It’s time to stick my neck out.
I’ve talked a lot about the past performance of various African stocks, and I’ve asked a number of local experts for their favorite listings. But I haven’t often gone out on a limb and made picks of my own, and many of you have noticed.
So, it’s only fair that I go on record with my best bets.
Here are my top South African stock picks. I expect that, on average, they will outperform the Johannesburg Stock Exchange All Share Index over the next 12 months.
ARB Holdings (ARH: SJ) — Price: R4.80, P/E Ratio: 13.0, DivYield: 2.9%
ARB wholesales electrical products ranging from overhead cable to light fixtures. It’s not a market devoid of competition, and ARB has the narrowing margins to prove it. But consider this. The South African government has committed to spending R210 billion over the next 10 years to improve the nation’s transmission grid. What’s more? ARB is the largest independent wholesaler in the industry, so it is perfectly placed compete for much of that spend. Factor in an experienced, heavily invested management team and a balance sheet free of long-term debt, and I conclude that this one is a winner.
Bowler Metcalf (BCF:SJ) — Price: R7.86, P/E Ratio: 10.9, DivYield: 4.6%
This 40-year-old family-run plastics and soft drink business reported a drop in earnings during its 2012 fiscal year due to a two-month labor strike and a shortage of CO2. The market didn’t much like this, so the company’s share price has dropped nearly 9% over the past year. But management doesn’t seem too worried, boosting the dividend in spite of the fall in earnings. The reason behind their confidence may stem from a new high-speed bottling plant and expansion into the Johannesburg market. The impact of both these moves is yet to trickle down to the bottom line. But I expect that we will see earnings rebound nicely in 2013.
Calgro M3 (CGR:SJ) — Price: R5.20, P/E Ratio: 7.9 DivYield: N/A
Calgro M3 develops and builds low-income housing in a country with an enormous need for it. Moreover, with low interest rates prevailing, this sector of the population is increasingly able to afford homeownership. Management appears to be capitalizing on the opportunity. Operating profit more than doubled during the first half of its 2013 fiscal year, up 147%. Yet the company trades at less than eight times its trailing earnings. That’s an earnings yield of nearly 13%. And the future looks bright. The company has built an order book nearly twice as large as its total 2012 sales.
Cashbuild (CSB:SJ) — Price: R135.00, P/E Ratio: 10.7, DivYield: 4.2%
Much as its name implies, Cashbuild is a retailer of basic building supplies to low-income, but primarily cash-paying customers. It operates nearly 200 stores throughout Southern Africa. Cashbuild’s share price got hammered last month when it reported slowing same store sales growth, dropping 7.9% in a single day. In my view, this presents a nice buying opportunity at a trailing earnings multiple of less than 10. If the company continues its northward push into the continent and scales up its credit sales, we could see some towering results out of this stock.
Ellies (ELI:SJ) — Price: R8.70, P/E Ratio: 11.5, DivYield: 1.2%
Ellies sells television reception equipment and electricity generators, both hot items in a nation with a constrained power supply and virtually non-existent cable television network. It stands to benefit immensely when South African television converts from an analog to a digital signal because thousands of households will need to purchase a set-top converter box to watch their favorite programs. The company is also blessed with a solid management team that has kept the balance sheet essentially free of debt. With earnings growing 102% over the past twelve months and bright prospects, this stock is bargain-priced.
Holdsport (HSP:SJ) — Price: R44.49, P/E Ratio: 12.5, DivYield: 3.2%
Holdsport runs two chains of sporting goods stores. One focuses on athletic equipment and clothing, and the other sells hiking and camping gear. When I first looked at this company last year, I had questions about its long-term prospects given its failure to establish much of a presence beyond South Africa’s borders. But the company is still small with less than 60 outlets currently in operation. This fact combined with strong sales growth and a significantly less demanding valuation than other South African retailers prompted me to reconsider my position.
Howden Africa (HWN:SJ) — Price: R27.00, P/E Ratio: 10.4, DivYield: 2.0%
An affiliate of the global industrial group, Colfax (CFX:US), Howden Africa manufactures fans, pumps, and air cleaning equipment for a wide range of industries. This focus has paid substantial dividends over the past few years, as Southern Africa invests increasing amounts of resources into power production, construction, and manufacturing. Earnings nearly doubled during the first half of 2012 and the business continued to spin off gobs of cash. Couple this with annualized sales growth of 14.1% over the past five years and a pristine balance sheet, and I think we’re looking at a winner.
Hudaco Industries (HDC:SJ) — Price: R95.00, P/E Ratio: 8.9, DivYield: 4.9%
Now marking its 75th year as a listed company on the Johannesburg Stock Exchange, Hudaco imports and distributes car parts and power tools. Selling things like belts and ball bearings certainly isn’t the sexiest of businesses, but it’s hard to complain about a business that has grown earnings at a 12.5% clip since 2008. Because their product line, in large part, keeps vehicles on the road, Hudaco is shielded from economic dips more than an auto maker would be. Management is also making a push north into other African countries. Export earnings have risen 85% over the past two years.
Trustco (TTO:SJ) — Price: R1.10, P/E Ratio: 3.1, DivYield: 1.8%
This Namibian group is one of the strangest companies I’ve come across in Africa, but strange in a good way. It operates in the education, micro-insurance, and micro-finance sectors. The company sells life insurance to low income communities; often by packaging it with mobile phone airtime or as a perk awarded to frequent shoppers at stores like Shoprite. It also provides financing for distance education courses through its own educational institution. Finally, it owns high value real estate in and around the Namibian capital, Windhoek. And did I mention the IFC wants to buy a chunk of shares? This one looks very cheap.
Value Group (VLE:SJ) — Price: R5.68, P/E Ratio: 8.6, DivYield: 3.9%
How could an investor not like a stock with a name like “Value Group”? This logistics company runs warehouses, rents out trucks, and repairs forklifts, and its spent a lot of money over the past few years to upgrade its fleet and infrastructure. Now that this capital spend is complete, management plans to pay down debt and explore opportunities in the rest of the Sub-Sahara. Given the tough business environment in South Africa, I don’t anticipate significant earnings growth over the near term, but at this valuation and yield, I can afford to be patient.
What Do You Think?
Does this group of stocks have what it takes to beat the market? What stocks would you include on this list?
[Disclosure: I have a beneficial interest in shares of Ellies through my work at Africa Capital Group.]