Top money managers share their JSE stock picks (Part I)

Twelve of the country’s top market commentators and fund managers shared their stock picks in two live YouTube sessions hosted by the JSE this month.

The idea originated from well-known market watcher David Shapiro of Sasfin who openly challenged JSE CEO Leila Fourie to host a webinar with picks from those who follow the market. She agreed this was a great idea and the first session was held on August 3, less than two weeks later.

So come Leila. Organise a webinar where a few of us can discuss our top 5 to 10 stock picks. Piet’s a big follower. You have Anthony, Keith, Adrian. Speed dating. 10 to 15 minutes each. https://t.co/NBSgETvwVp

— David Shapiro (@davidshapiro61) July 21, 2021

Each participant had under 10 minutes to provide their three top stock picks, with reasoning for each.

Of the 36 picks across the two sessions, four stocks – Afrimat, Sibanye-Stillwater, Combined Motor Holdings (CMH) and City Lodge – were picked by two participants. There were no overlaps of picks from the six fund managers who were part of the first session.

Highlights from session one

David Shapiro of Sasfin

Shapiro, in his 50th year on the market, kicked things off. He says he is “confident that the mining boom will be sustained for longer”. His choices are auxiliary businesses to mining, so-called “pick and shovel companies” that are “well-placed to score if the mining companies continue to do well”. These are AECI, Barloworld and Hudaco.

AECI serves the mining, manufacturing and agriculture sectors. The share is directly linked to trends in the broader economy and infrastructure, with the big risk (almost paradoxically) being rising commodity and chemicals prices as these are large inputs.

Barloworld has “transformed meaningfully since its days as a conglomerate. Given Shapiro’s theme, Barloworld as a big supplier of mining and construction equipment is an obvious pick. His third pick is a smaller supplier of industrial materials, Hudaco.

Delphine Govender of Perpetua Asset Management

Govender says she “interestingly also picked South African industrial shares” but that her three stocks are “more diversified”. She firmly believes all three are “fundamentally undervalued, but for different reasons”.

Life Healthcare, the country’s second-largest private healthcare company, is a “recovery story”. But Govender says the group is “diversified and not just a play on South African healthcare”. Its investment in Alliance Medical, in particular this business’s Life Molecular Imaging unit, is increasingly an important growth lever.

Well-known retailer Massmart is the second of Govender’s picks. She notes that there “isn’t a direct competitor to Massmart in South Africa”. Three things attract her to this business – the recovery on core operations, a turnaround (as a result of new management), and growth. “The turnaround is the key element.” But, says Govender, from a product perspective, Massmart is “very overlapped to a business like Takealot; it has a unique opportunity to grow in that space”.

The last of her picks is Datatec, which “used to be a poster child of the market”.

“Everyone spoke about it in the late 1990s. Today, no one speaks about it – it is neglected because it’s small” [it has a market cap of about R5 billion]. Contrast this with revenue of $4 billion, says Govender. She says Datatec is “very cheap on almost every valuation metric”.

Keith McLachlan of Integral Asset Management

McLachlan shared three very different picks. Northam Platinum is a “uniquely South African miner”, because unlike many others in the sector, it has a “growing production profile to 2026-2028”. He also highlights that supply of the commodity is “not very elastic”. Currently, the “valuation is not at all demanding”.

Because of its globally diversified operations, food services business Bid Corporation “is not exposed to any one lockdown or pandemic cycle”.

“It stands out in terms of margins and capital, when compared to its peers” and trades at “one times sales”. MacLachlan believes BidCorp has “grown market share over the past 12-18 months”.

MacLachlan’s final pick, Renergen, holds the only onshore gas rights in South Africa. It has piloted its Virgina gas asset and is ramping up phase one of the project to extract helium and methane, which becomes liquified natural gas (LNG). He says it “will likely take a R1 billion rights issue to fund phase two”.

Listen: CEO Stefano Marani explains Renergen’s progress from ‘greenfield’ mining to expected final production in 2023

Bright Khumalo of Vestact

Khumalo shared three picks linked to a rebound in economic growth. Transaction Capital, with a market cap of over R25 billion, has historically been centred on the SA Taxi business, although the group has diversified over time.

Khumalo says the “catalyst” and “real growth opportunity” will be WeBuyCars. He says aside from growing market share in the used vehicle market, the group could “bolt on additional services in the value chain which they’ve already done in SA Taxi”.

He describes Afrocentric, mostly focused on medical aid administration through Medscheme, as a “simple is elegant, small is beautiful” business. He says it could benefit from changing dynamics in the medical aid market going forward.

ADvTECH, his third pick, has “been very conservative, when compared to Curro”. He admits he has “always liked schooling” and that the group proved agile enough to shift to distance learning during the hard lockdowns.

Patrice Rassou of Ashburton Investments

Rassou has three picks linked to the “reopening of the economy”. The first, Sasol, was the “most actively traded share last year during lockdown” and a “potential winner linked to the global reopening”. Two years ago, it had a market cap of R300 billion. That is now R140 billion. He admits that the group has had well-known “misadventures” in the US but is “still lingering below our fair value”, particularly given that chemicals prices are “100% higher than pre-Covid”. This is “one of the cheapest shares on the JSE, with a forward PE [price-earnings ratio] of five times”.

Cashbuild “benefitted from the work-from-home trend” as well as a “booming informal economy”, says Rassou. It has seen double-digit growth in cement, timber, bricks and this “is not only [a] local trend, it is a global trend”. If one looks back two years, Cashbuild was trading on a price-earnings ratio of 20. Now that is 11. The valuation is “very attractive”.

With FirstRand, the third of his picks, the key is FNB. He says the “retail franchise is underappreciated”. He says the UK business is also poised to grow as that economy reopens. Rassou reckons investors could “pencil in” compound growth of “20% over the next two to three years”.

Mia Kruger of Kruger International

Kruger shared three diversified miners as her picks. These are “all large positions” in the money manager’s equity fund.

Sibanye-Stillwater “has been in the news for all the right reasons” says Kruger, with the platinum business the most attractive. It is producing an astonishing amount of cash – in one quarter it produced enough cash to have funded all of the miner’s recent acquisitions (around R40 billion). CEO Neal Froneman is a “very good allocator of capital”.

Kruger “still expects solid income streams in the next three years” from Anglo American, even if commodity prices don’t stay where they are. With underlying companies paying out the bulk of their earnings as dividends, and strong cash generation at the core, the miner recently declared $4 billion in dividends, a special dividend of $1 billion and a share buyback programme totalling $1 billion. Kruger highlights its move away from so-called “non-green mining”.

Read: A scintillating week for the Anglo stable

Finally, BHP Group – the largest diversified miner globally – has also signalled a move away from coal and petroleum. She highlights that in July, it signed a nickel supply agreement with Tesla, where it will supply “greener” nickel from its Nickel West mine in Australia to the electric car maker. Demand from advances in battery technology will sustain shifts like this going forward.

* As at August 12, data from ProfileData

Highlights from the second JSE stock picks session will be published on Moneyweb next week.