SHARE WATCH: Spotting the gems in tough economic environment

Cape Town - Overberg Asset Management share analyst Kirk Swart looks at South African companies that are performing despite tough current economic conditions in this week's share watch.

PPC [JSE:PPC]

The South African market leading cement maker, PPC Cement [JSE:PPC], managed to increase group revenue for the nine months to December 2017. This happened amidst the company fighting off four potential buyers, one of which was the global cement producer, LafarageHolcim.

Some analysts believe that all the legal costs associates with the takeover bids impacted the bottom line materially. Despite the added costs, revenue raised.

A lack of infrastructure projects in South Africa continues to hamper volume growth in South Africa. Any good news relating to infrastructure spend will be very positive for PPC.

The rest of Africa has seen significant growth in volume. Finance Minister Malusi Gigaba announced last week that municipalities have underspent on their infrastructure budgets. If the new ANC regime can deliver on its growth plans, PPC stand to benefit greatly from such infrastructure spend.

Hudaco [JSE:HDC]

Hudaco [JSE:HDC] continued with their bolt-on acquisition strategy. In a tough operating environment, which Hudaco experienced over the last few years, these acquisitions can keep a company going. Following the ANC elective conference, companies like Hudaco stand to benefit from the improved economic optimism.

The CEO, Graham Dunford, mentioned on Friday that the improved optimism will lead to more investment by key customers.

The company spent R210m for the year ending November 2017 on acquisitions and decreased debt by R45m. Revenue grew by 6.6% and headline earnings by 2.8%. The dividend rose by 7%.

Arrowhead [JSE:AWA]

The share price of Arrowhead [JSE:AWA] came down from a high of R9.55 in March 2017 to R6.56 today. It is a drop of 31.3%. Arrowhead singled out the weak trading conditions and political uncertainty as the reasons why dividend growth in 2018 will be reduced by 6.5%. Vacancies increased from 7.8% to 12.1%.

If the slow market conditions weren’t enough, some property companies, including Arrowhead, are starting to face criticism over their remuneration policies.

Nearly 25% of the shareholders voted against their remuneration policy at Tuesday's meeting. There is a feeling among those shareholders that long-term share incentive schemes were not subject to performance conditions. 

Whether or not these criticisms are valid will be determined in time. A rising tide lifts all boats. Should Cyril Ramaphosa wake the economy up from its deep sleep, expect less concern from shareholders around remuneration policies.

Shoprite [JSE:SHP]

Good news for South African food retailers is that food price inflation has declined significantly. The food component of the PPI slowed to 1% and CPI decreased to 4.9%. This is welcome relief for the South African consumer who saw food inflation at 10% in February 2017.

Companies like Shoprite [JSE:SHP] will see a pick-up in volume sales should the lower food prices continue. In a recent operational update, the Shoprite Group increased turnover by 6.3% for the six months to December 2017. Revenue numbers might very well look better in 2018 should food inflation keep stable and the economy gathers momentum.

FirstRand [JSE:FSR]

During the month of December, households and businesses borrowed more than expected, above economists’ expectations. Private sector credit extension grew by 6.72% to R3.5trn.

This is an increase on Novembers 6.48%. With interest rates likely to come down later the year, one can expect the private sector credit extension growth to drive volumes at banking groups such as FirstRand [JSE:FSR].

FirstRand trades via companies such as FNB and Wesbank. Even though new vehicle sales declined by 8.9% in January, Wesbank can expect a good 2018. The January slowdown is ascribed to Volkswagen SA building up production following a year-end switch to a new Polo model and the General Motors disinvestment.

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*Kirk Swart is an analyst at Overberg Asset Management, an Authorised Financial Services Provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.

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