Nedbank Private Wealth stock picks for 2015
Nedbank Private Wealth’s Research and Fund Management Team presents its annual selection of the Top 10 Stock Picks for 2015:
• Safari Investments (SAR, recommended at 815 cps)
Safari Investments is a newly-listed company that develops and manages township shopping centres, currently in Mamelodi, Atteridgeville and Sebokeng. Outside of South Africa, Safari has a development project in progress in Swakopmund, Namibia. The company intends to distribute 85% – 90% of its earnings in any given year and to double the portfolio in the next four years. Management plans to grow the group mainly through adding retail space to its existing portfolio, as there is too little township retail stock available to grow through acquisitions. Safari currently trades at a 9,1% forward yield (SAPY: 7,1%). NPW believes Safari is undervalued at this yield given the quality of its assets and management team. At the current price (815 cps) Safari is also one of the few quality property stocks trading at a discount to NAV (FY 2014: 920 cps). We expect the share price to re-rate and the discount to narrow over time.
• ARB Holdings (ARF, recommended at 650 cps)
ARB Holdings is strategically well-positioned to continue benefiting from both organic and acquisitive growth as it looks to expand its presence in the lighting and electrical markets. The group remains under-represented in key target markets, particularly in the Gauteng region. We view the group’s ongoing roll-up strategy as a good medium-term growth vector.
• Master Drilling (MDI, recommended at 1 300 cps)
Master Drilling is a highly specialised South African company that has developed a cost-effective method of drilling large-diameter holes for underground mining, a requirement to maintain operations across different kinds of mining, such as gold, copper, iron ore and coal. The company started operating in 1986 and focuses on raise-boring, which entails drilling sloping shafts in underground mines backwards and upwards, using successful technology that has been developed in-house. However, it has extended its expertise to the drilling of much larger shafts. About one-third of the company’s revenue is domestic, but it has spread its geographic influence. As a result, other revenue and earnings are generated from Latin America with a small portion from the rest of Africa. The company has a large order book for work during the 2015 financial year and beyond, indicating that it should continue to grow earnings as its technology becomes more sought after in the mining industry. Its exposure to numerous commodities and geographies effectively lowers potential investment risk.
• Quantum (QFH, recommended at 320 cps)
After a rough couple of years for domestic egg and poultry producers such as Quantum, things finally appear to be looking up. Industry consolidation, increased protection against imports and lower raw-material prices all bode well for Quantum’s short- to medium-term earnings prospects. While the majority of Quantum’s listed peers have already re-rated significantly in response to this improved industry outlook, Quantum - in our view - still offers value. But shrewd investors would know that under the right circumstances even the most cyclical of companies can present great opportunities to make money. After all, there are no such things as bad assets, only bad prices.
• Sephaku Holdings (SEP, recommended at 650 cps)
If appears that 2015 will be the year where everything will come together for Sephaku Holdings, which has been in a start-up phase over the past few years. Its recently commissioned cement plant will be up and running for a full year and the company will benefit from cost savings as a result of using its own clinker raw material. Also, its Gauteng presence, through Métier, will be expanded to four plants. The reported numbers will become clearer this year as the company moves to stable-state production, and the pending share issue as part of its payment for the Métier transaction will be something of the past. This is likely to result in a re-assessment of this counter by the market and a better appreciation of its potential. Early indications are that Sephaku’s cement is well-received by customers. An experienced management team, the backing of Dangote Cement (Africa’s largest cement player owned by Africa’s richest person) and a new, more efficient plant all add to the appeal of this counter. The current internal focus of its largest competitor, PPC, also plays into Sephaku’s hands for now, as Sephaku is entering new markets to sell its products. While Sephaku still faces some uncertainties as part of its ramp up, in our view the potential upside is attractive.
• City Lodge Group (CLH, recommended at 12 300 cps)
The higher-than-usual number of public holidays and strike action saw the occupancies of hotels in the City Lodge Group come under some pressure in 2014. We expect to see a recovery in the growth momentum of hotel occupancies over the next year as local trading conditions improve. Earnings will be given a further boost by the consolidation of the group’s two Kenyan hotels; CLH acquired the remaining 50% share of the hotels earlier in the year. The traction CLH is gaining on its Africa (ex-SA) expansion, together with a pull-back in the share price from recent highs, makes the current valuation on CLH attractive. Agreements have been signed for the development of two new hotels in East Africa, Kenya and Tanzania, with more announcements likely to follow in the year ahead. CLH is therefore well-positioned for growth.
• Truworths (TRU, recommended at 6 900 cps)
Truworths shares are another option with the bad-debt cycle for credit retailers likely to improve this year. Also, the ringing of the tills doesn’t need to increase dramatically for the positive effect of rising interest income and decreasing bad debts to outweigh any short-term margin pressure. There is likely to be some European influence on the group when Jean-Christophe Garbino, the CEO of the French-based Kiabi retail group, takes over as CEO designate in March 2015, which may have an impact its shares.
• Naspers (NPN, recommended at 138 883 cps)
Naspers is a leading broad-based multinational group of e-media, entertainment and e-commerce companies and most of its businesses are market leaders within their segments. We expect Tencent to continue to report robust earnings growth, while the pay TV segment continues to deliver solid financial results and strong cash generation. However, it is the improved financial disclosure on Naspers’ e-commerce segment that could result in a re-rating in Naspers’ share price. Naspers has the capital to back and fund its prime e-commerce assets through their loss-making years. At current prices, investors will purchase the world’s fourth largest e-commerce player virtually for free. Clear structural opportunities remain within the e-commerce segment. However, these are not fully priced in by the market due to the limited disclosure regarding Naspers’ accelerated development spend. It is our view that over the next 12 months there will be further clarity on when the e-commerce segment may reach EBITDA neutrality.
• Octodec (OCT, recommended at 2 293 cps)
Octodec listed on the JSE in 1990 and over the last 10 years has delivered a total compound return to shareholders in excess of 20% pa. Following the recent successful merger with another stellar performer, Premium Properties, the business is set to achieve favourable returns on the 320 properties it owns in the Pretoria and Johannesburg CBDs and surrounding areas. An ongoing strategic focus for the business is its existing large residential portfolio and the continued conversion of office assets into residential units. Management’s track record of unlocking the value of properties through development, refurbishment and renewals is unblemished. With a high first-year income return and a management team with a proven ability to deliver growth, acquiring these return prospects at a discount to NAV is enough!
• Adapt IT (ADI, recommended at 810 cps)
Following its recent acquisition of cloud-linked business AspiviaUnison, and assuming a reasonable level of performance warranty profitability is achieved over the next 18 months, we believe ADI at 810 cps should yield at least a 20% return in the year ahead. In addition, we expect Adapt IT to continue with its IT services rich, acquisition-led strategy in 2015 and more corporate action is likely to boost the share price. Adapt IT also plans a fully paid-up BEE transaction during 2014, with existing staff being among the key role-players in the transaction. With an even greater alignment of shareholder and management interests, this is a stock to watch out for in 2015.
• Keaton Energy (KEH, recommended at 270 cps)
Although Keaton had a troubled birth during the financial crisis, it has maintained steady-state production throughout 2014. The bulk of production is being supplied to Eskom at favourable rates. Coal currently remains the cheapest source of energy for electrical power generation in South Africa. The company is fast becoming a key mid-tier coal supplier to Eskom, whose demand for coal seems insatiable as it struggles to meet the country’s demands for electricity. The recently acquired Moabsvelden asset should start production towards the end of 2015 and once the project is fully developed by FY 2016, we expect the group’s production of thermal coal to increase by 50%. This should be a catalyst to re-rate the share, as the company will no longer be dependent on a single colliery for the majority of its production.
