Our children sometimes teach us the most valuable life lessons. Quite a few years ago when my daughters were still very young, we decided to launch “operation clean-up” at home. The sole purpose of this operation was to clear out everything we haven’t used in the last six months. We took down old boxes of children’s toys and instead of placing them directly in the car to donate, the kids decided to have a final look at their old teddies and toys. Following a few “oohs” and “aahs”, those boxes were taken back to their rooms and they became the “new” favourites for a little while. Needless to say, the same process repeated itself a few months later with the exact same toys. My point is, however, in those moments following our first “operation clean-up”, those toys once again became the best thing since sliced bread.
It is exactly this type of behaviour that I feel best describes the current local sentiment towards authentic locally listed companies. With our local economic environment as uncomfortable as it has been, and where prevailing themes have been ‘corruption’ and ‘junk status’, locally-listed companies increasingly sought salvation offshore – to such an extent that the top 40 largest listed companies in SA’s operational exposure to foreign currency has increased from around 50% in 2008 to 70% in 2018.
When looking at returns from especially those companies that earn a high percentage of their revenue beyond the borders of South Africa, it’s interesting to note that they were the leader companies in terms of growth on the JSE, while local-earning companies were packed far away in boxes, much like my children’s toys.
Let’s have a look at the top 100 largest companies listed on the stock market, zoom in on those that earned more than 90% of their income locally, and then compare their average price earnings ratio (P/E) with the FTSE/JSE All Share’s P/E (JSE) over the last 10 years. After the correction in 2008, the rand remained stable and even traded below purchasing power parity (PPP) in 2011. This benefited companies that earned more than 90% of their revenue in rand, and these companies traded on a P/E of around 16 compared to the JSE’s 12.5.
We all know what happened since then: The group of companies that earned more than 90% of their revenue in rand didn’t really get much joy from the new rating compared to most world markets, and up to just before Pres. Ramaphosa was appointed (2017), they still traded on a P/E of around 16, compared to the JSE’s P/E of over 21. Although these ratings have improved since his appointment as president, we have seen a gap emerging where the 90%-plus-rand-revenue companies are now trading at a P/E closer to 10, compared to the JSE’s 19. Is this rating justified or does this present an opportunity for investors?
I personally feel that this may just be an opportunity starting to present itself and although it must be considered within your risk profile and done gradually, the following three companies deserve consideration:
Pioneer foods is one of the largest South African producers and distributors of a range of branded food and beverage products. Roughly 86% of the Group’s revenue is generated in South Africa. This company operates in a cyclical environment but is well positioned to deliver sustained volume and improved value growth. For the first half of their financial year, their volumes increased by 4%, adjusted headline earnings per share (HEPS) increased by 26% and cash from operations increased by 34%. The group expects further improvement in performance in the second half of their financial year.
Tsogo Sun owns a portfolio of 13 casinos and over 100 hotels, mainly situated in South Africa and the rest of Africa. Once shareholder approval is gained, the group will unbundle their holding in listed Hospitality Property Fund. Management believes the unbundling could unlock value for shareholders. Tsogo should benefit from an improvement in economic growth and consumer sentiment. The Group is highly cash generative and appears to be offering value at current levels.
Coronation is one of the largest fund managers in South Africa. The company, as at the time of writing, was trading on a historical P/E of 13.5 and an attractive dividend yield of 7.39%. The group recently advised clients that total assets under management (AUM) as at the end of June 2018, increased by 3.9% to R602bn compared to June 2017. This places the company on a current Market-Cap-to-AUM ratio of 3.5 times, which seems favourable compared to its five-year average of 4.9 times. In the latest interim results, the group expects the economic conditions in South Africa to improve, although patience might be required.
The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken based on the information contained in this newsletter. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.