Peter Takaendesa, head of equities at Mergence Investment Managers
Buy: Motus
We find Motus shares attractive in absolute terms and more so compared to other interest rate-sensitive South African domestic stocks. The company is one of the most geared to interest rate cuts and the shares are still trading at relatively attractive valuation levels.
Net finance costs were about 40% of earnings before interest and tax for the past financial year. We believe Motus’s earnings per share will show a strong recovery over the next 12 to 24 months, back to at least the R20.46 a share level reached in the financial year ended June 2023.
The shares should rerate to a multiple of between eight and 10 as gearing comes down and the overall South African market rerates after the formation of the government of national unity and the start of the rate-cutting cycle. Motus shares can trade in the R160-R200 range over the next 12 to 18 months as the market looks forward to a strong upward trajectory in earnings and dividends.
Sell: Retailers
Sophisticated investors could consider a long position in Motus shares paired with a short in one of the retailers that have already rerated sharply. Investors could pay particular attention to retailers that are losing market share in South African apparel and with some exposure to the UK and Australia (Truworths and Woolworths), or even Pepkor, which has a large 30% shareholder selling shares through book builds in the market.
These selected apparel retailers are now trading close to one standard deviation above their 10-year average forward multiples to a range of 11.5-15.5 forward multiples, reducing the margin of safety should earnings fail to catch up with those high expectations, and incentivising large shareholders to sell more shares into the market (as in the case of Pepkor).
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