FNB Wealth and Investments’ top investment analysts selected five stocks with good prospects – Mondi, Shoprite, Bidcorp, Glencore, and Balwin Properties.
Last year was challenging in global equity markets, and while the JSE showed a positive return in rand terms, it moved backwards when converted to the US Dollar.
FNB Wealth and Investments saw growth expectations moderate as the year progressed, thereby impacting the earnings outlook for companies near term.
This year is still rife with uncertainty. The war in Ukraine, questions around policies in China, high inflation, and recession fears create risks for investors.
In South Africa, the growth outlook has been tempered by the impact of continued and intensifying load-shedding.
Increased power outages will undoubtedly impact the profitability and balance sheets and local companies.
Despite a difficult economic environment, FNB still sees value in the South African equity market for 2023.
For this year, FNB Wealth and Investments prefer stocks and ETFs that offer decent value – i.e. those which are trading at low earnings multiples and offer good dividend yields.
Their preference is for companies and ETFs that are more defensive and less cyclically exposed with a strong long-term thematic impetus.
Here are the top picks from FNB Wealth and Investments’ top investment analysts.
Mondi (picked by Chantal Marx)
Mondi is an international paper and packaging group with production operations in over 30 countries. The group’s key operations are in central Europe and South Africa.
Mondi has been one of the JSE-listed companies most impacted by Russian sanctions. It has a large operation in Russia, and the stock derated substantially after Russia’s invasion of Ukraine.
Mondi has decided to divest from Russia entirely and has begun the process of selling its assets in this geography.
In December, Mondi announced the sale of its three Russian packaging converting operations for a consideration of RUB1.6 billion (~€24 million), at a loss of between €70 million to €80 million.
While disappointing relative to carrying value, these assets have been priced at zero by the market, and therefore any cash accruing to the company will be viewed as positive.
There is also a likelihood that this cash could be returned to shareholders in the form of dividends.
Outside of the Russia situation, Mondi runs a very clean and efficient operation.
It is resilient to economic cyclicality through a focus on corrugated boxes which are primarily used in defensive sectors such as food and beverages.
Corrugated boxes have structural support from the continued adoption of e-tail.
The company operates in low-cost regions with access to low-cost wood. Paper prices are also less volatile than metal or soft commodities, which makes its revenue more defensive than other resource companies.
Mondi is currently trading at a smaller premium to its peers relative to history. It is also trading well below its historical average forward PE and forward EV/EBITDA multiples.
“We think Mondi offers decent, defensive long-term value at current levels,” Marx said.
Shoprite (picked by Sithembile Bopela)
Shoprite Holdings is the largest fast-moving consumer goods (FMCG) retailer on the African continent.
The group has a large geographic footprint with a presence in several countries across Africa through brands including Shoprite, Checkers, Usave, OK, House & Home, and Hungry Lion.
Shoprite boasts strong market dominance in South African formal retail, with further gains experienced over the last five years.
The development and successful implementation of Checkers Sixty60 shows innovation and agility to changing market dynamics and execution success.
The sustained growth of Checkers Sixty60 and the on-demand grocery delivery app has allowed the group to monetise digital and alternate revenue stream opportunities.
Its sustainability targets to reduce its carbon footprint are encouraging, with innovative solutions.
Recent results were strong, with double-digit sales growth despite tough base effects.
While load-shedding has taken a toll on the group’s expenses, it has managed to curb disruptions and continue to trade seamlessly, given its solar and generator investment programme.
A volatile and uncertain economic and political climate in South Africa and Africa will be the biggest risk near term.
While defensive to a certain extent, GDP growth and consumer confidence will still be a determinant of growth.
“Overall, the business remains operationally sound, boasting a strong balance sheet and is highly cash generative,” said Bopela.
“On a valuation perspective, Shoprite appears to offer fair value on a forward PE of 20.1 times and a forward dividend yield of 2.9% complemented by a strong growth profile and defensive business model.”
Bidcorp (picked by Pritu Makan)
Bidcorp is a market-leading food service product distributor across several geographies, including the United Kingdom, Europe, Middle East, South America, Asia-Pacific, and South Africa.
The company’s business units operate across the food and ingredient manufacturing sectors, such as catering, hospitality, leisure, baked products, poultry, meat, seafood, and processing.
The strategy is to grow organically in existing regions and acquisitively in new ones, with improvements in the customer mix and value add opportunities providing further upside potential.
The group has a well-diversified client base and businesses at different life cycles across developed and emerging geographies.
Bidcorp is not overly exposed to any specific client or category, boasting healthy diversification across the portfolio.
The company’s dual strategy of targeting organic and acquisitive growth spreads risk, with the flexible balance sheet offering further room for bolt-on acquisitions or a major transaction.
The group’s market-leading position in many countries of operation provides some pricing power in a low-margin industry.
Bidcorp has also seen solid momentum following the easing of Covid-19 restrictions and supply chain headwinds, with an expected recovery in China creating further growth opportunities.
Margins have also remained resilient, which is noteworthy given the current inflationary environment, as most businesses were able to pass through inflation increases.
A continued recovery in travel, leisure, and conferencing sectors could also provide a near-term boost.
“The company remains financially strong with relatively low levels of gearing and a robust business model with solid diversification and defensive characteristics,” said Makan.
Bidcorp is trading on a forward PE of 18 times, below its historical average rating of 20 times.
Glencore (picked by Jalpa Bhoolia)
Glencore is one of the world’s largest global diversified resource companies. It engages in the production and marketing of metals and minerals, agricultural products, and energy products.
Glencore has a well-diversified commodity mix, including iron ore, coal, copper, zinc, nickel, and cobalt.
The group recently signed a 15-year agreement with recycling technology firm ACE Green Recycling, in which the latter will supply recycled lead and battery metal-based end products from recycled lithium-ion batteries.
It expands the group’s commodity basket, allowing it to ride the high-demand lithium battery wave.
The group’s supply chain focus makes it more of a defensive business rather than pure commodity play.
Its investment in unloved but still vital commodities such as coal and oil could aid cash flows medium term.
The group will continue working towards decarbonisation while using its solid cash flow generation from the “old” business to fund “new” business ideas i.e., coal to lithium.
“Glencore had a great run last year, but we still believe that there is room for upside potential, especially considering the play that the Chinese economy has on the commodity sector,” said Bhoolia.
“The company is committed to returning cash to shareholders, which means that the potential for capital growth is complimented by an attractive forward dividend yield of 9.6%.”
Balwin Properties (picked by Hashmeel Suka)
Balwin operates as a real estate property development firm in South Africa, specialising in the construction as well as the rental of apartment complexes and lifestyle estates.
The company also offers various after-sales services, including fibre to the home (FTTH), solar energy, and insurance.
Balwin’s portfolio currently consists of 97 developments and over 47,000 apartments. It is the largest sectional title developer in South Africa.
Balwin targets high-density, high-growth metropolitan areas in South Africa and has a long-term development pipeline (~45,000 apartments) in such locations.
Hence, it is well-positioned to address the lack of quality and affordable housing in the low to middle-income market.
An added benefit for the company is the high barriers to entry within the industry.
Fundamentally speaking, the company has been performing well – in its 1H23 results, it reported accelerated growth in both headline earnings per share (+47%) and revenue (+20%), driven by increased unit sales and higher selling prices.
Input costs have been well controlled, and the overall balance sheet position is strong.
“Currently, the stock is trading at a 61% discount to net asset value (NAV),” Suka said.
“The counter is trading on a historical PE ratio of 3.42 times, which looks attractive compared to its five-year average rating as well as its medium-term growth profile.”