BROKERS’ NOTES: Buy Dis-Chem, avoid Sasol

Chantal Marx, head of investment research and content at FNB Wealth & Investments

Buy: Dis-Chem

We are tactically positive on South Africa Inc heading into the elections period, with a potential rerating on the cards should a “tail risk” outcome be avoided. That said, a more defensive tilt can be employed to counter anticipated volatility in some of these stocks over the next month, and health retail is a sector regarded as more defensive within that basket. In February, Dis-Chem released a trading update indicating it would finish the financial year on a strong note — top-line growth was tracking well ahead of consensus and momentum had picked up since the halfway mark. Results are due on May 31.

Over the longer term, we are positive on the health and beauty retail sector. Dis-Chem is the market leader in dispensary, vitamins and supplements, and health care and nutrition. Private label accounts for a big proportion of sales, with the possibility of increasing — these products tend to carry higher margins. Dis-Chem’s franchise model, The Local Choice, is an interesting differentiator and is growing quickly. That, along with continued store rollouts and reasonable growth in its own store sales, will drive supply chain volumes and margins in its distribution business.

The stock is trading on a forward p:e of 22, slightly below its five-year average, and the technicals also seem solid, with momentum to the upside especially supportive. We would be comfortable taking a long position at current levels. Our upside target is R37 (+14%) with a stop-loss recommended at R31.

Avoid: Sasol

Sasol has been under significant pressure so far this year, notwithstanding the positive impact of higher oil prices and the weaker rand. The company’s nine-month operational update last week was disappointing and guidance was revised lower in several areas.

From a fundamental perspective, Sasol is trading at a substantial discount to peers, as well as its long-term average multiple ratings. That has the potential to lull fundamental investors into a false sense of security when considering potential downside. The company may still benefit from a weaker rand and higher oil and chemical prices this year, but operational challenges and supply chain concerns could limit its gearing to these factors and hinder a potential rerating.

Technically, momentum is to the downside — the stock is trading well below its 200-day and 200-week moving averages, with limited support in sight.