The "Nasionale Pers" or Naspers started with humble beginnings as a print media company based in Cape Town, and has grown into the one of the biggest internet conglomerates in the world, with a market capitalisation of R950 billion or about 19% of the JSE Top 40 index.
The Naspers "Rump", which refers to its non-listed assets, is trading at multiyear lows. It’s more a case of when rather than if this value unlocks, and there is a potential 30% gain in it when that happens. What we like about Naspers’s business model is that it has cash generative businesses like Multichoice, Media24 and local e-commerce businesses such as Takealot, OLX and Spree. This creates the opportunity to seek those lucrative big deals like Tencent. No doubt that when it comes to Naspers, the Tencent investment get all the glory, and the tech giant’s dominance in China (especially the mobile gaming space) continues to grow. But what about the other often overlooked assets in the Naspers stable?
Naspers’s latest investments in Indian travel business Ibibo Group and online travel service MakeMyTrip, and educational technology company Brainly proves that they are in the forefront of e-commerce investments, and expectations are that these bets will pay off handsomely. "Naspers is consistently looking to invest in market leaders that have global scale and the potential to be transformed by technology." Said Bob van Dijk, CEO of Naspers. With nearly half of the global population connected to the internet today, management is on the lookout for the next market disruptors and online education could be just what they’re looking for.
Steinhoff is probably the most exciting company to watch in the Mergers & Acquisition space in South Africa. Their acquisition of the largest mattress firm in the US, Mattress Firm Holdings, is the biggest ever acquisition by a South African firm. Other recent acquisitions include UK’s discount retailer Poundland, Tekkie Town, and there are talks about a potential deal with South African retailer Shoprite.
The Mattress Firm and Poundland have similar characteristics, which may provide insight as to why Steinhoff found them attractive purchases. They both are underperforming after recent acquisitions, yet both have significant growth potential when management implements turnaround execution, a proven Steinhoff strength. Mattress Firm Holdings is not just a stepping stone to the largest consumer driven market in the world, but a country-wide footprint with over 3500 stores, 80 distribution centres and already dominant market share in the US mattress market.
One of Steinhoff’s strong points is its management’s ability to successfully incorporate acquired companies into their portfolio. CEO Markus Jooste has a steady track record of growing Steinhoff through acquisitions and getting the full potential from group synergies.
The Steinhoff share price is coming from a 12-month high of R97.00 and is trading around R68.00 at the moment and a Price/Earnings ratio of just over 13. The share price has been under pressure lately, but we do see potential upside of up to 35% over the next year.
Aspen has a strong portfolio that ranges from infant nutritional products and anaesthetics to ARVs, supplied internationally across a spectrum of pharmacies, hospitals and clinics. Over 80% of their revenue is generated outside of South Africa.
Aspen’s share price came under pressure in October when GlaxoSmithKline sold its 6.2% stake, 28.2 million shares in the company. Aspen’s share price never fully recovered after the first of the share disposals by GSK back in March 2015, and the most recent sale has just made things harder. There no longer exists an overhang on the share price, which means there is a lot more sky above Aspen for the share price to soar.
A Trump presidency is good news for pharmaceutical companies in general, as Hillary Clinton had a strong stance against speciality drug makers that charge high prices for their products. Aspen is trading at an attractive forward PE of 18x FY2017 that is in line with sector peers and below the group’s historical average. We don’t think it’s unrealistic for the share price to rise 34% over the next year.
Woolies recently released a soft sales update for the first 19 weeks of the 2017 financial year that came below expectations, causing the share price to plunge 8% on the day. Clothing retailers are experiencing a weak trading environment with international discount retailers like H&M and Cotton On stealing market share in an already slow-growing economy. The Woolies food division was more resilient with 9.2% growth for the period.
Woolworths’ Australian business is still in its very early stages, but we believe there is huge potential to successfully roll out the SA food business model in that market. The Australian acquisitions, David Jones and Country Road, offer a diversified portfolio of food and clothing companies that could potentially grow into heavyweights in that market.
Woolworths is trading at a 12-month low of around R64 and a forward PE of 13.3x FY2017. For a long-term investment, the current trading price is a good entry point and we expect a potential upside of up to 36% in 2017.
The declining oil price that has shed more than half its value since 2014 has not been kind to Sasol. The bulk of Sasol’s revenue is driven by the Rand oil price, causing headline earnings per share to fall 17% over each of the past two years. There were various positives and negatives on the way, and these may explain why its share price dropped 22% from highs reached in June, and why it is a top 5 pick going into 2017.
The management team at Sasol did excellently to keep costs down, however instead of testing the R500 level, the company’s share price is now struggling to break above R400. That is because Sasol dropped the ball a bit when capital expenditure for the new Lake Charles Cracker Project (LCCP) dwarfed previous guidance. This pushed back the timeline for the project to break into net positive earnings to at least 2020. LCCP is set apart from others on the US Gulf Coast with its semi-speciality production capabilities and should be a large earnings contributor in future for the patient investor.
Other positives for Sasol include its new remuneration policy, which was taken well by shareholders. There is also a deal being drafted between OPEC members to freeze oil production and lift prices. This could sustain the oil price at around $60 per barrel in 2017, which would be positive for earnings. At the current level Sasol does offer exceptional value and considering the potential short- term boost from an OPEC deal and medium- to long-term contribution from LCCP, this one is certainly on our radar for 2017.
Analyst and Securities Trader
Daniel is a full-time analyst and securities trader, and is responsible for equities research across industries. Although he grew up in a small town in the Klein Karoo, Daniel has always been interested in both locally and internationally traded companies. Daniel has been actively investing and trading on the JSE and other global exchanges since starting his Bcom Investments Degree at the University of Stellenbosch, which he completed in 2014 . During his studies, Daniel worked as an intern at Kruger Internasionaal in Johannesburg in 2015, gaining valuable experience from Hein and Mia Kruger. He is currently a CFA candidate.