BROKERS’ NOTES: Buy Mr Price, short Sun International

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

Buy: Mr Price

Weakness in the share price has coincided with a trough in the business cycle, with consumer confidence and spending power under pressure amid higher interest rates, low economic growth and high inflation. We could see an improvement in conditions this year and while growth is expected to remain subdued, lower inflation and a reduction in interest rates could support consumer stocks.

The stock is trading on a forward p:e of 11.6, which is more than one standard deviation below its five-year average — indicating that the stock is looking cheap relative to its own history. While still trading at a slight premium to local peers, the premium has narrowed substantially over the recent credit cycle (a tough consumer environment favoured credit retailers). The technicals also seem to be lining up. The share remains above its 200-day and 200-month simple moving averages and the moving average convergence/ divergence indicates upside momentum. The current relative strength index reading is 51 — confirming that sentiment around the name has improved.

We would be comfortable taking a long position at current levels and would increase exposure for a break above R169. Our upside target is R213 (+35%) with a stop loss recommended at R135.

Short: Sun International

We still like Sun International from a long-term perspective — international travel is booming despite a slowdown in global growth and South Africa remains an attractive holiday destination complemented by a weak currency. Domestic travel has also held up well despite a slowdown in economic activity and pressure on disposable income. We think an improvement in local and international conditions next year could provide further thrust in the travel and leisure space.

However, Sun’s recent announcement of a potential tie-up with Peermont has given us pause. While the merger makes sense longer term and could unlock substantial efficiency and synergy over time, there is execution risk in an acquisition of this magnitude. Sun will be regearing its balance sheet, which adds liquidity risk and reduces room to manoeuvre in the event of a major external shock. We think the share price may be under pressure until the deal is finalised, and perhaps even some time thereafter, as investors assess its performance.

Technically, momentum is to the downside. Increase short exposure for a break below R38. Our target price is R35 (-9.6%) with a stop loss recommended at R42.