Old Mutual sees too much bad news priced into SA stocks

South Africa’s weak economy and poor growth prospects have hidden the “phenomenal” potential for the shares in some locally focused companies to deliver returns for investors, according to Old Mutual Investment Group.

So-called South Africa Inc. stocks have largely missed out on the 40% rebound in Johannesburg’s benchmark index from its March lows, an underperformance that is “not sustainable,” Meryl Pick, who helps oversee OMIG’s R10 billion ($533 million) Investors Fund, said during a webinar Wednesday.


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“There are resilient and adaptive companies that can still outperform in a weak macro,” Pick said, citing stock-specific areas of the local market that the money manager sees as attractive.

Pick pointed to South African bank valuations as an example, with lenders trading at the same price-to-book multiples they had in the 1980s, even though their businesses are much stronger with more robust balance sheets.

Here are more of Pick’s views on “South Africa Inc.” stocks:

  • Aspen Pharmacare’s deal with Johnson & Johnson to manufacture the US company’s Covid-19 vaccine will allow the health care firm to generate volumes at its manufacturing facilities.
  • Construction companies Raubex and Stefanutti Stocks are also favoured, given their strong balance sheets, cost-cutting measures, and are poised to benefit from government infrastructure spending.
  • MTN and Vodacom have benefited from work-from-home and have cut their costs in response to a low-growth environment.

  • Italtile is poised to benefit from relatively low penetration in South African market.
  • Hospital operators are priced as if the current low occupancies and slow rate of elective surgery will continue indefinitely, but volumes will return. “We have seen that in the US, we will see that in South Africa.”
  • Among retailers, Massmart remains “exciting,” given its rationalisation and reorganisation.
    • Foschini’s acquisition of Jet has given the fashion retailer additional local manufacturing capacity and a new platform.
    • Shoprite’s online shopping business and restructuring of its portfolio has positioned it to emerge from the pandemic stronger than it entered it.
    • Retailers should also benefit from favorable lease terms with landlords in the wake of the virus
© 2020 Bloomberg

Source: moneyweb.co.za