Mid-Caps – Is it time to go big?

With the Rugby World Cup (RWC) behind us, we can proudly say that we are the world champions. Not only did we win the final against England, we just about destroyed them in dominating fashion. What makes this achievement even greater, is the fact that in March last year (2018), there was absolutely no excitement about this year’s RWC on a local front. In fact, most South Africans would have told you that given their performance at that time, and South Africa’s financial crisis, it would have been be better to just withdraw from the RWC and save some money in the process. Rassie Erasmus was appointed as coach shortly thereafter, though, and Siya Kolisi was crowned captain of the team. The rest, as they say, is history. The most important lesson we learnt from the whole experience, is how quickly momentum can turn in your favour when the wheels start to turn.

When you take a look at the JSE, you will see that we had a very similar experience with mid-market capitalisation shares (Mid-Caps) on the local stock exchange. The Mid-Cap Index consists of shares listed on the JSE, that falls outside of the 40 largest shares, but within the top 100. In other words, Mid-Caps account for the top 41 to 100 largest companies listed on the JSE according to market capitalisation. When you work your way through these 60 companies, you will see that most of them generate their earnings within the borders of South Africa. Most of them feature as so-called “SA Inc.” companies.

With the dark cloud that has been hanging over them, especially this past year, it’s no surprise that until three months ago (end of July 2019), while the FTSE/JSE All Share Index with its total earnings of 5.6% per year, couldn’t even manage to outperform local money market, Mid-Caps performed negatively over the same period with -1.4% per year. Not unlike the Springboks, these shares were pretty much a write-off at the time.

A mere three months later, however, the tables have turned. Of course we don’t want to get ahead of ourselves, but not only did the JSE recover nicely, like a proper Makazole Mapimpi, Mid-Caps also managed to run away from its opponents at warp speed. As at the end of October 2019, the JSE All Share Index was trading positively by 10.5% for 2019, growing by 3.1% in October alone. Mid-Caps managed to more than double that performance (7.2%) over the same one-month period, and is currently trading at +9.7% for 2019, not far behind the JSE’s year to date performance. The fact is that value opportunities can only hide for so long before they start to emerge again.

PJ van Niekerk, equity analyst at PSG Wealth Old Oak, identified four Mid- and Small-Cap shares that possibly seems to be on the cheaper side for those investors who believe that this recovery is still in its infant phase:

1.    Momentum Metropolitan Holdings

Momentum Metropolitan Holdings engages in long and short-term insurance, asset management, savings, investment and employee benefits. Good progress has been made with the “Reset and Growth” strategy, which is a three-year plan set in September 2018, to improve earnings to R4bn in the 2021 financial year. The group recently reinstated dividends after completion of a R2bn share buy-back programme.

2.    AECI

AECI is a South African-based explosives and chemical speciality company. During the first six months of 2019, the group went through a process of restructuring its water processing and mining solutions segment. The benefits of the realignment projects, better rainfall in the Western Cape and improved conditions in the mining sector could support earnings in the second half of the financial year.

3.    Hudaco

Hudaco is involved in the importation and distribution of branded automotive, industrial and electrical consumable products for the local market. Group earnings will be dependent on GDP growth and local business confidence. Despite challenging trading conditions, the group managed to deliver a satisfactory set of interim results. Hudaco is trading at a trailing price to earnings ratio of 9.15 and a dividend yield of 5.18%.

4.    Coronation Asset Management

Coronation is a leading brand in the South African investment industry with total assets under management of R571bn as at 30 September 2019. The group’s returns are correlated to the performance of equity markets. As at the time of writing, the JSE All Share Index has delivered an annualised return of 8.45%. Should current market levels hold, management expects an improvement in their results for the second half of the current financial year.

The opinions expressed in this blog 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 blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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