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Five Anchor picks for 2017

A basket of opportunities from the highly-rated investment manager….

Investment manager Anchor Capital has published five of its stock picks for 2017. It cautions that these are “not intended to represent a holistic, diversified portfolio”, “nor a comprehensive list” of its “current ‘picks’”. The report is penned by chief investment officer Sean Ashton, and analysts Henry Biddlecombe and Liam Hechter. What the five stocks share, says Anchor, is that they “have derated materially in recent months (or are already cheap) and we expect EPS growth of at least 20% from the current base”. It is important to note that this research was conducted well before the December break (hence the inclusion of one-year as well as 30-day returns for context below).

Rhodes Food Group

Anchor points to the attractiveness of this company’s business model: “where Rhodes continues to consolidate and turn around underperforming SMME food producers. Since listing in 2014, the group has effected eight acquisitions – with the group’s subsequent earnings growth reflecting management’s ability to successfully extract synergies and to allocate capital to expansionary projects that yield attractive returns”.

It expects this year to be a busy one on the deal-making front, and estimates that these kinds of deals “could add at least 6% [to] 7% to group earnings on an annualised basis in year 1”. It argues that this “could be closer to 10% from year 2 onward as synergies are extracted and utilisation rates are improved”.

While its forward price-earnings ratio (mid-teens) is broadly in line with its peer group (Tiger Brands, Pioneer Foods), Anchor maintains that Rhodes has a “superior growth profile”. It is worth pointing out that the share has rallied a fair amount since early December and is up over 13% since a sharp drop in late November, which would’ve surely piqued Anchor’s interest (among others).

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One-year return (to date)*


30-day return


Market cap


Forward PE


Aspen Pharmacare

Aspen has endured two tough years, with the share down by a quarter (24%) in 2015 and a 2016 where it ended 7% higher (after a selloff in the second-half, despite a decent recovery in the first-). The share is up 15% from Christmas.

Anchor makes the case that “much of this poor performance is owing to a sharp derating from what was arguably an overextended earnings multiple”. It also points to “disappointing and ‘messy’” FY16 results. Anchor sides with management’s view that growth should accelerate materially in FY17: it expects “as much as 30% earnings growth for the next two financial years (consensus is lower at +23% per annum), which unwinds the stock’s forward PE multiple to a level last seen five years ago”.

Anchor cautions, however, that “a continued resurgence in the US dollar vs emerging market currencies remains the key risk to Aspen, largely via input cost pressure”.

Importantly, says Anchor, “the stock’s premium rating it has enjoyed over time has also shrunk to below-average levels – despite an absolute derating in the broader market multiple”. Provided the business achieves the earnings expected, Anchor says it “would not be surprised to see annualised share price gains of 20% or more from current [pre-Christmas] levels”. Given that the share is already up 15%, one could argue that much of these anticipated gains have already materialised.

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One-year return (to date)


30-day return


Market cap


Forward PE



Naspers was “one of the immediate major casualties of Donald Trump’s victory in the US elections”. The net result of what is widely anticipated to be some seismic policy shifts, “has been a rapid and dramatic shift in capital flows from emerging markets to developed (specifically US) markets. Within these changes, we have witnessed swift sector rotation, which has generally favoured US banks, “old economy” stocks over that of more highly-rated, higher growth tech stocks”.

Tencent is obviously caught up in all of this and given its “dominance in Naspers’ life, this has been key to the decline in Naspers’ share price” towards the end of last year. Anchor’s analysts argue that “perhaps more importantly”, the “discount to Naspers’ sum of the parts” has risen sharply in recent months – “quite aside from Tencent’s own investment thesis”. It draws the conclusion that this “implies investors are increasingly losing patience with management’s ability to create value at ‘the centre’”.

Anchor says the H1 2017 result was “encouraging” in respect of the monetisation of the group’s other e-commerce assets. This is “ultimately” key to unlocking the discount.

It calculates that Naspers currently trades at a 33% discount to its estimate of intrinsic value and it believes “this is an especially deep discount as it has typically tended to trade in the band of 15%-25% over time when assessed on this basis”.

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One-year return (to date)


30-day return


Market cap


Forward PE


Sun International

It isn’t often where so much hangs on a single project, but Sun International’s new Time Square hotel and casino at Menlyn Maine will be the country’s second-largest casino in what has been – to now – a largely untapped and lucrative market, northern Gauteng (where one previously had to travel to either Montecasino in Fourways or Emperor’s Palace in Kempton Park). Anchor expects Time Square to “contribute over R1 billion in annualised Ebitda once fully operational”, which it says “will add around R32 in intrinsic value per share – significant in the context of today’s share price of R85, which in turn we think is not discounting any of Menlyn Maine’s value contribution”. Obviously, this isn’t going to (fully) materialise overnight, but Anchor’s analysts argue that “market scepticism around Time Square’s success and overblown concerns (in our view) about the group’s balance sheet are creating an exceptional opportunity for investors to take advantage of a level of mispricing not often seen”.

There is a fillip from the first full year of consolidation of the Latin American assets into ‘Sun Dreams’, and Anchor believes that “favourable valuation terms of Sun’s Latin American assets in the merger should result in material earnings accretion for the group in FY17”. It estimates 150c.

It calculates a forward PE of ±10x, based on Sun International’s new financial year-end and calculates “long-term sustainable earnings of around R9.60 per share”, once Time Square is fully operational. This translates to a “fair value twelve months out of R115”.

There are risks, Anchor notes, chiefly “a more protracted period of moribund casino revenues currently being experienced in South Africa”. It also notes that debt levels are “currently high” but it does not expect any covenant breaches (in either South Africa or Latin America).

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One-year return (to date)


30-day return


Market cap


Forward PE

RMI Holdings

RMI offers a “truly diversified offering” of insurance assets, says Anchor, with a “mix of life insurance (Discovery and MMI), short-term insurance (OUTsurance and [a newly-acquired stake in] Hastings Group Plc), high growth assets (Discovery, OUTsurance and Hastings), mature assets (MMI), emerging markets (OUTsurance SA, Discovery and MMI) and developed markets (YOUI Group [OUTsurance’s operation in Australasia] and Hastings Group Plc”.

Prior to the Hastings investment, Anchor “anticipated RMI to deliver earnings growth between 15% and 20% over the medium term, with growth kickers coming from a combination of Discovery’s loss making fledgling businesses breaking even and OUTsurance’s Australian subsidiary, YOUI’s, earnings to ramp up the J-curve as this business achieves scale”. It saw “earnings accretion” from Hastings as “highly likely”, as the deal was funded by debt.

Anchor does note – importantly – that its earnings forecast for both RMI and (its holding) Discovery are “materially ahead of consensus expectations”. It has “trimmed” its estimates for “OUTsurance’s earnings by c.3% as this business is currently experiencing cyclically high underwriting margins in the domestic market, a situation we believe could normalise with the hail-related claims [from recent storms in Johannesburg] that are not yet reflected in the most recent reported earnings base”.

Anchor calculates a “12-month rolling forward PE multiple of 13x” and argues that RMI “offers a sector-leading EPS growth profile of 20% per annum and investors also receive a 4% dividend yield”. It believes these “metrics should be supportive of total returns in the region of 20%”.

The analysts add that, “alongside Old Mutual, RMI remains [Anchor’s] preferred pick in the insurance sector”.

Share code


One-year return (to date)


30-day return


Market cap


Forward PE


* All data as per Profile Data as at January 25 2017.

* Hilton Tarrant works at immedia. He can still be contacted at

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