JSE’s industrial sector goes rusty
It’s becoming harder to find value in a sector that has taken a beating in recent times. But there are bright spots
The JSE industrial sector is looking anything but attractive for investors right now. This is probably inevitable, given that it reflects an economy struggling to keep its head above water.
But the valuation metrics have worsened in recent months. For example, the p:e of the JSE’s all share industrial index, a useful tool for evaluating the relative attractiveness of stock prices compared to current earnings, has slipped from 31.6 in December to 16.7 now.
"Finding value in the current economic environment is tough and the recent results releases have proved that," says Cartesian Capital MD Anthea Gardner.
She says investors must be wary of companies exposed to the local consumer, "such as clothing retailers and insurance, where consumers make the deepest spending cuts".
But while industrials have taken a beating this year (down 13.5%, roughly double the loss of the JSE all share index), over five years the performance hasn’t been too bad. Over that period, industrials are up 28.7%, outpacing the all share index — which suggests there are still companies of value.
So where is the value in this sector? Most analysts still tip the two heavyweights — packaging and paper company Mondi and distribution group Barloworld.
In Mondi’s case, for the six months to June strong demand and higher prices for its products lifted earnings 17% to €852m. The stable volumes also helped to offset higher costs.
Gardner says Mondi has a clean balance sheet and the ability to withstand tough times. "Mondi [is] a well-run business in which management have successfully focused on cost containment, proved by the fact that they have doubled operating margins since listing in 2007."
Mondi is also investing €750m to boost growth from next year.
David Shapiro, deputy chair of Sasfin Securities, says industrial companies tend to be well-run and predictable, and points to Barloworld and Imperial as good value. "Ahead of the unbundling [of automotive business Motus], Imperial is looking attractive. Barloworld is also looking good — the CEO recently bought some shares. That is a positive thing."
Imperial, which has seen its share plummet 16.2% in the past year thanks in part to the resignation in April of CEO Mark Lamberti, is one of the cheapest around on a p:e of 10.5.
This makes it cheaper even than Barloworld, whose share has dropped 7% over the past year. Still, most analysts consider it a "buy", possibly with an eye on its cheap 11.7 p:e.
By contrast, Mondi is far more expensive with a p:e of 16.4, as is Bidvest at 14.7.
Shapiro is certainly less optimistic about Bidvest. "They could do with some acquisitions."
Gardner lists Comair, which operates BA flights in SA, as another top pick. The airline has a record of 72 unbroken years of profit — almost the inverse of the state-owned SAA.
For the year to June, Comair reported a bump in revenue to R6.5bn, and the highest profit in its history of R325.6m — despite a 14.2% hike in the price of fuel.
"Most investors would be wary of airline stocks, especially in a high oil-price environment in a country with a fundamentally weakening currency — [which] explains the low p:e that this company trades at," Gardner says.
But the financial results underscore Comair’s ability to deliver even in a hostile operating environment.
Comair is also claiming R2bn from SAA in damages for anticompetitive conduct. If it wins, it plans to distribute half to shareholders — which suggests a special dividend may be on the horizon.
Bidvest owns 27.2% of Comair too, and this is one of the stakes — along with the 38.4% it owns of pharmaceutical company Adcock Ingram — that it plans to sell.
Gardner says any recovery in the rand or drop in the oil price will boost the airline’s share.
If that happens, plenty of industrial shares could get a boost, too. Which would be a nice reprieve from the grim news in the sector over the past year.