• Samantha Steyn, Chief Investment Officer

Market gloom opens attractive buys


The tough local environment is a challenge for most companies, and many local investors are feeling the pain after a somewhat demoralising third quarter.


Despite a bumper start to the year for local markets, South Africa’s stop-start economic growth, and mixed signals from government on policy reform, saw business confidence hit an all-time low in August, while the JSE All Share Index ended September in the red for the third consecutive month.


Then, further compounding the general mood of despondency, negative sentiment, policy uncertainty and Eskom-related anxiety saw the World Bank cut its 2019 growth forecast for South Africa by half a percentage point to 0.8%.


However, in some good news for investors, difficult local conditions have led to a material de-rating in equity valuations, creating several enticing opportunities in higher-quality companies that were previously expensive, or were trading on historically demanding multiples.


While local industries will likely continue to be challenged by the weak environment, select companies that are supported by higher quality or defensive attributes are also set to fare relatively better as we inch towards a brighter setting in the economic cycle. These attributes include stable business models, above-average returns on invested capital (ROIC), industry prominence, balance sheet strength and high cash generation, amongst other factors.


In our view, some of the attractive companies on offer include:


RMB Holdings (RMH)

Source: Iress, 2019


Since its listing in 1993, RMH has provided shareholders with a vehicle to co-invest with the founders of FirstRand (which makes up 99.3% of RMH’s intrinsic value). RMH’s discount to net asset value (NAV) is currently around 11%, thus offering an attractive investment into FirstRand. This compares to the three- and seven-year average discounts to intrinsic value of 6.8% and 3.3% respectively. With quality management behind the group, the business' strategy to deliver superior earnings, dividend growth and sustained long-term capital growth will also appeal to many investors.


The primary asset, FirstRand, is a high-quality banking and financial services operation that has historically traded at a material premium to its peers. FirstRand has momentum behind its franchise, and its strong core operating performance looks set to continue, albeit at a lower level of growth. Return on equity (ROE) is likely to moderate from the current level (22%), but we believe that ROE can be supported within management’s target range of 18%-22%. And, while the group continues to trade at a premium to peers, the stock has de-rated, providing an attractive entry point.


The current price-earnings (P/E) multiple is 12.8 times, with an attractive dividend yield of 4.6%. This is made further enticing through RMH’s discount to NAV.


Given the structural nature of South Africa’s challenges, companies will have to execute appropriate strategies in order to produce growth, and we believe that RMH should be able to deliver on this promise with its current portfolio.


MultiChoice Group


The MultiChoice Group (MCG) is a pay-TV operator with 15 million subscribers, a 30-year track record and a presence in 50 countries across Africa. The MCG group com