SA banks
Investor nerves ahead of local elections at the end of the month have induced some volatility within the SA Inc space. The local banks index is flat year-to-date (on a total return basis) and we think there could be scope for a rerating post-elections in the absence of a tail risk outcome. This will be a function of both foreign and local investors becoming more comfortable in taking positions in SA Inc and the banks.
Fundamentally, returns metrics have been stable and slowly expanding and valuations look compelling. Increasingly, rate cuts are anticipated to only occur later, and the cutting cycle is expected to be flatter than previously assumed. This will be positive for net interest margin resilience through this cycle. Credit loss ratios have been more resilient than expected through the hiking cycle and cuts will have a positive impact in this regard as well. The banks are exceptionally well capitalised.
Among the local banks, Absa, FirstRand, and Investec are trading below their longer-term price to book valuations. Standard Bank has underperformed the index so far this year, following a softish 1Q24 print and we do see scope for a rebound in this name as well.
Bidvest Group (BVT)
Bidvest is a service, trading, and distribution company operating mainly in South Africa. The company specialises in services including cleaning, security, landscaping, indoor plants and flowers, travel, banking, and foreign exchange; Private sector freight management; Commercial, which involves the manufacturing and distribution of electrical products, office stationery, office furniture, packaging closures and catering equipment; and Automotive retail, among others.
Bidvest continues to be an attractive play as we remain in a period of continued macro uncertainty, with recent results showing that the portfolio remains highly defensive despite ongoing labour issues, heightened inflation, macro headwinds and elevated interest rates. Overall, the outlook for the company remains relatively positive, with management remaining confident in the group's growth prospects. The group also has a pipeline of reasonably sized acquisitions that are being considered, which could compliment the organic growth profile. The balance sheet is also reasonably healthy, which means that funding growth is not a concern.
Bidvest is trading on a forward PE of 11.1 times, below average levels historically. We retain our favourable long-term view of this counter.
Compagnie Financiere Richemont (CFR)
Richemont is a luxury goods group managed with a view to the long-term development of successful international brands. The company owns several of the world's leading brands in the field of luxury goods, with particular strengths in jewellery, luxury watches and writing instruments. Brands include Cartier, Alfred Dunhill, Montblanc, Lancel, and Van Cleef & Arpels.
Recently we have received results from several competitors in the sector and it has become clear that there is stronger demand support for 'hard luxury' (jewellery and watches) over 'soft luxury' (clothing and leather goods). Richemont is more exposed to hard luxury goods, which could see it outperform peers this year.
Following recent share price pressure, Richemont is trading on a forward PE of ~18.4 times, well below its average rating long term. We believe the current price offers an attractive entry point into a company we view favourably from a long-term perspective.
Tiger Brands (TBS)
Tiger Brands is a branded fast-moving consumer packaged goods (FMCG) company that operates mainly in South Africa and selected emerging markets. Brands include All Gold, Koo, Beacon, Albany, Tastic, Ace and many others.
The group remains optimistic on current restructuring efforts, but near term there is a large element of dependency risk for a meaningful recovery from the upcoming Easter trade. We would expect an improvement in trading conditions in the second half of the 2024 calendar year to offer support.
While the share price has been rather jumpy year-to-date, we believe that the fundamentals of the company are still solid and that Tiger brands seems to offer good value on a forward PE of ~10.5 times, based on what we regard to be conservative consensus numbers, which is well below its five-year average rating.
Listed gold miners (excl. -Harmony)
The gold price has been particularly strong over the last few months as geopolitical concerns, rampant central bank bullion buying, sticky inflation, and gold jewellery demand has been strong. Additionally, there are several traditional drivers of gold that have not yet 'fired up'. Despite Chinese buying, physically-backed ETFs in fact sustained net outflows for nine months consecutively to the end of March.
Renewed dollar strength at the start of the year did little to curtail the gold bull run, but we do foresee the possibility of support from a weakening dollar should investors again become more positive on possible interest rate cuts by the Fed later this year. This scenario remains in the balance, however, as there is a possibility that the Fed may cut later and by less than many other global central banks resulting in a stronger US dollar.
There are other reasons to be cautious as well. Cost-of-living pressures could dampen jewellery demand and indeed retail investor demand for gold ETFs globally. There may also be some tactical changes coming through from asset managers in response to record high gold prices and perhaps more compelling opportunities elsewhere
While we are a little nervous on adding direct exposure to gold around record high levels, since the end of February 2022 (around the invasion of Ukraine) most listed gold miners have underperformed the rand gold price. These companies will be generating supernormal cash flows at current gold prices, which could offer near-term support from a shareholder returns perspective. We therefore see an opportunity to invest in select names, particularly AngloGold, Pan African Resources, and DRD Gold over the next few months.
