries, diesel, technical staff, security and replacements due to vandalism.
There was much excitement at MTN’s takeover bid for Telkom, with industry players widely agreeing that the latter’s trove of fibre assets was the real prize MTN was after. It subsequently called off talks after data-only provider Rain made its own bid to merge with the fixed-line operator. That said, MTN and Telkom are expected to be back at the negotiating table soon.
But amid all this, value unlock and the search for deals were hampered by the global economic downturn, which wrought havoc on valuations. And rising interest rates have made capital more expensive, deterring the speculative activities that characterised the past decade.
The tech sector — including Datatec, Bytes and EOH — wasn’t immune from value destruction. In particular, those with hardware businesses — Datatec, for example — are yet to recover from supply chain challenges that have increased end prices for customers.
Within this difficult market, Naspers bucked the trend. The group was up 32% over the year, adding R336bn to its market cap. To put that in context, MTN was down 24%, and Datatec 19%. It also fared better than international peers such as Meta, Alphabet and Amazon, which all lost at least a quarter of their value.
Mudiwa Gavaza
Media & entertainment
Online streaming continues to be the name of the broadcast game, with free-to-air players the SABC and eMedia both catching up with the trend.
The SABC has dissolved its partnership with fixed-line operator Telkom, which had run the public broadcaster’s streaming platform. That leaves SABC Plus — the unit’s various television and radio properties — to run as a solo project.
At the same time, eVOD, the online version of e.tv’s free-to-air service, got up and running.
For MultiChoice, it was all-important to deliver all 64 games of the Soccer World Cup, both online and through satellite. It poured about R1bn into that effort — both for advertising and ramping up the manufacture of decoders.
On the publishing side, media companies have been tinkering for years with online subscription models to offset declining print circulation.
There’s also the issue of advertising. While there was a solid recovery in advertising revenue, that came off a low base: in the two prior years, Covid-related lockdowns had greatly reduced advertising spend. And the likes of Facebook and Google consistently take up as much as 60% of local advertising revenue.
In shifting its investment towards packaging, however, Caxton & CTP has been somewhat insulated from these pressures.
Still, business prospects in the broader sector have taken a knock from rising living costs and interest rates, driven by the war in Ukraine. Now, operators will be hoping a global recession doesn’t materialise.
Mudiwa Gavaza
Food & beverages
It’s been a stomach-churning ride for investors dabbling in the JSE’s broader food sector. Higher input costs — a direct consequence of the war in Ukraine — raised doubts about companies’ ability to retain fat margins, especially when consumers are hard-pressed.
Then there were company setbacks. Tongaat Hulett shuffled into a dank corner, and Brait added to the gloom when it called off the listing of consumer brands subsidiary Premier Group.
But, as the FM predicted last year, Tiger Brands has regained its mojo and was the standout performer, with a chunky 25% gain in 2022. Premier Fishing & Brands notched up an eye-popping return, but this was off a low base after an offer to minority shareholders was pitched late in the year.
As for the rest of the food basket, there wasn’t much to fortify portfolio returns. AVI, our pick for 2022, hardly moved — though the dividends were sumptuous. RCL, which is trying to refocus on its higher-margin grocery brands business, took a pasting, dropping more than 20%. Still, the restructuring could offer opportunity in the year ahead.
Among the smaller diversified producers, Libstar was down more than 10%, and RFG made a sliver of a gain. Poultry producers Astral and Quantum were also largely on the back foot, while fishing group Sea Harvest sank 24%.
The year ahead looks a little tastier. Will Brait reconsider listing Premier? Will Tiger Brands make a significant acquisition? Will AVI unbundle its fishing arm, I&J? Will Libstar be bought out?
Marc Hasenfuss
Retail
With exposure to South African consumers and pressure on operating costs (electricity, utilities and supply chain, for example), local retailers’ margins are being squeezed. A modest change in gross margin, and especially operating margin, can drive substantial swings in net profit, with the share price following suit.
Punting at clothing retailers in this environment is risky, with Truworths at one end of the spectrum as the unloved counter and TFG at the other, in terms of investor sentiment. Of course, a change in sentiment (for better or worse) is what really drives a share price. But with consumers under pressure, clothing feels too hard in 2023, even for value players Pepkor and Mr Price and their recent acquisitions.
There also isn’t much appeal in pharmaceutical players Clicks and Dis-Chem, which both demand high multiples that are applied to profits that include nondefensive categories, such as homeware, and health and beauty.
This brings us neatly to grocery. After a strong showing in 2022, Woolworths has perhaps run out of puff. Spar is in disarray and might appeal to the gambler in you. Pick n Pay is making better strategic choices but remains expensive and has been going sideways.
Shoprite is the choice in this sector, though it suffers from the same recent sideways action as arch-rival Pick n Pay. The difference is that Shoprite has shown us how adaptable the group is and how it can win market share at every LSM level. That could be the difference this year.
The Finance Ghost
Transport & logistics
You’d have done a lot worse in 2022 than to pick small-cap logistics group Santova, whose shares rallied almost 58%, taking its three-year gains to a cool 382%. Which makes it a risky pick for 2023: given such appreciation, what is left in the tank?
For one, Santova’s earnings put the stock on a lowly p:e of five, and there’s little indication that the technological leap in the way that goods are transported is in danger of abating. Santova is arguably more of a tech company than a logistics one — so, given the convergence of tech and logistics, it looks to be a promising bet.
Bloomberg recently reported that “as supply snarls recede this year, they’re giving way to a different kind of disruption in the $10-trillion global logistics industry: a tech transformation, where everything between an assembly line and a store shelf will be tracked in real time where possible, fortified with artificial intelligence and automated”.
And Daniel Swan, the co-head of McKinsey & Co’s global operations, believes “we’re in kind of a golden age over the next three to five years of companies reinventing their supply chains”.
The shipping side of global logistics is likely in for a tough year. In November, for example, the mighty AP Moller Maersk warned that shipping freight rates had “peaked”, and that investors should expect a slowdown in demand — which makes those stocks all the riskier.
The necessity to add more technology to logistics, however, should stand Santova in good stead.
Giulietta Talevi
Energy
If 2023 becomes the year in which stage 4 load-shedding is considered the good times, then Reunert will surely stand to benefit.
In 2022, South Africa suffered more than 200 days of power cuts — and there’s little reason to believe Eskom’s hard-run, ageing coal-fired fleet will be fixed this year, new management or not.
The utility’s week-on-week energy availability factor sank to a record low of 50.73% in week 50 of last year. Having posted a net loss of R12.3bn for 2022, Eskom also forecast a loss of R20.1bn for the 2023 financial year, given its diesel budget and spend on open-cycle gas turbines, as it tries to stick with a better maintenance record that began under outgoing CEO André de Ruyter. And there’s still no clarity from the government as to how much of Eskom’s debt it plans to take on — though it’s hoped the February budget will give details.
While not an obvious candidate, cabling and power company Reunert — once better known for its ownership of Nashua Mobile (sold in 2014) than its force in the renewable energy sector — has been steadily building up a powerful presence through its applied electronics business, which owns companies such as lithium-ion battery storage group BlueNova, and solar installation specialist Terra Firma.
Despite a strong financial performance in 2022 — revenue for the group rose 11% to R11.1bn, and operating profit was 17% ahead, at R1.2bn — Reunert shares are only 7.8% up over one year, and remain well off their two-year high of R72.
Giulietta Talevi
*The writer owns shares in Reunert
Listed property
Despite a mini-rally in the last quarter of 2022, the South Africa-listed property index ended the year barely in the black, with a total return of just 0.5%. Income chasers clearly fled to safer pastures as interest rate hikes and inflationary pressures took the shine off bricks-and-mortar investments around the world.
European-focused real estate stocks were particularly hard hit in the first half of 2022 by the war in Ukraine. Still, the FM’s 2022 property pick, MAS Real Estate, had recovered most of its share price losses by December. And thanks to a rebound in dividends, MAS shareholders earned a positive total return of about 0.1%.
Given the uncertainties plaguing South Africa’s economy, the FM’s pick for 2023 is again a rand hedge: Sirius Real Estate. The company, with a €2.4bn portfolio of 150 business and industrial parks split 75/25 (by value) between Germany and the UK, was heavily sold off last year after a stellar performance in 2021.
Despite worries that higher energy costs and a potential slowdown in manufacturing would eat into Sirius’s earnings, it continues its eight-year record of uninterrupted dividend growth. For the six months to September dividends were up a hefty 32.4%, while funds from operations climbed 47%. So last year’s sell-down, which sent the share price crashing by more than 40%, has created what appears to be a bargain buying opportunity.
Sirius currently trades at a discount to NAV of about 15%. Given its superior earnings growth prospects, it seems materially undervalued.
Joan Muller
Industrials
With load-shedding locally and the risk of a recession globally in 2023, the industrials sector is treacherous. Scale is your friend, unless you’re feeling lucky and want to take a speculative punt at a bruised company such as Trellidor, which had a terrible 2022. For a safer approach, Bidvest brings diversification and a track record of capital allocation.
After unbundling the food services business in 2016, the group focused on offshore profits without sacrificing return on capital. This has necessitated a more complex balance sheet with a substantial offshore component. With 9.8 times net interest cover and 85% of debt in the long-term bucket, Bidvest can weather just about any storm. Importantly, cash conversion of trading profit is above pre-pandemic levels.
In the year ended June 2022, most divisions achieved margin expansion against the prior year. In the four months to October, group margin has been maintained. After both the freight and the automotive businesses had exceptional results in the 2022 financial year, there is a base risk at play that shouldn’t be ignored. Still, the services businesses should benefit from a return to offices and there should be enough diversification across the group to build in resilience.
Bidvest probably won’t win a stock picking competition in 2023 for outright returns. Instead, it offers some inflation protection and exposure to markets that tend to have electricity.
On a dividend yield of 3.5% and with growth potential, investing in Bidvest is one of the few ways to buy something in this sector and sleep peacefully at night.
Finance Ghost
Mining
The mining sector’s balance sheet is the healthiest it’s been in two decades. That’s reflected in the performance of the underlying equities, with the JSE’s resource 10 index gaining 1.68% in 2022. It’s impressive, considering that the sector absorbed inflationary pressure, Chinese economic activity declined and there was continued supply chain disruption. Over three years, the index is 43% higher.
Set against this, finding value among the blue chips is tricky, but it is possible. Anglo American, up about 4% over 12 months, has struggled operationally, but it’s still one of the few diversified mining companies globally that offers volume growth to copper, by dint of its Quellaveco project in Peru. It also has diversity.
That’s vital, especially for 2023 and beyond. In December banking group Citi said the prices of the metals that were expected to remain in supply deficit had been priced into many of the “pure plays” — companies that produce only a single metal. In contrast, the assumed metal prices in diversified companies such as Anglo American aggregate somewhat lower.
Yet while Anglo offers exposure to platinum group metals (80%-owned Amplats) and steel (70%-owned Kumba Iron Ore), all roads lead to Glencore. It offers “arguably one of the cheapest exposures to copper globally, with optionality of [a] coal price rally”, said Citi. The group’s December investor update shows that it also has a 25% free cash flow yield at spot commodity prices — one of the highest among the diversified mining companies.
David McKay
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