Moneyweb (Johannesburg)
Bruce Whitfield
1 October 2001
The terror attacks in New York and Washington nearly three weeks ago sent share prices on the JSE plummeting nearly 20%, but the 10% recovery last week is evidence that institutions have been seeing value in large cap shares, and have been snapping up bargains. With their attention now focused on larger companies, now could be a good opportunity to pick up selected small caps.
Before the attacks, institutional investors had been focusing much of their attention on sniffing out undervalued small caps, but since the massive devaluations in the wake of the attacks in New York and Washington, they have once again shifted their attention to hard hit large and medium caps.
But if you are looking for value in the market, advises John Biccard at Investec Asset Management, small and medium caps are still the way to go. "Small caps in South Africa= have more of a bias towards the local economy, and the larger caps more towards the international economy. After the events of 11 September the prospects for the global economy, which was slowing anyway, are substantially worse and only slightly worse for the small caps."
But do your buying on a stock-by-stock basis, rather than buying into specific sectors, and look at those with Rand hedge potential.
"I think both in large and small caps you want stocks that are earning dollars and their costs are in Rand. There are a number of small cap stocks like Grintek, Ocfish, and Rebhold which produce in Rand and sell in dollars, which are trading on low PE's with 4%, 5% dividend yields. While selling into the overseas markets will be a bit more difficult for them, it's more than offset by the Rand weakening by 15% over the last couple of months."
His view: If you are going to buy the following shares, they may lose some value in the uncertain times ahead, but even at current prices they are offering good value nevertheless.
Grintek: This electronics company is his favourite small cap share, trading on an 8 PE, and recently showed 35% earnings growth, but the big reason for liking the firm as it is set to benefit from government defence spending. "This is going to be a way of them getting into the long-term contracts with international arms companies. They've got a lot of intellectual capital, a lot of qualified engineers working there, and obviously they're a beneficiary of a weak rand with a lot of the contracts being priced in dollars. And to me it's a story of what can go right in a small local company that's stuck to its knitting and stuck with its competencies, and it's come through in the end."
Rebhold: One of the larger, more liquid small cap shares on the market, and according to Biccard, very cheap. "This is a stock that was R25 and everyone loved it. Now on one likes it at R7. It's got R2.50 of cash sitting at the centre, which they will use to make acquisitions, to buy back shares. Stripping out that R2.50 cash, you're buying the only really remaining business ... they're sold off a lot of the underperforming businesses ... the only business is Rebserve which is in the services business and that's only on an implied 5 PE. So it's not priced for very much and if they can get another contract like they did with Telkom, that 5 PE looks very attractive. "
Ocfish: At the current price it's still on nearly 5% dividend yield, 9 PE. The good thing about fishing is people eat fish. It doesn't matter what happens, and the regulatory risks have come down a lot. They earn a lot of their money in dollars. And doing a lot of exports. And the government are definitely more friendly towards the major fishing companies with black empowerment like Ocfish. It's got an unbelievable 10, 15 year track record ... it's the kind of stock, to me, that for the next six months you still want to have in your portfolio because it's really immune to a lot of the things that can go wrong."
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