Chantal Marx, head of investment research and content at FNB Wealth and Investments
BUY: JSE Ltd
We have seen a strong improvement in value traded on the JSE over the past few months as local investors have become more positive about the country’s economic prospects. Primary activity (listings) has also picked up, and we expect a resurgence in foreign interest in South African assets. These factors are expected to support revenue growth and by extension earnings growth and cash generation over the next few years. The JSE has a history of generating strong cash flows and boasts a solid balance sheet with excess cash of close to R1bn to either fund growth or return to shareholders. The financial position and consistent cash generation profile underpin a solid dividend yield for the next 12 months of 7.3% (with risk to the upside). The stock is trading on a forward earnings multiple of 10.3, below its long-term average and at a discount to its emerging-market peers, despite its solid growth prospects. JSE Ltd has retreated close to 10% from its September highs, and we think this could offer an opportunity to enter the stock for the longer term.
SELL: Pick n Pay
The rights offer earlier this year and Boxer’s successful IPO mean that the company’s two-step recapitalisation plan is complete, and its balance sheet has been restored. The hard work in turning its struggling South African supermarkets business around is just starting, however, and execution risk on this front remains elevated. Pick n Pay retains a majority shareholding of 65.6% in Boxer. Taking the market value of Boxer and applying a 15% holding company discount, we value the business inside of Pick n Pay at R23 a share. We are more positive on the prospects of Boxer relative to Pick n Pay, but after a very enthusiastic first few days of trading, the share price of R67 is now above even our most bullish forecast (of about R60). We value Pick n Pay (ex-Boxer) on a peer-relative basis with a most likely valuation of R12 a share and a bear case of 430c (which could happen if the business continues to generate negative free cash flow). This means our valuation range is R27.30 and R35.00 — and the midpoint implies a value of R31.15, which is close to the current share price. We would rather look for an opportunity to enter the higher-quality name in the sector, Shoprite, or consider direct exposure to Boxer (at a more reasonable valuation).
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