A big five to hunt on the JSE
Low growth calls for a new look at the giants on the JSE.
Local investors can be forgiven if they seem irritable whenever anybody asks how their shares are doing. The main reason is that the market has been fluctuating in a fairly tight range for the last year and the outlook for the rest of the year is not too rosy either.
The SA Reserve Bank last week trimmed its growth expectations for 2018 to only 1.2% compared to the forecast of GDP growth of 1.8% at the beginning of the year, while it also said that it expects inflation to increase from current levels. This will put even more pressure on SA consumers and, subsequently, on company earnings and share prices.
Add to this a dose of political tension and then sit and ponder the outlook for local companies over the next 12 months. Meanwhile, the global economy is plodding along at its normal speed. The World Bank predicts global economic growth of around 3.1% this year after recovering faster than expected in 2017. Some countries, like China, Indonesia, India, Bangladesh and Pakistan are still expected to grow much faster. In the case of China at 6.4% and India at 7.3%.
Lower expected growth in America and Europe of about 2.4% is still double that of the South African economy. So it makes more sense to look at the large international companies on the JSE for exposure to growing economies and strong currencies, rather than the local businesses that are reliant on the poorer SA consumer and their lower-valued rands.
Countries like India, China and Indonesia can expect faster growth.
Local investors can buy shares in the largest international companies on the JSE with a sense of pride: The Moneyweb Investor’s selection of five shares to look at, namely British American Tobacco, BHP Billiton, Richemont, Anheuser-Busch InBev and MTN, are all local babies that have grown to international giants.
Naspers is not on the list this time around due to the conflicting views with regards to the outlook and valuation of the share. On the one hand, Naspers is trading at about 40% below its net asset value. On the other hand, investors are uncomfortable with the high valuation of Tencent itself.
Proponents of Naspers – currently trading at around R3 310 – will point to the fact that the share also seemed overvalued at R1 000 and R2 000, while critics will baulk at the high PE of above 60 times.
British American Tobacco (JSE: BTI)
I-n contrast, British American Tobacco, listed as BatSA on the JSE, is sitting on a low PE of less than 16 times at its current share price of just about R712. The share is barely 14% above its recent low in April and way below the 10year high of R940.
The low rating is not without reason. Tobacco companies operate in a mature and heavily regulated, if not hostile, business environment and are also facing government’s world-wide that either tax them harshly or are committed to shutting them down.
However, BatSA’s results for the six months to June show that tobacco is still as good a bet as it has been for the last 500 years. Revenue increased by 56% in the first half of its financial year due to to the acquisition of Reynolds American Inc (RAI), continued demand for traditional tobacco products and the launch of new modern products.
Due to the dilution effect of the RAI acquisition, earnings per share increased by only 2.1% in British pound, which nevertheless translates into quite attractive return in rands. If RAI had been incorporated in both years, the EPS would have been 10% higher.
CEO Nicandro Durante states in his overview of the results that BatSA is bound to benefit from continued growth in traditional tobacco products in developing markets. Meanwhile, BatSA positioned itself as the dominant player in the market for more modern tobacco products (vapour and tobacco heating) with the acquisition of RAI.
Consensus forecasts indicate EPS of around 302p for the full year to December, putting BatSA on a forward PE ratio of around 13 times when EPS are converted to rand at the current exchange rate.
Nicandro Durante: There is growth in tobacco products in developing markets.
Anheuser-Busch Inbev (JSE: ANH)
The world's biggest beer producer Anheuser-Busch Inbev (AB Inbev) also presented its interim results to June last week. These results bolster the case for inclusion in local investors' portfolios.
Management states that beer volumes and revenue in SA declined due to lower economic growth, higher fuel prices and increases in the rate of Vat and excise duties. However, sales of the other more than 500 beer brands around the globe has given local shareholders reason to smile.
Revenue increased by nearly 5% (in dollar terms during the six months to June and gross profit nearly 6%, resulting in an increase of 8.3% in normalised earnings per share. Management expects strong growth in the second half of the current financial year as benefits of the merger with SABMiller will bring even more benefits of production efficiencies.
"The benefits of the combination with SABMiller exceeded expectations," says AB Inbev in its results statement. In a separate document, management says that cost synergies are not only greater than expected, but have also been delivered at a faster pace.
Analysts have recently upgraded their earnings forecasts for AB Inbev to just more than $5 per share for the full year to December, compared to last weeks interim figure of $1.83 per share. This forecast translates to a forward PE of 20.6 times at the current share price of R1 400.
M&A activity has created a beer behemoth.
BHP Billiton (JSE: BIL)
BHP Billiton (Billiton) earned a place on our list as one of the world's largest resource companies rather than the other SA giant Anglo American. This is due to Billiton's more diverse portfolio of commodities, including its interest in oil and gas producers.
Anglo's struggling SA platinum mines – at worst seen to be in terminal decline – cost it its place on our list and possibly in many investors' portfolios.
Billiton has had a good run from its low of R138 in January 2016 to the current R300 in line with most mining and commodity stocks.
Interim results for the six months to December 2017 showed an increase of 25% compared to the first half of the previous year with basic earnings at $0.76 per share. At the time management said that higher production volumes of key commodities and an increase in international prices more than offset an increase in production cost. Subsequent production updates showed a continued good operating performance by most units, while commodity prices remained high. Unfortunately, these updates did not provide guidance with regards to production cost, but still give the impression of further improvement in the second half of the financial year.
Billiton will publish its annual results in a few weeks' time (21 August). Consensus forecasts indicate that the market expects earnings in the region of $1.38 which translates into R18.16 per share at the current exchange rate. This is equal to a PE of just below 16 times, which seems reasonable for an international company that offers protection against a weakening currency.
BHP's share price has more than doubled in 18 months.
Compagnie Financiere Richemont (JSE:CFR)
Most fund managers or long-term investors include Richemont as a core holding in their portfolios. It has always been a good rand hedge share and now serves as an escape from the doldrums of the SA economy.
In the latest annual report, chairman Johann Rupert says an improved international economic environment led to strong overall retail sales in Richemont's main markets. In the year to March 2018 sales increased by around 3% in actual exchange rates to nearly €11 billion and generated earnings of €2.16c per share (€0.216 for local shareholders in Richemont ADRs).
The fast-growing countries in Asia produced double-digit growth in sales of the luxury group's exclusive jewellery and watches, such as the pilot-inspired watches produced by IWC Schaffhausen that sell for more than a commercial pilot's training course.
Richemont's sales also improved in Europe and America, but adverse exchange rate movements resulted in small declines in actual revenue. Continued strong growth in Asian economies, as well as renewed growth in the US and Europe, will produce acceptable growth for local shareholders.
As usual, Rupert remains conservative about the outlook for the future, only saying that Richemont is well-positioned to deliver growth as it has during the last three decades.
Earnings forecasts indicate that local investors can expect earnings of around €0.33 per share for the current financial year to March 2019, or around R5.10 per share at the current exchange rate. This places Richemont on a forward PE of 22.7 times at the current share price of R116.
Johann Rupert: Conservatively optimistic.
MTN Group (JSE: MTN)
MTN Group CEO Rob Shuter says that MTN is well placed to benefit from the expected strong growth over the medium and longer term in Africa and the Middle East. Specifically, low data service penetration in these fast-growing areas is expected to deliver double-digit growth in revenue.
It is noteworthy that MTN earned nearly 70% of revenue outside of SA in the year to December 2017. MTN now has 217 million subscribers, mostly on the African continent. Or, in other words, there are 217 million people who send MTN a few rands every month.
Operations in Nigeria are now nearly as big as the mostly-saturated SA market, but with the difference that it is still in a growth phase. Nigeria has 52 million MTN subscribers, contributing R36 billion to revenue compared to the R42 billion from SA users. In constant exchange rates, revenue from data services increased a massive 87% in Nigeria compared to the previous financial year.
In addition, MTN reduced operating costs and paid less interest and tax last year to show a turnaround in earnings from a reported loss of R3.1 billion to a profit of R4.5 billion.
Interim results for the six months to June will be announced within the next two weeks, which will show if MTN will achieve the rather high expectations from investors – at the current share price of nearly R108, MTN is on a PE ratio of a high 59 times.
Franco Pretorius, analyst at PSG Wealth, says that the earnings forecast for the year to December 2018 is indeed the high R5.85 reflected in consensus earnings models which places MTN on a forward PE of just below 19 times.
The latest quarterly update from MTN for the three months to March showed continued good performance in newer African markets which should translate into significant growth. For the immediate future, management aims at dividend growth of 20% per annum, says Pretorius.
Rob Shuter: MTN earned almost 70% of revenue outside of SA in 2017.
There are obviously many more international shares on the JSE, as well as a large contingent of unit trusts that offer exposure to international companies. But for those that like individual stock selection we think these five stocks are attractive rand hedges.■