Compiling an "apocalypse" portfolio is not easy — especially in a monthly magazine where a production schedule means our story stays in limbo for more than a few days.
It also requires the assumption that one day, hopefully soon, SA will emerge from this atrocious pandemic, and slowly start the economy’s cogs grinding again. Perhaps when we do emerge, many more South Africans will appreciate just how fragile our economy is and just how important business confidence is to job-creating investment decisions.
The crux of the story is the stock selection we have made at this delicate juncture. Most are small-cap counters — but these are stocks we believe are not only resilient, but can emerge stronger contenders over the longer term.
There is a common theme that is not difficult to discern: redoubtable management, strong cash flow, smart capital allocation, well-reinforced balance sheets and an ability to capitalise on the crisis.
I’m sure many readers will disagree with some selections. Please feel free to mail your selection of six stocks to hasenfussm@fm.co.za — and hopefully we’ll all be a little healthier in the pocket in years to come.
Here are our apocalypse picks:
Sea Harvest
Food counters, mainly because most are fully functioning during the Covid-19 lockdown, have become an obvious focal point for investors. There are admittedly a number of interestingly priced opportunities, including sector stalwart AVI, but IM has developed a taste for Sea Harvest because its brands focus on essential protein sources — fish (a major hake player) and dairy (cheese and butter).
The company’s hake catch is also a strong export earner, which will help in a time of rand vulnerability.
Sea Harvest is a solid cash generator with a stout balance sheet — which should help the business through even the leanest times. It will be worth watching whether the current economic impasse throws up opportunistic deals for Sea Harvest, particularly in the aquaculture niche where it has a significant interest via recently acquired controlling interest in Viking Aquaculture.
On an earnings multiple of eight times Sea Harvest is not super-cheap — but investors can depend on it to land profits.
Afrimat
If smart capital allocation and disciplined investor returns had a face, it would be Afrimat CEO Andries van Heerden. From its JSE listing in 2006, the counter has diversified away from its focus on primary construction materials and spread its interests successfully and profitably into industrial minerals as well as iron ore.
These moves were initially questioned, but well-priced and -timed acquisitions at times of economic and sector duress enabled Afrimat to grab great assets at knockdown prices.
Management runs a tight operational business with a keen focus on cash generation. The domestic construction materials and industrial minerals sector may encounter leaner times as SA transitions post the Covid-19 lockdown and capital spend across all areas is tightened. But Afrimat is well balanced, and iron ore provides a rand hedge profit kicker (especially as China recovers from its shutdown). Opportunistic deals leveraging off its superior balance sheet could also power earnings.
Hosken Passenger Logistics & Rail
With economic activity grinding to a halt, buying a ticket for Hosken Passenger Logistics & Rail (Hosken Pax), which operates in and around Cape Town, might seem counterintuitive. But the wheels of commerce and industry will have to start turning again eventually.
On a trailing earnings multiple of just three times, Hosken Pax looks a good long-term bet on an economic recovery, whether partial or prolonged.
Obviously — based on the Covid-19 predicament and the company’s own outlook — IM estimates the forward earnings multiple being a little more demanding.
That said, the business is highly cash generative with a well-reinforced balance sheet, and Hosken Pax’s superb managers know the passenger transport system backwards.
The company is fortunate enough to have, in past years, invested heavily in its fleet and technology. This has led to significant savings in fuel and maintenance.
Hosken Pax is geared for acquisitions and there might not be a better time to expand the operational fleet.
Astral Foods
Astral is the JSE’s "big bird", producing more than 5-million birds weekly. Despite the recent volatility on the JSE, the company has been remarkably resilient and its shares have gained some ground.
The past year saw Astral come off its best-yet reporting period, as higher input costs of maize coupled with municipal service delivery hitches hampered profits. Interim results to March 2020 will be muted. Many retailers had a difficult festive period and Astral indicated that sales in that key period were not great.
The hangover of higher input costs also hit profitability. The impending trading update should detail this. Still, Covid-19 has seen increased demand for food as the lockdown extends, though affordability in the informal sector raises concerns on volumes and sales.
Overall, a better second half and 2021 financial year is expected as Astral reaps the benefit of higher tariffs on dumped poultry imports and on a bumper SA maize harvest.
Combined Motor Holdings
Much like Hosken Pax, mobility industries might be the last thing on investors’ minds. No doubt, Combined Motor Holdings (CMH) is going to see vehicle sales stall for April, and perhaps beyond.
At the time of writing the share was at a five-year low, which seems to disregard just how well the CMH profit engine has been maintained over the decades.
Management, led by Jebb McIntosh, has been ultra-conservative, even in good times. The company has no gearing to speak of and net cash flow in the six months to end-August was a reassuring R149m.
Interim earnings came in at 120c a share. If this number is reduced by 40% for the second half — and that’s extreme, since April is a short sales month due to public holidays — full-year earnings will be 192c a share.
This puts the share on an earnings multiple of 6.5 times and perhaps reflects a realistic "rejigged" forecast of 2021 earnings. IM doubts CMH will hesitate to buy back more of its own shares.
Cashbuild
For years Cashbuild was the undisputed stock market darling, stoutly positioned as a nationwide retailer of building materials. Its formidable rural reach and urban footprint saw the counter chalk up growth year after year.
But a change of leadership and a period of lethargy saw Cashbuild’s grip on the sector slip.
Nimbler competitors, including Builders and Spar’s Build it, muscled in on its territory. Today, Cashbuild is bouncing off lows at R137, putting the stock on an earnings multiple of 7.2 times. Interim results to December saw a slip of only 1% in overall revenues, but profits fell 20%.
The economy for building materials remains challenging and a recent update was not encouraging for the coming six months.
However, Cashbuild has found its footing again and tightened costs, and sits on R1.4bn in cash (40% of its market capitalisation). It has the endurance and structure to ride out the storm.
AfroCentric
For a company that has carved some viable niches in specialised services to the public and private health-care sectors — tagged to a credo of making quality health care more accessible and affordable to members and beneficiaries alike, in both sectors — it is odd that the share does not get prescribed more widely to punters.
The Covid-19 crisis might focus more attention on AfroCentric (ACT).
ACT’s best-known subsidiary is health-care administrator Medscheme — but there is also a growing wholesale pharmaceutical supply business (with a chronic medication distribution capability) as well as services in specialised disease management, information technology solutions, transactional switching and health-care fraud detection.
Interim results to end-December showed compelling cash generation of R226m, which is equivalent to 39c a share and gave a quality underpin to headline earnings of 24c a share.
This is a well-disciplined company that should continue to trade in a vibrant manner, and has an opportunity to capitalise on new opportunities.
Invicta
If there was a case study in beaten-down mid-cap titans, Invicta would be a perfect example.
From a peak of R122 a share in April 2014, the stock has been trampled by a series of strategic missteps and the weaker local mining and manufacturing sector. What’s more, the drought and worries over land tenure also hindered Invicta’s interests in agricultural equipment.
Investor concerns were heightened late last year when management hinted at asset sales or a rights issue to reinforce the balance sheet. The share nosedived and sits at levels not seen since 2003.
Invicta’s NAV was R42 a share at last count and new management, headed by Steven Joffe, recently canned any idea of a rights issue in favour of refinancing debt. IM sees a leaner, tighter Invicta emerging with asset sales and debt reduction being the key to its recovery. This year will be awful — but the bad news is already priced in.
eMedia Holdings
This television broadcast group, if anyone watches eNCA, has been industrious in the Covid-19 lockdown. The provision of news as well as in-home entertainment — which eMedia do through the free-to-air e.tv and the OpenView satellite channel — is a service much in demand, with most people housebound.
Advertising revenues may fall off, but eMedia will have an opportunity to build its brand in households around SA — especially the ones where discretionary spending on entertainment has been staunched by the current circumstances
While e.tv and eNCA are solid businesses, the real game-changer is OpenView. In the half-year to end-September, OpenView’s advertising revenue grew 62% to R94m and set-top box activations was close to 1.8-million, and growing. Interim headline earnings, notwithstanding losses incurred while building out OpenView, topped 15c, but net cash flows presented a clearer view at R130m.
With Hosken Consolidated Investments and Remgro strongly backing eMedia, this business offers intriguing long-term value at current levels.
Quantum Foods
Quantum is SA’s largest egg producer and eggs are doing well in the Covid-19 environment as a cheap protein source (not to mention the home-baking surge during the lockdown).
This has taken the edge off the national overproduction in eggs and halted the slide in prices (which had hit profits). Of course, eggs are highly cyclical and this will still take some shine off financial 2020 results.
Animal feed and contract poultry rearing, as well as the supply of day-old chicks, are far more resilient segments. They have enjoyed a better period than last year, as a recent trading update attested.
With a solid balance sheet, good cash generation and a solid NAV of 918c a share, Quantum — which offers a decent yield — is a solid little stock. IM reckons the company will emerge stronger through the current cycle.
Argent Industrial
This little industrial conglomerate has become a fascinating combination value and growth play.
At the end of September the group reflected a NAV of almost R14 a share.
IM estimates that the tangible NAV is closer to R10 a share. The test of this NAV estimate is under way, with Argent seemingly intent on disinvesting from its SA operations and focusing on growing its operational base offshore.
In the interim period the SA businesses trudged along, but its UK-based operations — Fuel Proof, OSA Door Parts and Cannock Gates — all exceeded expectations. In the US, New Joules Engineering North America performed well too.
Despite the asset sale regime — which might slow in the prevailing pandemic – Argent has shied away from dividends, and taken advantage of the gaping discount the share offers on NAV by regularly repurchasing shares in the open market. Argent’s share price has buckled in recent weeks, which should offer an opportunity to mop up more scrip once the final results are published.
Stadio
Tertiary education business Stadio’s share price peaked briefly at 850c after its 2017 listing. But subsequently, private education stocks have been mercilessly flogged. The recent selloff saw Stadio hit a new low of 75c, valuing the business at just R640m.
The recent report card, operationally, was satisfactory, with Stadio reporting a 29% rise in revenue to R633m and posting core headline earnings of 10.8c a share.
With student numbers near 30,000 and two new campuses planned for Cape Town and Joburg, a period of rapid expansion will hit Stadio. This is not without risk as the expansion effort is debt-funded.
The increased funding costs and time lag to campus utilisation will be an initial drag to earnings.
But IM feels the market has been too harsh on Stadio, as tertiary education, in campus and online formats alike, will see ongoing increased demand as students and professionals need to stay relevant in challenging and changing economic times.
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