Last year was a tumultuous year in global equity markets and while the JSE eked out a positive return in rand terms, it still moved backwards when converted to the greenback. We saw growth expectations moderate as the year progressed thereby impacting the earnings outlook for companies near term – we still see quite a bit of value in the local equity market for 2023.
That said, risks are still rife as the war in Ukraine continues, China’s policy implementation remains haphazard, and inflation stays elevated. Locally, the growth outlook has been tempered by the impact of continued and intensifying load shedding which will undoubtedly impact company profitability and/or balance sheets (depending on whether they become self-reliant or not).
Against this backdrop, we prefer:
- Stocks and ETFs that offer decent value, in other words, are trading at low earnings multiples and offering good dividend yields.
- Companies and ETFs that are more defensive and less cyclically exposed.
- Companies and ETFs with strong long-term thematic impetus.
Chantal Marx, head of investments research at FNB Wealth and Investments
Mondi (MNP) is an international paper and packaging group with production operations in over 30 countries. The group’s key operations are in central Europe and South Africa.
- Mondi has been one of the JSE-listed companies most impacted by Russian sanctions. The company has a large operation in Russia and therefore the stock derated substantially in the wake of the country’s invasion of Ukraine.
- Mondi has decided to divest from Russia entirely and has begun the process of selling its assets in this geography. In December, Mondi announced the sale of its three Russian packaging converting operations for a consideration of RUB1.6 billion (€24 million), at a loss of between €70 million to €80 million. While disappointing relative to carrying value, these assets have been priced at zero by the market and therefore any cash accruing to the company will be viewed as positive. There is also a likelihood that this cash could be returned to shareholders in the form of dividends.
- Outside of the Russia situation, Mondi runs a very clean and efficient operation. It is resilient to economic cyclicality through focus on corrugated boxes which are primarily used in defensive sectors such as food and beverages. Corrugated boxes have structural support from the continued adoption of e-tail.
- The company operates in low-cost regions with access to low-cost wood.
- Paper prices are less volatile than metal or soft commodity prices, which makes its revenue more defensive than other resources companies.
Mondi is currently trading at a smaller premium to its peers relative to history. It is also trading well below its historic average forward PE and forward EV/Ebitda multiples. We think the counter offers decent, defensive long-term value at current levels.
Mondi Forward PE over time
The Investco Solar ETF (TAN US) is based on the MAC Global Solar Energy Index that is comprised of companies in the solar energy industry. Its largest investments include First Solar, SolarEdge Technologies, Enphase, Xinyi Solar and GCL Technology.
- Solar PV is a secular growth market as the world transitions to a greener future. Due to technology enhancements, increased competition and favourable financing options, the price of a residential solar system has come down significantly over the years.
- In certain countries, customers have also been compensated with incentives such as net metering (credits solar system owners for electricity they add to the grid).
- In addition, solar Investment Tax Credits (ITCs) in the US provided a 26% tax credit for systems installed between 2020 and 2022 and will provide a 22% credit for systems installed in 2023. When factoring in possible government support from Biden’s Build Back Better (BBB) Act, overall solar installations are expected to be even higher as the legislation includes an increase and extension of the investment tax credit and an energy storage ITCs. The Green Energy Tax Incentive in the BBB Act would extend renewable energy ITCs for projects that begin construction before 2026 and from there it will be phased down over the subsequent two years.
- In other countries, generation constraints have further upped the appeal of self-generation, and by extension solar energy, as a solution for residential and commercial power users alike.
The ETF ran up hard in the wake of the Russian invasion of Ukraine, but the price has since steadied at lower levels. The companies within this ETF are highly exposed to the US residential solar PV market, which still has substantial room for growth. We view the industry as a good long-term investment and this ETF as an effective means to invest therein.
Sithembile Bopela, Investment Analyst at FNB Wealth and Investments
Shoprite Holdings (SHP) is the largest fast-moving consumer goods (FMCG) retailer on the African continent. The group has a large geographic footprint with a presence in several countries across Africa through brands including Shoprite, Checkers, Usave, OK, House & Home and Hungry Lion.
- Shoprite boasts strong market dominance in South African formal retail, with further gains experienced over the last five years.
- The development and successful implementation of Checkers Sixty60 shows innovation and agility to changing market dynamics and execution success. The sustained growth of Checkers Sixty60 and the on-demand grocery delivery app has allowed the group to monetise digital and alternate revenue stream opportunities.
- Its sustainability targets to reduce its carbon footprint are encouraging, with innovative solutions.
- Recent results were strong, with double-digit sales growth despite tough base effects.
- While unprecedented load shedding in SA has taken a toll on the group’s expenses with diesel expenses for the quarter being significantly higher, the group has managed to curb disruptions and continue to trade seamlessly given its solar and generator investment programme.
- A volatile and uncertain economic and political climate in South Africa and Africa will be the biggest risks near term. While defensive to a certain extent (versus other categories), GDP growth and consumer confidence will still be a determinant of growth.
Overall, the business remains operationally sound, boasting a strong balance sheet and is highly cash generative. On a valuation perspective, Shoprite appears to offer fair value on a forward PE of 20.1 times and a forward dividend yield of 2.9% complemented by a strong growth profile and defensive business model.
Alibaba (BABA US) is one of the largest e-commerce players in China. It provides tech infrastructure and marketing to build businesses and create value.
- Alibaba has numerous subsidiaries and operating segments which provides it with a diversified revenue stream.
- Its large exposure to China (70% of sales) remains a risk amid prevailing operational and supply chain challenges. However, risks are to the upside amid the continued easing of lockdown restrictions.
- Alibaba has decent exposure to cloud (10% of sales), which should continue to benefit from robust demand amid the continued adoption of digitised business solutions.
- Recent results disappointed on the top-line, with quarterly top-line growth below the group’s historic double-digit rates as it remained adversely impacted by China’s zero-Covid policy and increasing competitive pressures, against a backdrop of general macroeconomic weakness.
Nonetheless, the group continues to show robust profitability driven by positive revenue and to a larger extent lower costs growth on the back of effective containment efforts.
From a valuation perspective Alibaba is trading on a forward PE of 13.7 times, which remains undemanding relative to its peers and its own historic rating. We expect volatility around the price amid prevailing headwinds but are still positive on the long-term growth trajectory of the company and its various subsidiaries.
Alibaba forward PE premium (discount) to competitors over time
Pritu Makan, Investment Analyst at FNB Wealth and Investments
Bidcorp is a market-leading food service product distributor across several geographies including the United Kingdom, Europe, Middle East, South America, the Asia-Pacific region, and South Africa. The company’s business units operate across the food and ingredient manufacturing sectors, such as catering, hospitality, leisure, baked products, poultry, meat, seafood, and processing. The strategy is to grow organically in existing regions and acquisitively in new ones, with improvements in the customer mix and value add opportunities providing further upside potential.
- The group has a well-diversified client base and businesses at different life cycles across developed and emerging geographies.
- Bidcorp is not overly exposed to any specific client or category, boasting healthy diversification across the portfolio.
- The company’s dual strategy of targeting organic and acquisitive growth spreads risk with the flexible balance sheet offering further room for bolt-on acquisitions or a major transaction.
- The group’s market leading position in many countries of operation provides some pricing power in a low-margin industry.
- Bidcorp has also seen solid momentum following the easing of Covid-19 restrictions and supply chain headwinds with an expected recovery in China creating further growth opportunities.
- Margins have also remained resilient, which is noteworthy given the current inflationary environment as most businesses were able to pass through inflation increases.
- A continued recovery in travel, leisure and conferencing sectors could also provide a near-term boost.
The company remains financially strong with relatively low levels of gearing and a robust business model with solid diversification and defensive characteristics. Bidcorp is trading on a forward PE of 18 times, below its historic average rating of 20 times.
CrowdStrike (CRWD US)
CrowdStrike, a global cybersecurity leader, provides cloud-delivered protection across endpoints, cloud workloads, identity and data, and leading threat intelligence, managed security services, IT operations management, threat hunting, Zero Trust identity protection, and log management. Cyber Security remains an ever-evolving market, with focus shifting from the perimeter of the network to deeper within the network and addressing endpoints, users, and applications.
- The cybersecurity market has seen strong growth during the Covid-19 period amid a sizable increase in online traffic with the swift adoption of remote working also resulting in firms deploying a host of cyber security solutions.
- Some of the factors driving this growth include the increasing number of cyber-attacks with the emergence of e-commerce platforms, deployment of cloud solutions, and proliferation of smart devices.
- The company remains a category leader, with a differentiated cloud native architecture and a management team that continues to execute and innovate well.
- Endpoint security is also a top priority within security segments, and CrowdStrike is the vendor expected to see the greatest increase in spending as a result.
- Its most recent quarterly result showed robust growth at scale and achieved strong retention rates, growing module adoption, record net new annual recurring revenue (ARR) from emerging products and a record number of customers contributing at least $1 million to net new ARR.
- Longer term, the group reiterated its FY26 goal of $5 billion in ARR and the FY25 target of operating margins between 20% and 22%, which provides investors with further confidence in the multi-year outlook. Overall, demand for the group’s products remains robust which is supportive of profit growth over the longer investment horizon.
The group is disrupting a $7 to $8 billion corporate endpoint market with the competitive environment becoming more favourable.
CrowdStrike is also acquiring market share faster than other disruptors with consensus expecting the group to dominate around 15% to 20% of the segment by 2025. The company is also well-positioned to navigate through macroeconomic headwinds as tighter budgets could accelerate consolidation and standardisation among platform providers, which will boost the adoption of CrowdStrike’s add-on products in areas such as identity and log security. In addition, competition is limited from firewall peers.
Consensus is positive on the stock and the average target price on the sell-side is $168 per share, representing 73% upside from current levels.
12-month consensus target price versus market price
Jalpa Bhoolia, Investment Analyst at FNB Wealth and Investments
Glencore is one of the world’s largest global diversified resource companies. The group engages in the production and marketing of metals and minerals, agricultural products, and energy products. Glencore is the market leader in terms of its commodities trading and marketing business.
- Glencore has a well-diversified commodity mix including iron ore, coal, copper, zinc, nickel, and cobalt.
- The group recently signed a 15-year agreement with recycling technology firm, ACE Green Recycling, in which the latter will supply recycled lead and battery metal-based end products from recycled lithium-ion batteries. This expands the group’s commodity basket, allowing it to ride the high-demand lithium battery wave.
- The group’s supply chain focus makes it more of a defensive business rather than pure commodity play.
- The group’s investment in unloved but still vital commodities such as coal and oil could aid cash flows medium term. The group will continue working towards decarbonisation while using its solid cash flow generation from the “old” business to fund “new” business ideas i.e., coal to lithium.
Glencore had a great run last year, but we still believe that there is room for upside potential especially considering the play that the Chinese economy has on the commodity sector. The company is committed to returning cash to shareholders which means that the potential for capital growth is complimented by an attractive forward dividend yield of 9.6%.
Glencore 12-month forward dividend yield – five-year history
Schlumberger (SLB US)
Formed in 1929 by Conrad and Marcel Schlumberger, Schlumberger is the largest global oilfield services company in the world, holding 33% market share. The company provides technology and services to the energy industry for reservoir characterisation, drilling, production, and processing.
- Schlumberger thrived on soaring energy prices, and we expect the group to find further support from structural supply issues in the oil market.
- Fears of an economic slowdown continue to linger in markets, which could impede growth prospects near term, but utility stocks are expected to be relatively recession-proof.
- As part of its restructuring in 2019, the group started reporting its Digital and Integration division separately to address the emerging trend of digital transformation within the sector. We believe that the group’s growing emphasis on cloud-based technology is a great value-unlock strategy, especially in the current economic climate.
- The group’s 3Q22 results were robust. All divisions displayed solid growth as global demand for oil and energy resources remained strong. The financial position has improved, with a recovery in free cash flow driven by robust cash generation. Management’s outlook for the final quarter of the year was positive.
- Downside risks to our fundamental views include geopolitical and economic risk including continued inflation risk, as well as pressures around sustainability and climate change. As climate change becomes a more pressing matter, government intervention has urged industries to make and execute on plans to transition towards more sustainable energy production methods. However, oil and gas as a source of energy is still expected to be over 50% of the energy mix in 2040, therefore investment in upstream oil and gas projects will remain essential, even considering the transition.
- Schlumberger is trading on a forward PE of 18.7 times, which may look slightly expensive compared to its peers, however, the group’s growth prospects and unique offering is unmatched. Despite concerns over the broader economic climate, fundamentals within the energy industry remain supportive for the company.
Hashmeel Suka, Investment Analyst at FNB Wealth and Investments
Balwin Properties (BWN)
Balwin operates as a real estate property development firm in South Africa, specialising in the construction as well as the rental of apartment complexes and lifestyle estates. The company also offers various after-sales services including fibre to the home (FTTH), solar energy and insurance. Balwin’s portfolio currently consists of 97 developments and over 47 000 apartments. It is the largest sectional title developer in South Africa.
Balwin targets high-density, high-growth metropolitan areas in South Africa and has a long-term development pipeline (45 000 apartments) in such locations.
Hence, it is well-positioned to address the lack of quality and affordable housing in the low to middle income market.
An added benefit for the company is the high barriers to entry within the industry.
Fundamentally speaking, the company has been performing well – in its 1H23 results, it reported accelerated growth in both headline earnings per share (+47%) and revenue (+20%), driven by increased unit sales and higher selling prices. Input costs have been well controlled, and the overall balance sheet position is strong.
Currently, the stock is trading at R3.03, a 61% discount to NAV (R7.71). The counter is trading on a historic PE ratio of 3.42 times, which looks attractive compared to its five-year average rating as well as its medium-term growth profile.
Balwin Properties NAV and premium (discount) to NAV
Dufry (DUFN SW)
Dufry is a Swiss-based travel retailer operating over 2 300 duty-free and duty-paid stores in various airports, cruise lines and railway stations around the world, representing an overall market share of 11%, with most of the company’s historic growth realised through a series of strategic acquisitions.
The company operates using differentiated retail brands which are fully integrated into the business. It also operates a joint venture with Alibaba (in China) as well as independent brand boutiques on behalf of Hugo Boss, Jimmy Choo, Gucci, Lacoste, and other well-known brands. The majority of turnover is generated from the sale of Perfumes and Cosmetics (31%), Food Confectionary and Catering (22%), Wine and Spirits (17%) as well as Luxury Goods (11%).
- The recovery in airline passenger numbers to pre-pandemic levels is set to drive substantial revenue growth for the company over the next few years. According to Bloomberg, this will translate into EPS growth of 123% for FY22 and 339% for FY23, respectively.
- A planned merger with concessions caterer Autogrill, is poised to create an even more dominant entity within the industry.
The stock is currently trading at CHF41.43 while consensus has a price target of CHF45.71 – representing a potential upside of 10%. However, consensus has been slow to adjust to new dynamics in international travel, including a potential full reopening of the Chinese economy. We therefore see upside risk to current earnings estimates and by extension, valuations.