Wilhelm Hertzog, portfolio manager at asset management company RECM, looks at some South African shares that offer good value at the moment.

For the first time in a few years, the South African market is offering up some exciting opportunities to buy high-quality businesses at, in some cases, less than half of what we believe they are worth.

The South African shares presenting value belong predominantly to cyclical businesses in the resource sector, as well as a handful in the gaming and leisure sectors. As the stock prices of these businesses have fallen, they have started to present opportunities for investors to purchase high-quality businesses which are selling for substantially less than they are worth, and then wait for this mispricing to be corrected over time.

An example of this is JD Group, a furniture and motor retailer. We believe that the negativity around the consumer lending sector has weighed heavily on share prices, and therefore, JD Group’s shares have started to show value. The first signs of a painful ending to the extended growth period enjoyed by the unsecured lenders in South Africa have slowly been revealing themselves, and we fully expect that there’ll be a tough period ahead. However, at JD Group’s current level, we believe the market is factoring in more bad news in the share price than is justified for the business, especially in the light of their relatively conservative approach in the unsecured lending market.

We also believe the current negative sentiment attached to the local platinum mining sector provides South African investors with a spectacular opportunity to invest in high-quality, cheap platinum investments. The recent poor history and a weak short-term outlook for the European automotive market has served to drive platinum and platinum mining share prices to levels that we consider very attractive from a longer-term perspective.

With smaller mines shutting down, and production volumes falling, platinum supply has fallen and will continue to do so. This, along with an eventual pick-up in demand once the European automotive industry recovers, should eventually see the platinum capital cycle normalising. The fact that three South African platinum miners, namely Anglo American Platinum, Lonmin and Impala Platinum control the majority of global platinum production (over 75%) and reserves (over 90%), places them in a very strong position.

We currently find Impala Platinum especially interesting, as after initially withstanding the onslaught that the platinum sector has experienced far better than the other platinum miners, Impala’s share price has now also succumbed to the on-going pressures. We recently faced the almost unbelievable situation where the shares of all three of the major global platinum producers are trading at less than 50% of our estimate of fair value – and they still offer compelling value today.

The platinum price should at some point in the capital cycle, when demand outstrips supply, rise above the marginal cost of production and make the industry economically viable once more.

Although many investors are more focused on short-term volatility in market prices right now than on long-term investment prospects, we believe it is better to wait patiently and stay away from expensive assets, no matter how much momentum is fuelling them, because the best way to protect clients’ capital is never to pay more for a business than what it is worth – no matter how popular it is at the time.

RECM is a medium-sized, independent asset management company that follows a bottom-up value approach based on thorough, fundamental research.