Investment expert Patrice Rassou identified three companies with good upside potential at an SAStockPicks webinar hosted by the Johannesburg Stock Exchange (JSE) – Standard Bank, City Lodge, and AECI.
Having trained as a chartered accountant, Rassou is well known for managing market-leading equity unit trusts. He was head of equities at Sanlam for 14 years.
Under his tenure, the Sanlam Investment Management Top Choice Equity Fund was one of the best-performing general equity funds in the country.
He currently serves as the chief investment officer of the investment manager for FirstRand, Ashburton Investments.
In an interview with Citywire, Rassou said that Ashburton had an excellent fixed-income business and a good credit and corporate money market offering when he joined.
However, the local multi-asset and equity franchises were “weak links” for Ashburton.
Rassou brought in his colleague from Sanlam, Charl de Villiers, to head up the equity division at Ashburton. The performance of the Ashburton equity fund has improved since then.
Ashburton’s investment philosophy is built upon three principles:
- Identify trends in the market to inform investment decisions.
- Invest in quality companies that can outperform their peers over the long term.
- Assess the valuation of companies when making investment decisions.
Rassou picked three stocks which he believes have significant upside potential.
- Price to earnings ratio of 8.
- Dividend yield of just below 6%.
- Market capitalisation of R295 billion.
Rassou argued that Standard Bank’s exposure to the African continent, its dominant market position, and strong earnings growth means there is the potential for a 30% increase in the company’s share price.
Standard Bank was founded in 1862 and is currently the largest bank in Africa with a market cap a shade under R300 billion.
The bank has a leading market share in mortgages, transaction volume, and foreign exchange, which positions them well for future success.
While Standard Bank is one of South Africa’s big four banks, it operates across the African continent, offering strong growth potential.
“You are getting a bank with a ginormous Africa footprint and these economies are growing at two to three times the rate of South Africa.”
Rassou said that South African banks had been supported by strong client growth. Standard Bank has seen two years of greater than 5% client growth.
Standard Banks’ latest results revealed that the company’s earnings grew by 37% last year.
- Price to earnings ratio of 11.
- Dividend yield of 1.3%.
- Market Capitalisation of R2.4 billion.
Rassou said that City Lodge has an excellent portfolio of hotels, is rebounding strongly from the pandemic, and is innovating to improve their offering.
The company owns 49 hotels through a number of brands.
The occupancy rate across the company has rebounded strongly since the height of the pandemic. In 2021 the group occupancy rate was 30%, and in 2022 it reached 57%.
Rassou believes the long-term normalised occupancy level could be as high as 65%.
City Lodge is also innovating to ensure they are competitive.
They use an AI pricing model that uses flexible pricing to keep occupancy high during periods of low demand.
In addition, they have launched a new food and beverage offering that could attract more tourists to the chain rather than just business people. Food and beverage revenue now accounts for 16% of total revenue.
Rassou said that earnings are still recovering, but he expects them to more than double by the end of the full year.
- Price to earnings ratio of 11.
- Dividend yield 7.4%.
- Market Capitalisation of R11 billion.
Rassou said that the diversified mining and chemicals group has an expanding global footprint with market-leading divisions.
It has a dominant mining solutions division and is a market leader on the African continent due to its ammonium nitrate facilities.
He said that some bad acquisitions before the covid crisis in their chemicals division had hurt the company. They are in the process of fixing this, though, which is repairing the balance sheet.
There are some nice themes within the stock. The company does work to improve the water treatment and sewerage systems of cities, and urbanisation in Africa has helped this division.
High fertilizer prices have also helped the company.