Three leading fund management companies share their three top picks for the year

Nedbank Private Wealth:

Foschini : With 18 store brands in its portfolio, The Foschini Group (TFG) has most malls well covered: homeware, sporting goods, jewellery, and men’s and women’s fashion are all represented through multiple brands. TFG is a few years behind Mr Price and Truworths in terms of store optimisation and supply chain management. There is room to improve further and wring more efficiency from the supply chain. TFG has been clear in communicating its desire to reduce its stake in financial services company RCS, an exit from this business could result in a positive re-rating.

Pan African Resources (also a top pick for Cannon Asset Managers): In light of the continuing uncertainty in global financial markets, we still recommend holding gold or gold shares for those investors with a higher risk profile. Gold exchange traded funds like Absa NewGold have outperformed gold shares on average over the past year. However, certain gold companies can outperform the gold price due to their gearing to the gold price as a result of expansion projects. PAN is a low cost gold producer and is currently finalising the acquisition of Evander GM, a transaction which is earnings enhancing. Management is expanding the dump treatment operations at Barberton to add a further low cost operation to the group. Both of these transactions should positively impact earnings over the next few years.

ELLIES: Ellies services local and African markets through the distribution of consumer goods, renewable energy, power, and telecommunication infrastructure. Ellies has exposure to more than six African countries including SA and the contribution from Africa is expected to grow in future, through expansion into new markets and from the infrastructure division (Megatron). Ellies’ focus is on energy saving and energy renewables going forward. Ellies has shown strong growth in the past year, which was enhanced by the strong performance of the Megatron division. We expect the company to continue delivering a good performance in the year ahead, as a result of new product launches and expansion into new markets.

Other top stock picks by Nedbank Wealth include MTN, Clover, Iliad, Mpact and Bidvest

Cannon Asset Managers:

Omnia Holdings: Omnia has exposure to the broader resources industry and has a commendable track record for investors.  Although exposed to mining activities with half of operating profit coming from this segment, agriculture contributes almost 40% and chemicals the remaining 10%, so the company stands to benefit from the broader resources sector. Omnia remains South Africa-centric, but is increasingly doing business outside our borders, with a quarter of revenue being generated in Africa.  The company’s agricultural expertise fits Africa’s growing need to produce more food, while Africa remains a key market for mining production. Omnia displays sound value multiples, supported by a diverse earnings base and growing market share.

Old Mutual: Old Mutual displays excellent value relative to its peers:  price to net asset value is at 1.3 times versus the peer group average of 2.1 times.  This comparison suggests a discount of approximately 50%.  In addition, Old Mutual generates a 15% return on assets, just shy of the peer group’s 17.5%.  This relatively small difference is at odds with the large price to net asset value discount.

Nedbank, Mutual & Federal and Old Mutual’s US asset management business account for two thirds of Old Mutual’s total market value of R118billion.  The remaining one third is then valued at approximately R39billion and generated profit of R11.2billion at the last set of financial results, placing that remaining part of the business on a price:earnings ratio of just 3.5 times.

Old Mutual appears to be priced as a global insurance firm, a cluster that has been under high levels of financial stress over the recent past.  We consider this to be misplaced sentiment and possibly explains Old Mutual’s price discount: more than 80% of the company’s earnings in the last year came from emerging markets.

African Rainbow Minerals (ARM): ARM provides an excellent entry into the resource sector via its investments in a diversified range of resources, which include both base metals as well as some exposure to precious metals.  ARM trades on exceptionally compelling multiples as evidenced by its single digit PE ratio of 11.0 times, a forward PE ratio of 7.1 times and a dividend yield of 2.5%.  Coupled with this, by our measures, ARM is considered a business of high quality, with a sound balance sheet.

Absa Investments:

Sasol: Sasol is currently sitting on an historic PE of around 9 times with good forecast earnings growth. The two main drivers of earnings-the USD oil price and the ZAR/USD exchange rate-both look favourable for Sasol. Provided Sasol can keeps its costs in check, earnings growth should be robust. The stock is not expensive but it hasn’t been expensive for a while and yet the share price languishes. Part of the reason for the relative under-performance must surely be scepticism surrounding Sasol’s ability to compete in the US with its Lake Charles, Louisiana GTL project this is estimated to cost between $11bn and $14bn.

Our immediate price target is R400 per share and our longer term valuation is R540.

SABMiller: SABMiller is a highly defensive stock with undoubtedly the best geographical footprint of any global brewer. Although expensive on a historic PE of over 26x, that rating comes down quickly during the next couple of years based on strong earnings growth to 16.8x in 2014. Most geographical jurisdictions are performing well now and even Europe, which had been struggling in the past couple of years, is now coming back to life. The very diversified geographical businesses have resulted in an exquisite ability to minimise risk.

There remains an outside chance that AB-Inbev, the world’s largest brewer, may make an unsolicited bid for SABMiller in years to come and AB-Inbev would have to pay a premium of at least 30% on the share price to secure SABMiller.

Richemont: Richemont, which owns many global luxury brands, has bounced back strongly from the depths of the Global Financial Crisis. At an industry level, we remain confident on a one-year view given the luxury goods sector’s strong growth potential stemming from pricing power, barriers to entry and structural growth from emerging markets combined with excellent cash flow generation. Current sentiment towards the sector has improved, following a stabilisation of the economic situation in China and a resolution (albeit perhaps temporary)  to the US fiscal cliff. Richemont remains a favourite among luxury goods analysts. We see Richemont as favourably positioned for the long term given 50% retail exposure, high end pricing power and underestimated potential for the Chinese luxury branded jewellery market. We believe the current valuation of just 16x PE for 2013 offers good value, especially if adjusted for the significant cash position which reduces it to 13.5x.

First published in City Press.