BoE Private Clients' Christmas stocking stock picks for 2009

Christmas is once again approaching and, as is custom, we have put together a stocking of shares for our relatives. Needless to say, most family members are in a sombre mood, not only having to deal with deteriorating economic conditions, but seeing the value of their share investments declining as well.

Overall, the JSE All Share index was down by around 30% for the year to the end of November, pretty much in line with the decline in global markets. Some of the best performers this year so far have been General Retailers: Truworths (+18%); Massmart (+12%); Mr Price (+7%); and Food Retailer, Shoprite (+9%), which also heads the list for the best return over 12 months (+29%).

On the other side of the coin, with the collapse in commodity prices, the junior miners have been trounced with Metorex (-90%), Wesizwe (-75%), Merafe (-70%) and Wits

Gold (-66%). By all accounts next year is going to be tough. We are expecting the SA economy to only grow between 1-2%. Inflation will decline substantially and oil prices are not expected to return to previous heady levels, which will allow some relief in terms of interest rate cuts. We are also hoping that Trevor Manuel will provide some fiscal relief (other than adjusting for fiscal drag) in the budget in February.

For 2010, the outlook becomes a lot more cheery – the world should be showing signs of recovery and we will have the FIFA World Cup to look forward to.

With this in mind we have selected a list of shares which we hope will see us through 2009 with an emphasis on defensive, barring one dark horse (excuse the pun).

SPAR - TOP(S) OF MOM’S SHOPPING LIST

The good news for mom is that food inflation should reduce during 2009 (but still average in low double digits). In spite of this, Spar is well positioned to continue growing earnings. Growth in store numbers as well as the continued remodelling (2009: 145) stores will provide an underpin to revenue growth. Liquor sales (Tops) and Build It provide some diversification of earnings and are expected to continue their strong growth. Efficiencies implemented with respect to route optimisation combined with lower fuel prices will take pressure off operating expenses.

The company will pay out two-thirds of earnings, which should grow by 15% over the next year, giving a return over 20%; some Christmas cheer and top of mom’s food retailer shopping list.

DISCOVERY - DAD’S DESTINY

Dad has a family to look after, that means saving for retirement, insuring against adverse medical events and also buying life insurance. These are the needs of many families and are mostly non-discretionary purchases. This means a company like Discovery, which provides these products, has a very predictable and defensive income stream. At the same time the company has a strong market position and the continuous innovation of new products will result in good growth going forward. Given Discovery’s attractive valuation, defensiveness and good growth prospects, this share is likely to help dad retire early with not too much risk!

KEATON ENERGY - FOR THE SON - A YOUNG COMPANY

WITH ENERGY TO GROW

Keaton Energy is a newly established South African coal explorer and developer. Management is young and energetic; this, combined with a strong balance sheet, should allow projects to be brought on stream in record time. Keaton’s projects and prospects are well located to provide coal to domestic and export markets. Coal remains the major source of power generation in South Africa.

With the current electricity crisis by no means over, mothballed power stations are yet to come on stream and new power stations are still to be built. Notwithstanding slowing economic growth, demand for electricity remains relatively inelastic e.g. you can always park your car and walk but you still need to switch on the lights at night. For Keaton, Eskom’s need will ensure that there is sufficient demand for coal to provide healthy growth in future; for the son, that should translate into profits and dividends.

NASPERS - FOR THE DAUGHTER TO KEEP UP TO DATE ON THE LATEST FASHION NEWS

Naspers is an interesting emerging media company, with operations in print, Pay-TV, technology and IT. The daughter might enjoy watching the latest fashion and entertainment news on DSTV or she might enjoy reading about these trends in the magazines. Failing that she might be on her cell phone using MXit on her mobile to chat with her friends. Either way, there is sure to be something in the Naspers stable in which she would be interested.

Naspers recently reported interim results. Although the print operations (31% of revenue) are suffering from a slowdown in advertising and consumer spending, the rest of the businesses are fairly defensive. Pay-TV (44% of revenue) continues to report solid EBITDA margins, despite an increase in decoder subsidies. Naspers’ electronic media business is interesting and provides an additional spice to the business. In particular, its investment in China’s Tencent continues to grow from strength to strength.

SABMILLER - HERE’S TO CHARLES - THE SON-IN-LAW

Mothers-in-law do not usually encourage their sons-in-law to consume alcohol so it’s worth pointing out that SABMiller, apart from being one of the largest brewers in the world, is also one of the largest bottlers of Coca-Cola. Since its London listing in 1999,

SABMiller’s annual revenue has grown from R35 billion to R153bn with more than 65% of its earnings offshore. Admittedly growth has been mainly by acquisition but the global consolidation story of brewing is largely over, which should result in better dividends in due course. Chinese brewing is very fragmented, so there is potential growth from that region, with partner CR Snow. SABMiller’s portfolio of brands ranges across the globe and serves all income groups.

Beverage consumption is quite defensive in downturns and recent cost pressures are starting to ease. The son-in-law should find this a worthwhile longterm investment in the current very volatile world.

MTN - FOR THE SISTER-IN-LAW, WHO SPENDS MOST OF HER TIME ON HER CELL PHONE

MTN is a geographically diverse mobile operator, operating in 21 countries, with its main operations in SA, Nigeria and Iran. With MTN rolling out MTN Zone and cheaper roaming rates, call charges should become cheaper for the sister-in-law. But, she will probably apply this saving to pay for even more time on her mobile. MTN reported solid growth in its subscriber numbers during its recently reported quarterly update. This provides a solid base for earnings performance. MTN management has pro-actively diversified the earnings stream of MTN away from the South African and Nigerian markets.

In the next three years, evidence of this should be reflected in earnings. For now, MTN’s exposure to Nigeria means that a 10% devaluation of the naira (versus the rand) translates into a 3.5% decline in earnings, not too material for the sister-in-law.

BHP BILLITON – FOR GRANDFATHER – A VOICE OF EXPERIENCE WITH AN EYE ON THE FUTURE

BHP Billiton is a large, diversified and global mining company listed on the JSE, FTSE and ASX. Grandfather will have seen how its interests have grown in many countries across a wide range of products. These products are needed for nation building, a process that has been seen many times by grandfather. He will know that natural resources are needed to develop infrastructure and houses, for developing countries like China, India and of course South Africa. They are also needed to rebuild andupgrade roads, railways and harbours.

In some developed nations, these facilities are badly in need of repair or are inadequate after years of growth. BHP Billiton has a range of operations that produce products such as copper, iron ore, coal and oil. As a low cost producer, BHP Billiton is able to weather the storm of a global slowdown and be ready to help with nation building when the global recovery commences, and beyond that too.

BANK PREFERENCE SHARES - FOR GRANDMA

After this year's market whiplash, grandma needs some cash flow stability. She also hates to pay tax. ABSA prime-linked prefs are trading at a rate that will give her more than 77% of the prime rate, tax free; which comes to 12%. Gran would need to get a pre-tax interest return of 20% p.a. in interest to compete with this rate. There is of course always risk to any investment; but it’s unlikely that a South African bank would pass its dividend; the banking system is very sound. A reduction in tax rates on interest would also reduce these investments’ attractiveness - also unlikely in the year ahead.

While the capital value of the preference shares will fluctuate on the market, capital gain is more likely than loss from current low valuations. Bank preference shares are a high yielding investment with moderate risk; this should keep the cash flowing into grandma’s bank account.

PHUMELELA - ONE FOR THE UNCLE TO HEDGE HIS BETS ON

In troubled times, the uncle should be hedging his bets ... with an eye on value and the other on growth. Phumelela’s value underpin comes in the form of R150 million in cash on hand, a conservatively valued property portfolio of some R150 million (and no debt to boot for the risk averse!). Phumelela’s cash and property holdings represent 34% of its current market cap of R886m.

Phumelela’s SA gaming operations generated 81% of FY2008 group profit before tax and one-time items. Local punters should find their legs during the second half of FY2009 in response to rapidly moderating inflationary pressure on disposable income levels.

Against a backdrop of at least real earnings growth in FY2009 and 2010 from local operations, management expect Phumelela’s offshore operations to contribute 50% of group earnings within three years.

Even if the credit crunch puts a lid on the global gaming market in the short-term (a market currently valued at US$100 billion annually), the uncle should agree that only incremental offshore market share gains by Phumelela would be sufficient to support management’s earnings guidance. So there is more to Phumelela than just horse racing in South Africa ... maybe it’s time for the uncle to take a punt!

MEDI-CLINIC - GOOD INVESTMENT HEALTH FOR THE AUNT

Defensive earnings and a hedge against healthcare costs will give the aunt peace of mind during her travels to Europe next year. From South Africa, to her stopover in Dubai and her final destination, Switzerland, she can count on receiving medical attention from the Medi-Clinic Group. The expansion of capacity in Switzerland will improve revenue and margins, while an increase in government employees in South Africa will add to the pool of private health care recipients. The completion of the UAE expansion will provide a useful kicker to future earnings.

Finally, for the next generation

ANGLO AMERICAN -A SOLID BLUE CHIP FOR THE UNBORN CHILD!

A better quality stock with great long term prospects would be difficult to find. Currently trading at R190 and off its 12 months high of R557 this stock is showing true value. It provides a solid yield of 4.95% and has a price earnings ratio of 5.5x - which is low relative to its long term average. Once the current market turmoil subsides, and global growth gets back on track, this stock will rebound strongly. Tucking some away to help with school or university fees later might be a good idea for this future investor.