BROKERS’ NOTES: Buy Calgro M3, sell Dis-Chem

Alex Duys, portfolio manager: Umthombo Wealth 

Buy: Calgro M3 

The business model has inherent risks and is not everyone’s cup of tea but the share is misunderstood and below the radar of most institutional asset managers — which creates the opportunity. The last set of results was excellent, the balance sheet is the strongest it’s been in a long time, management has found its mojo again and, most importantly, the guidance it is giving on cash flows is exceptionally strong. It’s saying it can fund all developments with cash next year, including Frankenwald, it’s bought back shares and it’s looking to reinstate a dividend. The price offers an excellent entry point now.

Sell: Dis-Chem

The valuation is far too high considering where the rest of South Africa Inc is trading. Its growth numbers are looking very pedestrian for the next couple of years, if not downward, and I’m not convinced by the huge expansion drive. To double the store base is very ambitious considering where we are. Then there’s the potential diesel costs — as with all retailers. The more these guys expand, the more costs they put onto the income statement. The business has negative operational leverage. There are far more compelling opportunities out there.