BROKERS’ NOTES: Buy Pepkor, sell Thungela

Mark du Toit, portfolio manager at OysterCatcher Investments, on what the smart money is doing

BUY Pepkor (PPH)

Fashion and accessories retail conglomerate Pepkor — which owns well-frequented chains such as Pep, Ackermans, Shoe City, Dunns, Tekkie Town, Sleepmasters, Incredible Connection, and HiFi Corp — is a great business with a good management team.

The Pepkor share price is 12% lower year to date, offering a good entry point for investors. The business is largely defensive and will benefit from the current real wage growth in South Africa, with consumers having more to spend, particularly at the iconic PEP stores. Long-term growth is expected to come from its promising expansion in Brazil, where the group is looking to replicate its successful South African business model. Now, the share trades at an undemanding price-to-earnings multiple of 16 — which is reasonable for a company that can grow earnings above 15% per year.

SELL Thungela (TGA)

Thermal coal business Thungela, split off from mining giant Anglo American in mid-2021, went from ugly cast-off to market darling in little over a year. The group’s share price rocketed from about R22 at the time of listing to a record high of R377.52 in mid-September 2022.

But things have changed of late. Thermal coal prices have fallen steadily from last year’s peak of $117 a ton to $89 a ton. This will halve Thungela’s earnings, even though the rand has weakened against the dollar. The fall in coal prices can be attributed to the increased operation of nuclear power plants, particularly in Japan, combined with higher coal production from Indonesia. Thungela does have sufficient cash reserves to weather the lower coal price, but there is a risk that the current share price is not correctly reflecting the lower coal price.