As a tumultuous year winds down, Sanlam Private Wealth analysts look to the year ahead and choose the stocks they expect will offer the most value to investors.

In this article, we look at Alwyn van der Merwe’s stock picks for the year ahead.

I normally follow a particular approach to our annual stock picks. Over the years we’ve learnt that the one-year investment outcome of a limited list of shares can be very random, and I therefore pick shares using a combination of both valuation criteria and so-called momentum criteria – price momentum and earnings revision. This methodology differs somewhat from our normal stock-picking criteria where we pick shares for the long haul.

Looking back over 2016, the four stocks I picked at the end of last year all outperformed the market comfortably. Barloworld was the best performer with a total return over the year of 41.7%, followed by Sappi at 27%. Nedbank was up by 15%, and KAP by 8.5%. Our share selection methodology therefore seems to be bearing fruit.

Here are my picks for 2017:

Remgro – The Stellenbosch-based investment group gives investors exposure to listed assets such as Mediclinic and the First Rand Group, but also to a number of quality unlisted shares, which currently comprise around 22% of the net asset value (NAV) of the group. Historically, Remgro shares have tended to trade at an average discount to their NAV of 15%, and the current 18.25% discount to NAV is attractive compared to its own history.

Looking at the performance of the underlying shares, the Mediclinic share price had a torrid time over the past year as a result of one-off events, such as the Al Noor Hospitals Group transaction amounting to R788 million. Buying Remgro shares today will therefore provide investors with exposure to Mediclinic at a markedly reduced price, a quality unlisted portfolio, and a premium bank – First Rand – at an attractive discount.

Metair Investments – This share was down-rated significantly over the past two or three years, mainly as a result of a one-off retooling of Metair’s South African manufacturing facility and struggling European operations largely on the back of deteriorating political relations between Turkey and Russia. With these issues now in the past, ‘normal’ business conditions will restore Metair’s margins. As a result the share should re-rate on the back of better expected performance that the market hasn’t yet discounted.

Based on our research, we’ve estimated earnings per share of R1.50 for the 2016 financial year. For 2017, we forecast earnings per share of R2.44, which translates to growth of 62%. This puts the share on an 8 times forward earnings multiple, which is very cheap. If Metair’s operational results do turn around as expected, this share will certainly reward investors. 

Hudaco Industries – This business has been under pressure for a number of years, resulting from the slump in industrial production and in the mining industry since 2008. Despite tough business conditions, Hudaco has remained a well-managed company. The group has diversified its product range, making it less reliant on specific industries. Should we experience even a minimal recovery in the mining sector and industrial activity in South Africa, this share’s performance is likely to beat market expectations.

Hudaco is now trading at a forward earnings multiple of 8.7 times, which is a steep discount to the rest of the market. It is an unloved share in terms of its rating, which normally creates great opportunities for patient investors.

Barclays Africa Group (formerly ABSA Group) – Like other banks, Barclays/ABSA was under severe pressure until mid-2016 as a result of tough economic conditions. The market was also generally disappointed with management as the bank has lost prominent senior managers in recent years. The UK influence in the top structures was also concerning. The reduction of the Barclays shareholding in ABSA, and the resultant increase in local leadership, should lead to a narrowing of the discount at which the company is currently trading relative to other banks.

I believe Barclays/ABSA has managed the group’s bad debts reasonably well, for which it hasn’t received much credit. The share is trading at a forward earnings multiple of 8.3 times, which is a massive discount to the rest of the market. If the South African economy remains on its current modest recovery path, then this share is simply too cheap and should re-rate.

Alwyn van der Merwe is Director of Investments at Sanlam Private Wealth