7 Reasons You Should Be Investing in Shares

Investing in shares on the Johannesburg Stock Exchange offers a host of benefits for the long-term investor. Here’s a handful.

Meet Cassandra – Cassy for short.

Cassy graduated last year – Honours in Tax – and has landed her first real gig. She got a job with a multinational company and is coming in as a junior to learn the ropes.

Cassy is long-term oriented and knows the importance of saving for the future.

She intends to open up her own tax consulting business after she has gained sufficient practical experience. In the meantime, she’ll be investing her long-term savings on the Johannesburg Stock Exchange (JSE).

Cassy has signed up with an online brokerage platform and has budgeted R700.00 a month for investing.

She’s done her homework and knows that there are costs involved in buying and selling shares.
So, to keep trading costs to a minimum, she intends to invest in the Satrix ALSI Index Fund. This fund is not only cost-efficient, but it gives her exposure to all the shares trading on the JSE, which diversifies her risk.

She decides to educate herself so that she can make her own calls on what shares to invest in next year.

If history’s any guide, her steady, consistent approach will yield a crafty little nest egg in the next 15 years – large enough for her to spread her entrepreneurial wings.

Why Cassy Loves Investing on the JSE

Cassy’s strategy capitalizes on three attractive features of investing on the JSE.

1. It’s convenient. Many South African stockbrokers offer intuitive online trading platforms. They’re easy to use and allow her to buy and sell shares with a click of a mouse.

2. A wide variety of index funds and ETFs make it easy to diversify her portfolio quickly and cheaply.

3. World-class financial reporting requirements give her excellent visibility into the goings-on at each listed company, giving her the information she needs to pick winning shares.

Meet DJ Deejay

Photo by Matt Rhodes
Photo by Matt Rhodes

Deejay is a house music DJ and has been making mad music for a good few years. His beats have proven quite popular on the Durban club scene, and he has managed to rake in some serious cash.

His friend Natasha suggested that he think about investing on the JSE:

“Deejay, take the advice of a good old friend – investing in companies on the JSE is a great way to build wealth over the long-term.

  • If you buy good companies at fair prices, you can expect the value of your shares to grow over time.
  • Many companies even pay dividends to their shareholders once or twice per year.

But keep in mind that owning shares is like being in a relationship – you don’t end it when things get rough. Buy shares of a quality company at a fair price and stick with them during tough spells. Your reward will be handsome if you remember this.”

Intrigued, Deejay contacts one of the well-known banks and informs them of his decision to invest his money.

His savings allow him to open up a premium account with access to a personal broker who will help him to build and manage a healthy share portfolio to match his long-term goals.

Why Deejay Loves Investing on the JSE

Deejay wants a decent return on his money, but unlike Cassy, he’d rather be at the club than spending an evening poring over financial reports. Investing on the JSE allows him to accomplish both aims.

4. Diversified share portfolios tend to appreciate in value over time. In fact, no other asset class has been so successful at building investor wealth.

5. Periodic dividend payments can provide Deejay with a valuable income stream as he patiently watches his portfolio grow.

6. The nature of share investing allows him to choose to be very involved in choosing stocks or, instead, turn over the task of managing his account to a trusted broker.

This Is Thulani

Thulani is a man of his word.

His photographs have been pulled off his cubicle “wall” and his mug from home is packed snugly in the box on the floor. This is it. He has finally made it.

Unlike many his age, Thulani is not afraid of retirement because he has invested enough of his income over the years in what is now a solid share portfolio to carry him through the later years of his life.

He would have loved to have his wife waiting at home for him, God is the best of planners after all.

His heart skips a beat when he thinks of his trip to Nairobi next week where he will be visiting his daughter and grandchildren.  He’ll Skype her first thing when he gets home.

Thulani will be selling off his investment in the Satrix 40 ETF month on month to cover his living expenses and a few trips here and there.

He is glad of the liquidity that his investment brings and is thankful to his younger self for thinking about him in his old age.

He hopes that his daughter has taken his advice and is investing 10% of her monthly salary each month.

Why Thulani Loves Investing on the JSE

7. In a word, liquidity. Unlike real estate and many other investment classes which take time to sell, investing in shares on the JSE allows Thulani to sell (withdraw) the money that he needs at the time that he needs it. He doesn’t need to worry that his cash will be tied up if an unexpected opportunity or financial emergency arises.

Your Turn

What questions do you have about the JSE or investing in shares more generally? Let’s hear them in the comments!

Why JSE-Listed AVI Should Cast Aside Its Seafood Business

With a product line that ranges from biscuits to handbags, JSE-listed AVI benefits directly from rising African income levels, and its shares have climbed 412% over the past decade.

But its seafood division is starting to stink. Here’s why it’s time to cut bait.

Time to sell AVI shares?
Photo by World Bank

Johannesburg-based AVI (AVI:SJ) is one of Africa’s largest manufacturers and purveyors of consumer goods.

With a product line that ranges from biscuits to handbags, the company benefits directly from rising African income levels.

Its fast-growing beverage division distributes coffee and tea (including my personal favorite, Rooibos). Its snack line boasts a 42% share of the South African biscuit market. Its cosmetics operation is small but quite profitable with an operating margin of 19.2%. And its fashion division is shooting the lights out thanks to its enormously popular Carvela dress shoes.

Something Fishy

This lineup has been very good to AVI shareholders. The company’s share price has climbed 412% over the past decade.

But, year after year, AVI’s seafood division has proven to be a disappointing drag on the group’s growing profitability.

The division, which trades under the I&J brand, trawls for and processes a wide range of seafood, including hake, abalone, and squid. It operates a growing fleet of fishing vessels and several onshore processing facilities.

I&J’s assets account for more than a quarter (26.2%) of AVI’s total assets. The problem is that it contributes only 12.7% of AVI’s total operating profit.

In fact, it hasn’t come close to pulling its own weight since 2009.

The fishing business is capital intensive, and I&J consistently requires more expenditure on plant and equipment than any of AVI’s other divisions.

In the coming year, for example, management has budgeted R669 million worth of capital expenditure. Of this amount, expenses related to replacing and maintaining fishing boats account for roughly 45% of the total planned spend. They’ve recently purchased two new fishing boats and announced that they intend to double the production of their abalone aquaculture project.

Granted, AVI is free of long-term debt and much of the additional expenditure will be paid for out of its impressive cash flow. But I’m not convinced this is the best use of AVI’s resources.

The company has taken on a significant amount of short-term debt to finance growth and its chunky dividend in recent years. Finance costs took a 3.5% bite out of pre-tax income during the 2015 fiscal year, and the company expects debt levels to remain on the high side again this year.

Empty Seas?

Moreover, South Africa’s hake fisheries appear to be dwindling.

I&J’s average daily catch of the subtly-flavored fish has dropped steadily from a high of 11.9 tons n 2011 to just 8.5 tons today. That’s a total reduction of over 28%. Meanwhile, the South African government recently reduced the total allowable catch by 5%. CEO Simon Crutchley says that fishing rates are the worst he’s seen in his ten years on the AVI board.

So, AVI would likely be a more profitable company if it cut I&J loose. In doing so, it would not only liquidate the assets tied up in the business, it would be free of the huge ongoing capital expenditure it requires.

The balance sheet would accumulate even more cash than it does presently, with which AVI could invest in more profitable divisions, pay down debt, boost dividends, or buy back shares.

Alas, management doesn’t appear to be considering a sale or spinoff. Far from it. With the purchase of two new boats, they appear to be committed to wringing a profit out of I&J for as long as they possibly can.

Fish or Cut Bait?

So, what’s an AVI investor to do?

AVI currently trades at a P/E ratio of 18.6 and at 6.4x book value. These multiples are well above their historic averages but pretty much in line with other firms within the industry.

I’m a holder of the shares here because the company (even with I&J) is such a cash-spinner, and has been relatively generous with its dividend policy. But in the absence of a plan to jettison the fishing business, it’s probably time to disembark.

Sometimes, the best investments are the ones that you catch and throw back.

[Disclosure: At the time of publication, Ryan held a beneficial interest in AVI shares.]

7 Reasons to Be Bullish on MTN Group

MTN Group, Africa’s wireless telecommunications giant, had a rough start to the year.

Stiff competition, regulatory action, weakening currencies, and a labor strike in its home base, South Africa, conspired to slash the company’s first half earnings by 24.2%, and its shares have dropped 21% since their September high.

But don’t push the “sell” button quite yet.

Reasons to Own MTN Shares
Photo by Michael Pollak

MTN Group (MTN:SJ), Africa’s wireless telecommunications giant, had a rough start to the year.

Stiff competition, regulatory action, weakening currencies, and a labor strike in its home base, South Africa, conspired to slash the company’s first half earnings by 24.2%, and its shares have dropped 21% since their September high.

But don’t push the “sell” button quite yet.

I believe the stock is positioned to deliver solid returns over the next three to five years.

Here are seven reasons why.

1. Africa’s coming data boom

While the market for voice calls is all but tapped, Africa’s demand for wireless data services remains in its nascent stages.

Just 3% of the continent’s rural communities are connected to a fixed telephone network, and relatively few urban residents can afford the cost of a DSL or broadband cable connection in their home. Thus, for the vast majority of Africans, the easiest, most efficient way to use the Internet is with their mobile device.

And demand for internet access has thus far been limited only by wireless operators’ capacity to expand their 3G and 4G coverage areas. In 2006, MTN’s largest market, Nigeria, was home to 7.9 million internet users. Today, that figure stands at well over 79 million. Remarkably, this is still less than half of the nation’s total population.

As a result, MTN’s data revenue has soared, surging 33.2% in 2014 and 21.2% in the first half of 2015.

And it looks like this trend’s got legs.

Cisco Systems estimates that mobile data usage in the Middle East and Africa will expand at a 72% clip between now and 2019 – faster than anywhere else on the globe.

As the region’s largest wireless data provider with operations in 21 countries, MTN will be facilitating this growth.

2. Mobile Money

MTN launched its Mobile Money service in 2009. It allows MTN customers to send and receive cash via their mobile device – a huge deal in under-banked Africa.

Over the past 12 months, it looks like the venture is beginning to reach scale. Subscribers to the service have grown 46% to a total of 32.4 million users.

This presents the company with enormous potential to grow income from transaction fees and numerous other financial services ranging from small loans to insurance.

3. The Iran nuclear deal

MTN owns a 49% stake in Iran’s second largest wireless operator, MTN-Irancell.

The operation accounts for nearly 10% of MTN’s operating profit, but, due to sanctions imposed by the international community, the company hasn’t been able to repatriate the ZAR1.1 billion worth of dividends it accumulated over the past several years.

Now, with an agreement to limit Iran’s ability to produce a nuclear weapon nearly finalized, it appears that the sanctions will soon be lifted. MTN will thus be able to make more efficient use of its Irancell earnings.

4. Improving cash flow

Erecting a network of cellular masts and towers is a costly undertaking. Fortunately for MTN, much of this work is now complete. Existing 2G sites can be upgraded to 3G technology by simply switching out components.

This has resulted in a steady reduction in capital expenditure as a percentage of operating cash flow. MTN’s free cash flow has nearly tripled over the past five years, giving it the flexibility to pay down debt and create value for shareholders.

5. Regular share buybacks

One way MTN management creates value for shareholders is by repurchasing company shares. The company has reduced its total share count in each of the past five years, resulting in a cumulative decrease of roughly 3%.

That may not sound like much, but it effectively added 60 tax-free basis points to MTN’s dividend yield each year. A nice bonus.

6. A generous dividend

Speaking of dividends, MTN sports one of the juiciest payouts on the Johannesburg Stock Exchange (JSE). As of this writing, the shares yield 6.1%.

Management has boosted the total dividend 15% over the past 12 months and aims to increase it by 5-15% every year. This is a feat it’s managed to achieve every year since 2006 – nine consecutive years.

7. A nice price

Most importantly, MTN shares appear priced for a solid, long-term return.

Over the past six years, the company has grown its book value per share at an annualized rate of 11.5%. If it maintains this pace over the next five years (and I believe it can), its book value per share will end up in the neighborhood of R115.70.

MTN’s currently trades at a 3.1x multiple to book value. That’s near the low end of its historic range. In the past five years, the shares have never been priced lower than 2.7x book value.

If we assume that MTN’s price-to-book ratio drops to 2.7 five years hence, investors at today’s price stand to reap an annualized return of 14-15% including dividends. That’s a rate that I believe will comfortably outperform the JSE as a whole.

Dial up a decent return

MTN’s a big company, and the law of large numbers suggests that it won’t post your portfolio’s gaudiest performance figures between now and 2020. It should, however, provide a steady stream of dividend income coupled with a market-beating return.

Here’s a Quick Way to Invest in the JSE’s Dividend Aristocrats

Sometimes it’s fun to pore over balance sheets and cash flow statements in search of that 10-bagger stock — the one that transforms your meager nest egg into a comfy cash cushion.

But let’s face it.

You usually have more enjoyable things to do on a weekday evening or Saturday afternoon.

That’s why exchange traded funds (ETFs) are one of the most useful tools in an investor’s toolkit.

South African coins
Photo by Paul Saad

Sometimes it’s fun to pore over balance sheets and cash flow statements in search of that 10-bagger stock — the one that transforms your meager nest egg into a comfy cash cushion.

But let’s face it.

You usually have more enjoyable things to do on a weekday evening or Saturday afternoon.

That’s why exchange traded funds (ETFs) are one of the most useful tools in an investor’s toolkit. ETFs collect dozens, sometimes even hundreds, of different stocks into one tidy, trade-able, low-risk package.

An ETF for South African income investors

And if you love dividends and if you invest in South Africa, you need to know about the Coreshares Divtrax ETF (DIVTRX:SJ).

Launched in April 2014, the Divtrax ETF mirrors the performance of the S&P South Africa Dividend Aristocrats Index.

What’s a dividend aristocrat? Well, definitions vary, but for the purposes of this index, it is any South African stock that has increased or maintained a stable dividend for the past five years.

If a company reduces or suspends its dividend payment, the S&P boots it from the index.

Market-beating returns

This simple screen generates impressive performance.

Over the past five years the SA Dividend Aristocrats Index posted a gross annualized return of 22.5%. That figure far exceeds the market as a whole, which notched a 17.4% return over the same span. Year to date, the Divtrax ETF is up 11.8%.

At present, 26 South African shares call the index home. Roughly a third of them operate in the financial sector, another third are consumer goods companies, and the remainder is a mishmash of industrials, telecommunications, health care, and IT companies.

It tends to be very light on mining stocks due to their inconsistent dividend payouts, and it specifically excludes companies whose main business activity is to invest in real estate.

The ETF holds each constituent of the index in equal weights and re-balances them in July each year.

Here’s a list of the top ten holdings with their current weight in the portfolio:

  • Capitec Bank (CPI:SJ) – 6.37%
  • Foschini Group (TFG:SJ) – 4.98%
  • EOH Holdings (EOH:SJ) – 4.89%
  • Sanlam (SLM:SJ) – 4.89%
  • Standard Bank Group (SBK:SJ) – 4.81%
  • Truworths International (TRU:SJ) – 4.76%
  • Naspers (NPN:SJ) – 4.68%
  • Netcare (NTC:SJ) – 4.52%
  • The Spar Group (SPP:SJ) – 4.52%
  • Discovery Holdings (DSY:SJ) – 4.45%

One of the most attractive features of the ETF, of course is the quarterly dividend. As of this writing, it sported an annual dividend yield of 2.86%.

And with a maximum annual management fee of 0.46%, investors get to keep the lion’s share of those dividends. South Africa’s other dividend ETF, the Satrix Divi Plus (STXDIV), charges a 0.71% management fee.

So, if you:

  • prefer not to spend your time slogging through a valuation spreadsheet,
  • like a quarterly dividend,
  • and love the prospect of a steady market-beating gain from a basket of blue chip South African stocks, take a look at the Coreshares Divtrax ETF and then get back to enjoying your life.

If you’re new to South African ETFs, I highly recommend that you pay a visit to etfSA.co.za. They’ve got comprehensive coverage of all ETFs and exchange traded notes available to JSE investors and a host of educational articles to get you up to speed on how they work.

It’s your turn

Do you invest in ETFs? If so, let us know your favorite in the comments!

The JSE’s 9 Fastest-Growing Companies

Fastest-growing companies on the JSE
Photo by RayMorris1

I confess.

I don’t give revenue growth enough respect.

If you’re anything like me, the top line of the income statement is something you take a quick glance at as you scan the page for earnings — the bottom line.

After all, it’s earnings that count, right?

There’s some truth to that statement. But determining a company’s true earnings involves making lots of judgement calls. The figure is easily manipulated.

That’s less true of revenue. A company with steadily growing revenue is probably capturing market share. It may or may not be terribly profitable (think Twitter or Amazon), but it’s becoming a force to be reckoned with, and, sooner or later, investors take notice.

Think about some of the world’s best-performing stocks. Apple, Disney, Starbucks. These companies didn’t excite the market by reducing their expenses. They did it by selling a great product to more and more people.

The Fastest-Growing Companies on the JSE

With that in mind, I thought it would be interesting to take a look at the Johannesburg Stock Exchange’s fastest-growing companies.

The nine companies listed below have all grown revenue at an average rate of 25% or more over the past five years.

But we’re not talking about “one-year wonders” here. These companies haven’t just grown quickly, they’ve done it consistently. Each one has increased its revenue by at least 10% each year.

Let’s count them down.

9. PSG Konsult (KST)
Annualized 5-Yr Revenue Growth: 25.4%
Price Change (YTD): 0.4%

An intense marketing effort is building this wealth manager into one of South Africa’s most recognizable financial brands. PSG styles itself as a one-stop shop for clients in search of everything from stockbroking to health insurance. Consumers have responded exceedingly well, which has rapidly grown the company’s assets under management.

PSG plans to continue to invest heavily in advertising in the year ahead. It will also build up its stable of unit trusts. The stock market, however, remains a bit circumspect. The company’s share price is down 7.6% since the shares listed on the JSE in June of last year.

8. Onelogix (OLG)
Annualized 5-Yr Revenue Growth: 26.0%
Price Change (5-Yr): 719.7%

Once a conglomerate that owned everything from magazine distribution to copy shops, Onelogix has sharpened its focus on the transport of vehicles and other freight across Southern Africa. The company has been consistently profitable and highly acquisitive, which helps to explain its eye-popping revenue growth.

Acquisitions remain key to Onelogix’s growth strategy. It recently sold off some non-core holdings and purchased a refrigerated trucking company. With the stock price up some 41% over the past year, investors appear generally bullish on the company’s prospects.

7. Aspen Pharmacare (APN)
Annualized 5-Yr Revenue Growth: 28.5%
Price Change (5-Yr): 380.5%

The revenue growth at this generic drug manufacturer is all the more remarkable considering it didn’t enjoy the benefit of expanding off of a small base. Through years of shrewd acquisitions, CEO Stephen Saad has built his Durban-based company into a $10 billion enterprise with a presence in 47 countries across the globe.

Aspen management hopes that its new portfolio of anti-coagulant drugs will be just what the doctor ordered to extend its +25% revenue growth streak. Judging by its trailing P/E ratio of 34, the market believes they’re making all the right moves.

6. Taste Holdings (TAS)
Annualized 5-Yr Revenue Growth: 33.7%
Price Change (5-Yr): 695.4%

Who knew that pizza, fish & chips, and diamond rings was a recipe for toothsome sales growth? CEO Carlo Gonzaga has cobbled together an assortment of fast food restaurants and jewelry shops that consistently posts huge revenue increases. It’s rumored that he eats his own cooking, too, having personally visited nearly all the restaurants in Taste’s rapidly expanding footprint.

Looking forward, the jewel in the company’s crown is the rights to establish Domino’s Pizza’s presence in Southern Africa. Management will rely on the expansion of this franchise and acquisitions funded by its R200 million cash pile to feed future sales growth.

5. Coronation Fund Managers (CML)
Annualized 5-Yr Revenue Growth: 41.5%
Price Change (5-Yr): 973.8%

When it comes to asset management, nothing breeds success like success, and Coronation has had success in spades. The firm’s patient portfolio managers, backed by top-notch researchers and analysts, boast impressive track records across the board and now oversee some $52 billion worth of client assets.

As Coronation grows, it will be tougher to produce consistent earnings growth north of 40%. But even in tough market environments (and perhaps especially in tough markets), investors want a proven hand to manage their wealth. I expect the company’s growth to be as strong as its enviable reputation.

4. EOH Holdings (EOH)
Annualized 5-Yr Revenue Growth: 42.3%
Price Change (5-Yr): 1278.7%

Perhaps surprisingly, EOH is the lone information technology firm on this list. The company, which was the best performing stock on the JSE in 2013, sells enterprise level software and hardware and provides lots of smart people with the know-how to get it up and running. With a roster of technology partners that includes Microsoft, Oracle, SAP, HP, and Cisco, EOH doesn’t need to do much to convince Africa’s leading businesses that it can provide whatever tech solutions they need.

A serial acquirer, it has made three major purchases in the past six months. Yet, organic growth still accounts for the majority of the company’s ballooning sales figures. In coming years, expect EOH to consolidate its African presence, which already extends to an impressive 22 countries.

3. Capitec Bank Holdings (CPI)
Annualized 5-Yr Revenue Growth: 43.6%
Price Change (5-Yr): 439.9%

The straight-laced world of banking is hardly the place you’d expect to find a company with one of the JSE’s most blistering growth rates. But by offering accessible and affordable banking services to low-income South Africans, Stellenbosch-based Capitec has, in its short 14-year history, expanded to a size that now rivals the likes of Nedbank and Firstrand.

The bank opened 39 new branches and installed 500 new ATMs over the past year, which has helped it to add roughly 100,000 new customers every month. Over the next few years, management believes enhanced mobile and internet banking platforms will help to maintain the steep growth trajectory.

2. Curro Holdings (COH)
Annualized 5-Yr Revenue Growth: 83.6%
Price Change (3-Yr): 323.6%

South Africa’s education system ranks among the world’s worst, which makes it fertile ground for private schools. Established in a church building in 1998 with just 28 students, Curro now operates 42 schools for pupils whose age ranges from three months to 18-years.

The company’s meteoric growth surprised even its own managers, and it is now five years ahead of the ambitious targets laid out in its 2011 IPO prospectus. But don’t expect it to rest on its laurels. The company has proposed its fifth rights issue in as many years which should leave it flush with cash to meet its new goal — 80 schools by 2020. With a triple-digit PE ratio, the market evidently loves its odds of success.

1. Keaton Energy Holdings (KEH)
Annualized 5-Yr Revenue Growth: 202.4%
Price Change (5-Yr): -71.3%

The JSE’s fastest-growing company derives its income, perhaps ironically, from digging in the dirt. Founded in 2007, Keaton operates two coal mines that fuel power plants owned by the troubled national electric utility, Eskom, and provide anthracite for export to locales as distant as Brazil.

Unfortunately for Keaton shareholders, razor thin profit margins have prevented the share price from mirroring the company’s triple-digit revenue growth rate. The stock is down 34% over the past 12 months. Management hopes that a recently acquired third colliery will boost profitability when it goes into production next year.

It’s Your Turn

Did any of the companies on this list surprise you? Were there any surprising omissions? What companies do you think will grow sales at a 25% pace over the next five years? Let’s hear your thoughts in the comments!

Disclosure: I have a beneficial interest in shares of Onelogix and Taste Holdings.

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