BROKERS’ NOTES: Buy Standard Bank, sell BHP

Mark du Toit, portfolio manager at OysterCatcher Investments

BUY: Standard Bank

Leading indicators continue to highlight that the South African economy is at its highest level in nine years. The latest inflation print of 2.9% bodes well for further interest rate cuts, which will further stimulate the economy.

This is a great economic backdrop for banks to grow their lending books and earnings. Standard Bank has the scale in both retail and commercial banking in South Africa and elsewhere in Africa, where GDP growth is also recovering. The bank has also made good progress in modernising and simplifying its IT systems and continues to invest to improve its cost-to-income ratio, which is a good measure of a bank’s efficiency.

We expect Standard Bank to grow earnings faster than nominal GDP and the return on equity to improve towards the top of the bank’s target range of 17%-20%. This, coupled with a forward dividend yield of 6.5%, makes for an attractive investment opportunity.

SELL: BHP

BHP is a well-run global mining company. It generates the majority of its earnings from iron ore, copper and its major new project, potash (fertiliser). The company has benefited over the past 30 years from the large expansion of property in China, as iron ore is one of the major components of the steel used in buildings. This property boom has come to an end, with the Chinese government now more focused on stimulating domestic consumption than on property expansion. Reduced demand for steel, together with growing iron ore supply from West Africa, will keep the iron ore price under pressure, which will lead to lower earnings for BHP and lower investor returns for shareholders.