SBy Craig Pheiffer, Chief Investment Strategist, Absa Stockbrokers & Portfolio Management
Anheuser-Busch InBev (AB InBev)
Global brewing giant AB InBev took on a substantial amount of debt to acquire SABMiller for over $100bn in 2016 and at the last reading the group debt stood at $108bn. When calculating the ratio of debt to earnings, the company’s net debt/EBITDA ratio stands at a whopping 4,9x. Anything above 2x would raise analyst questions but with the great cash flow generation of the company the 4,9x should be whittled down to 2x over the next two to three years. While the company digests the SABMiller deal (and generates the proposed acquisition efficiencies) no further large deals will be contemplated. The Board cut the dividend payout recently in order to redirect some of the cash flows to debt reduction, which left AB InBev as an average dividend-payer rather than a great dividend-payer. The strength of this global company, which produces seven of the world’s top ten beers, is in its margins and cash flows and investors just need to bide their time before the company supplements its organic growth with further acquisitions. The Brussels listing has fared a lot worse than the American listing, as the euro has lost ground to the dollar and that has left the European and South African listings of AB InBev looking attractive.
From being a debt-ridden company with a narrow focus on the graphic paper used in glossy magazines and the office photocopier, Sappi has burst through its debt shackles to be a global force in the wood fibre market as well as the packaging and specialty paper market. Sappi is the world’s leading producer of dissolving wood pulp, the cellulose used in clothing and textile production as well as food, pharmaceuticals and other household products. Sappi’s products are sold in over 150 countries with almost half of its sales (48%) generated in Europe (SA and North America each contribute 26% of group sales). Printing and writing papers still contribute 62% of group sales but only 29% of group operating profit. Specialised cellulose accounts for the largest share of operating profit (54%) with specialties and packaging papers contributing the other 17%. After production issues affected recent earnings results, better earnings growth is in prospect in the year ahead. With a 3% plus dividend yield and a Bloomberg consensus forward P/E just below 8x, the company looks to have a good margin of safety in terms of its valuation and that is this company’s attraction.
Pick n Pay
While consumers and households are not expected to suddenly be revitalised in 2019, some retailers stand out above the others at present. Pick n Pay has moved to refocus itself and catch up with its peers in terms of fresh produce and an efficient distribution network. This has been a work in progress for many years and there were many years of investor disappointment. The tide has been turning recently and the company’s own successes have been supplemented by some stumbling by its peers. The net effect is that Pick n Pay has been gaining market share from perennial market-leaders Shoprite and Woolworths. This is one company that is still expected to report a compound annual growth rate percentage over the next three years in the teens with a dividend yield above 3%. The company has frequently traded at a premium valuation to the market but at current levels it’s looking a lot cheaper relative to its own historical valuation of the past five years.
After flying high in 2017, making a record high above R4000, unbundling Novus and returning over 70% to shareholders, 2018 was something of a disappointment for Naspers as the share gave back a small part of 2017’s gains. Much of the decline in the Naspers share price could be attributed to the fall from grace of China-listed Tencent which makes up over 100% of Naspers’ sum of the parts valuation. Tencent came under the whip as earnings slowed on the back of Chinese regulators tightening up on new games releases. This limited Tencent’s ability to launch and monetise new games and keep the earnings momentum going. This regulatory barrier is unlikely to be overcome soon and will impact short-term earnings growth. Nevertheless, it should be lifted in time and while there may be an industry stockpile of new games for the regulator to review, that earnings channel should see accelerated growth again in time. The story of 2018 for Naspers though was more one of an inward review of operations and a sharper focus on unlocking the value trapped in the so-called “rump” (Naspers’ own businesses). To this end Naspers took the decision to unbundle Multichoice in 2019 to become more of a focused internet investor and player. During December, Naspers listed on the A2X exchange and is continuously looking at ways to reduce the significant discount that Naspers trades at to its net asset value. This sharp and ongoing management focus and the prospect of better Tencent earnings growth in time still make this a share to own.
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