Despite the high price-to-earnings (PE) ratio of the FTSE/JSE All Share Index (ALSI), our bottom-up investment process is finding attractive opportunities that offer good returns without taking substantial risk. The companies come from different industries and trade at different multiples of current accounting earnings, but the one common denominator is a requirement for patience.
Sasol is one of the most analysed shares in our stock market. Efficient market theory would not expect a company like this to be undervalued at any point in time, yet it is trading at a PE multiple of only 9 times the earnings one would expect at the current rand oil price. For many years the company has invested in expansion projects around the world, including R100 billion into an ethane cracker in the US (context: the market values Sasol at R250 billion); none of the benefits of these investments reflect in the earnings yet. If one includes the present value of future earnings on these projects, the PE multiple falls to 6.5. Investors may be tempted to wait for oil price uncertainty to subside or the projects to contribute to earnings, but, unfortunately, at that point the PE multiple won’t be 6.5; it is likely to be substantially higher.
Naspers is another widely followed share in our stock market that is extensively covered by sell-side analysts. The company boasts a superb long-term track record of growing intrinsic value per share and yet it trades at an estimated holding company discount of over 40%. Many investors are frustrated by the fact that the company has underperformed its largest holding, Chinese internet company Tencent, as start-up losses have mounted in new ventures. The guidance around these ventures has been clearly communicated over time and the latest guidance indicated a profitable result for the online classifieds business in the upcoming results. Once an online business crosses into profitability, operational leverage ensures attractive future profit growth – one is currently paying a big negative price for these assets when buying Naspers.
Various other local financial and industrial companies have also traded down to the point where inflationary growth offers attractive total returns to investors, since the dividend yields are above 5%. With low expectations priced into our portfolio of shares, we are optimistic about the potential for future real returns for our clients.
During the quarter, our top three purchases were Remgro, Woolworths and Nedbank and our top three sales were Naspers, Standard Bank and Mr Price.