Five Shares: Fortune can favour bold, but don’t throw caution to the wind
CAPE TOWN – The FTSE/JSE all share index was marginally stronger over the past week in line with the gradual firming of global stock markets, as global investor sentiment remained intact on optimism that the global economy was recovering as economies reopen after Covid-19 pandemic lockdowns.
The positive sentiment was also despite the further souring of relations between the US and China, after China’s leaders approved controversial security legislation for Hong Kong following widespread unrest in the former British colony.
There was good local news for JSE-listed shares in the past week, with a one percentage point interest rate cut that brought the repo rate to its lowest in 40 years at 3.5 percent, and the further opening of the economy with the easing of the lockdown to level 3 from today.
Countering this is a R1.16 a litre hike in the petrol price on Wednesday. Brent crude rose sharply from $19.33 a barrel in April to $36.17 this month and the recent strengthening in the rand was not enough to counter the increase.
The big problem is nobody knows how the economy will perform when it reopens fully, how long the Covid-19 virus will continue to affect the economy and what its eventual full impact will be on the economy.
Add to that South Africa’s multiplicity of structural economic, fiscal and socio-economic woes, and it becomes a heady brew of risk to consider buying locally-focused shares.
Blue chip logistics, vehicle services and heavy equipment group Barloworld indicated last week that it was taking no chances, and said it planned substantial retrenchments to prepare it to trade profitably in the changed environment, this in spite of a robust balance sheet.
Its share price was down 1.49 percent to R67.24 on Friday. It had been steady through May and April, but its share price has steadily fallen by half over most of a year from a 12-month high.
The share price seems inexpensive as the price:earnings per share is around 6, well down from the All Share Index average of 15.
But retrenchments are a last option, which means its management are spooked, and in that case I would probably hold off buying the shares until further clarity is obtained about the group’s prospects.
Afrimat, a strongly performing industrial minerals, bulk commodity and construction materials mining company, last week announced a bid to acquire the remaining more than 70 percent in Unicorn Capital Partners, that it does not already hold.
Afrimat also has a strong balance sheet, and its putting it to good use for opportunities. The deal should give Afrimat access to the Nkomati Anthracite mine, and will bolster the groups’ bulk commodity segment. Afrimat has good experience turning unprofitable businesses around, and there is no reason why it should not do so with Unicorn.
Afrimat’s share price gained more than 24 percent last week, to trade at R31 on Friday in evidence that fortune does indeed favour the bold.
The SA Reserve Bank’s release of its bi-annual financial stability review last week was an eye-opener not in terms of acknowledging that the sector is reasonably structurally sound and profitable, but in terms of what it warned might be lying ahead in the next few months.
Rising non-performing loans, an increase in the cashing in of investments, lower credit extension, rising insurance lapses, low interest rates, higher insurance claims for death and morbidity, and dysfunction in the bond market. This could well mean that financial sector share prices will also come under increasing pressure.
Standard Bank’s share price was 1.62 percent lower on Friday at R100.42, FirstRand was down 1.06 percent to R40.03, Nedbank Group fell 1.9 percent to R98.76 while Absa’s share price declined 2.39 percent to R81.96 by Friday afternoon. The Financial 15 index was down just over 2 percent from Wednesday’s close.
On the subject of China, Kumba Iron Ore’s share price surged 6.82 percent to R481.39 on Friday, making it the biggest upwards mover on the JSE on Friday. Kumba is another group with a robust balance sheet and probably sitting on enough finished stock to take it through the lower production period of the lockdown.
Iron ore has been surging in recent weeks due to stronger demand from a fast-recovering China, and lower exports from Brazil due to the impact of Covid-19. The price:earnings per share on Friday was low at 8.
African Rainbow Minerals, with platinum, copper, iron ore, and nickel interest and which was also sitting on enough of an iron stockpile to see it through the lockdown, was the second-biggest mover on the JSE on Friday, rising 4.2 percent to R171.09. Recent gains in the copper and platinum price in dollars will also have added to ARM’s lustre