BROKERS’ NOTES: TFG says hello to a good buy

Buy: TFG

TFG could benefit from easier consumer conditions near term. October and November were strong — benefiting from the introduction of the two-pot retirement system (end-September), lower interest rates and easing inflation, as well as a Black Friday weekend that fell after payday. The momentum has continued. Statistics from Stats SA show category growth of 10.4% for clothing and 8.5% for furniture in January. We like the business relative to its peer group; it’s the market leader locally in quick response with a design and manufacturing capability to lead from a stock perspective. Geographic, product and diversification across target markets adds a defensive component. Management has a track record of bedding down complex acquisitions and has shown good organic growth in existing franchises. The outlook is solid — with mid-teen earnings growth expected over the medium term, supported by mid to high single-digit revenue growth and margin expansion. The biggest risk is if the recent sharp deterioration in consumer confidence has an impact on spending. TFG has derated year to date and now trades on an undemanding forward earnings multiple of 10.3 — an uncharacteristically deep discount to its peers. 

SELL: Outsurance

 The stock has returned more than 70% over the past year, supported by continued delivery from a financial and operational perspective that drove a strong valuation rerating from a forward earnings multiple of about 18 this time last year to 24 now. This valuation level is close to two standard deviations above the five-year average forward p:e and represents a large premium (more than 100%) to its local and international short-term insurance peers. This is despite more benign growth predicted by analysts for the next few years. The stock seems to be forming a “double top” pattern, which could hint at a bearish reversal near term. There is key Fibonacci support for the stock at R69.80, R66.60, R65 and R63.30. A break below R63.30 could see the price fall back to R54. We will watch these levels closely to potentially enter a new long position at a more favourable fundamental valuation level as we still like the stock long term.