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Midcaps rule the JSE in 2013: Peter Armitage – Anchor Capital

Three very surprising winners in the year to date. Are they still good to go?

HILTON TARRANT: A scan of the ranking tables for JSE stocks in the first quarter of 2013 shows that midcap stocks have been the top performers, outdoing the performance of the JSE all-share index by a significant margin. We’ve been talking about many of these for a good few months here on the market update, with shares like Spur, EOH, Coronation, Famous Brands and more setting fresh 52-week and often all-time highs. David Shapiro is I think quite bored with talking about some of these stocks. [David laughs]
     We welcome Peter Armitage to the programme. He’s with Anchor Capital. Peter, midcaps ruling the JSE in 2013, and three very surprising winners in the year to date.

PETER ARMITAGE: Ja, absolutely. I think there’s no real trend from a sector perspective, but there are some shares that really shot the lights out. The top three are Sephaku, Rolfes and Super Group.
   But our analysis excluded the really small caps, because obviously the things that go from 5c to 10c aren’t realistic for investors.
   So this is the investable universe and you see the top 20 shares – the lowest of those is Ellies at 19%, which is against the market which is just about flat. So you’ve been able to make good money on the market this year, but you have to be in the right shares.
   I guess this speaks to the fact that it is tougher to find value among some of the big-cap stocks and tougher to find value in sectors which – if you look at the losers on the market, year to date – are really stocks that have run very hard in retailers, and stocks that are completely out of favour in resource stocks.

PETER ARMITAGE: Ja, it’s quite ironic. If you look at the winners, it’s all kind of midcaps, and the losers are all big caps, and big caps in the from of resources and the retail shares – Spar, Mr Price, Cashbuild, Foschini, JD Group, all in the bottom 20.

HILTON TARRANT: Peter, looking at those three winners, Sephaku Holdings has a R1.4bn market cap. This is a cement producer which is not yet producing cement. What are your thoughts on the company?

PETER ARMITAGE: We spent some time there. We went to their site a month or two ago. It’s being built by the Chinese, a very interesting operation. Our calculation is that at full production, selling all of its products, it’s worth about R15/share. It’s trading now at about R7. So there is still quite a nice path upwards. It’s in the luxurious position of not being in production yet, so operations and current demand have no impact on it. So it’s kind of a free ride until they start producing, and then it’s subject to normal market observations. But we put out a note about a month ago, saying we thought it could be R8 by year-end and R15 by the end of next year. But it’s getting there quicker than we projected.

HILTON TARRANT: I think we might hit that R8 level in the next few days if moves on the market are anything to go by – Sephaku closing at R7/share exactly today, up 4%.
   Peter, in terms of the risks with a share like this specifically that has run so hard, they have the luxury, as you say, of not being in production yet. I guess there are a number of risks as that plant comes on stream.

PETER ARMITAGE: Ja, there can be delays. So the first year of earnings – there’s a huge range that can be achieved. They’ll probably make a loss in their first year because you are moving up from zero production to full production. You’ve got to sell all of your production. So next year is a different year for them. This year is about getting the plant right.
   We went there and were quite impressed with what they’ve done to date. It’s a massive operation out in Lichtenburg in the middle of nowhere. Next year it’s about getting the sales through. But they’ve done some quite clever things. We think they’ll get up to kind of 30 to 40% of production in sales very quickly, and then it’s a bit of a slog to get to 15, 20% market share in the territory.

HILTON TARRANT: That share price has more than doubled in the year to date. In the first quarter it was up 109%.
   Rolfes is second on your ranking table. It’s up over 50%. This is a chemicals company with a R700m market cap. You call it – in your research that you’ve put out – your favourite small cap. That’s a big call.

PETER ARMITAGE: Ja, I think there isn’t really a helluva lot of quality in the small caps space below a billion rand. The 2007 listings boom didn’t really bring much quality to market. It was mostly cyclical construction companies.

   What we like about Rolfes is the strategy and the management team. It has basically the same founding shareholders as Pinnacle, which has been the top share of the century. And they are following their kind of business model in terms of increasing distribution, adding by acquisition and organic growth, and the Pinnacle shareholders own 40% of this company and are certainly the guiding force behind it. They are in a sector which has got quite a bit of growth and they’ve developed an excellent track record since listing in 2008.

HILTON TARRANT: Third place – Super Group. Not quite a junior. Now valued at R8bn, trading in the mid-twenties, around R25/share. Still a way to go, though, to get back to where it was in its heyday. I think back before the liquidity and financial crisis in 2008 this share was trading at over R80 if you take into account the 10-for-one consolidation. Are you pleased with the turnaround there?

PETER ARMITAGE: Ja. Management’s done a fantastic job. They had quite a big hole to fill. They lost the City of Johannesburg and Eastern Cape contract, which was about 25% of earnings. But what’s been a massive success has been their Australian operations. In fact, they generate more than 50% of their profits out of their Australian feed business now. And I think the market’s bought into that. If you look at the earnings they’ll deliver to June this year, it’s about R2/share. I think if you look back six months ago people were expecting probably R1.50. So management’s done a fantastic job there to turn this around – the new management team that took over.

HILTON TARRANT: Peter, if you look at this list of the top 20 in the year to date, only very few Top 40 stocks. You’ve got Mondi in there, both plc and Limited. You’ve got also Discovery and SABMiller. So, as you say, really dominated by midcaps. We’ve spoken about three of them. Are there any others that stand out for you?

PETER ARMITAGE: Ja, I think Grindrod still looks pretty interesting. If the shipping market can turn next year, it’ll be R30 by the end of the year. But there is quite a bit of risk to that statement, it’s difficult t predict it.

   In those shares I think Pinnacle has still got some headway, probably the one from these prices that we’d back the most from a share-price point of view would be Ellies. We think they’ve got a very big 24 months ahead of them. There is some growth potential there in all the right sectors in terms of renewable energy, growth into Africa and the new digital terrestrial television. They’ve got 50% market share in the installation market there, so that’s a big driver.
HILTON TARRANT: Our thanks to Peter Armitage. David, we’ve been speaking about a good number of these for quite some time, but nice to get into at least three of them in some detail.
   Sephaku – we were talking about it in the newsroom this afternoon.

DAVID SHAPIRO: Sephaku – I actually can’t comment because I think we are involved there as sponsoring brokers or something like that. But the only thing I will say is that these are seasoned cement men in it. And Dangote’s behind it as well. So I know where Peter is coming from. I’ve read his report on Sephaku.
   Rolfes – I don’t know that much about. But when you talk about R700m versus British American Tobacco at R1trn, it’s hard to accumulate big chunks, particularly as 40% of it is tied up with Pinnacle shareholders. So it’s a very small trader.
   But Super Group as well. And I like logistics. I’m looking at anything in logistics. I know that when we look at Super Group we look at a lot of the distributors and motor sales. Just watch the logistics side of it – Imperial’s in logistics, Super Group, Grindrod – as Peter also points out – as well. Look at that side of it. I think particularly with the opening up of Africa, there is plenty of room for growth there.

HILTON TARRANT: I bought Super Group way back before the consolidation – it was probably 60c, 70c. R6, R7 in today’s share price if you take the consolidation into account. I’m very surprised this has now got a market cap of R8bn.

DAVID SHAPIRO: Listen, they pumped enough steroids in there to get the group up and running, and a huge amount of cash had to be injected. There was never a question about the underlying business. There were perhaps question marks about management, or that management took their eye off the ball. But fundamentally there were some very good businesses and they brought good management in, a lot more capital and it’s…

HILTON TARRANT: A couple of rights issues.

DAVID SHAPIRO: That’s why I say plenty of steroids and support by shareholders – correctly so. And now it’s once more a proper company.

† Hilton Tarrant holds shares in Super Group, purchased in February 2011.

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