Mark du Toit, portfolio manager at Oystercatcher Investments
Buy: Afrimat
Afrimat is one of the better-run companies on the JSE and has a highly regarded management team. Its recent financial performance has been impacted by disruptions in the ferrochrome industry, which is a key customer for its anthracite mine, as well as higher costs associated with the acquisition of the Lafarge cement business. The iron ore division was also affected by ArcelorMittal South Africa, particularly the Vanderbijlpark steel plant, taking lower domestic volumes. Afrimat’s share price has almost halved and the company now trades broadly in line with its NAV.
We expect the operating environment to improve markedly. Thermal coal prices are higher, which will benefit Afrimat’s anthracite operations. ArcelorMittal is expected to increase its domestic iron ore purchases in the coming year, and losses in the cement business should drop. Company earnings are at trough levels and so is the share price. We are confident that the management team will allocate capital appropriately, and we look forward to seeing how it develops the rare earth minerals assets acquired in the Glenover transaction in 2021.
Sell: Listed property
Domestic listed property counters look expensive at current levels. The FTSE JSE SA listed property index is up more than 20% over a year. Share prices have performed well, driven by the compression in the South African 10-year bond yield and lower domestic interest rates. This has been in stark contrast to South African listed retail companies, whose share prices have been sold off as operating margins have come under pressure. This margin pressure reflects increased consumer spending on online gambling, as well as the growing impact of international e-commerce platforms such as Shein and Temu.
South African retail tenants contribute a significant portion of revenue for listed property companies. As a result, the financial strain experienced in the retail sector is likely to put pressure on rental income over time. This development is not appropriately reflected in current valuations of listed property companies.
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