Plenty of room for profit in hotels and leisure
THE 40% drop in the beverages, hotels and leisure sector over the past four months has left many of the sector's shares offering incredible value. But not all are a buy.
BOE Securities reckons Avis, Fedics, Rebhold, Sun International Southern Africa (Sisa) and Teljoy are a buy, but ABI, Kersaf and SA Breweries are a hold and City Lodge, Distillers, KWV and SFW are a sell.
While there is a trend now to buy human capital and blue-sky potential, BOE Securities uses the traditional investment policy of buying "well-run companies with solid growth prospects that also offer resilience during a recession".
In the four months to mid-September, the sector dropped to levels last seen in 1994, with PE levels last seen in 1985.
A report by BOE Securities analyst Wynand van Zyl says Avis leads in market share and exposure to inbound travellers. "With financing rates at 17.75%, Avis is earning exceptional profits as fees are tied to prime rate."
He says more than 55% of Fedics' income is annuity based, it is sitting on cash and achieves a return on equity of 48%. It is not a glamour stock, is ignored by investors and trades at a 26% discount to the industrial index.
Rebhold has a premium rating to the industrial index, which BOE Securities says is justified by growth prospects and a belief that management can maintain the momentum following the acquisition of Jumbo Cash and Carry and interest on its net cash of R354-million.
Teljoy, which derives 76% of turnover from cellular services, is at a discount to the index although earnings growth is expected to outperform market averages. Van Zyl says growth in cellphone subscribers and prepaid Vodago cards is likely to exceed 15% a year. "We cannot ignore this strong management team and net cash of R163-million."
Prospects for Sisa, which gets 71% of revenue from gaming, depend largely on the impact of new competition in the gaming market, but BOE Securities believes its share price fall has been overdone, and puts its tangible net asset value (NAV) at 274c, a 282% premium to its ruling price.
Sisa is the major contributor to Kersaf's earnings, but Van Zyl recommends a hold, and not a buy, for the parent, saying its earnings growth will be affected by what happens to Sisa. Kersaf was, at R17, trading at a 44% discount to NAV, and cash (R1-billion) comprises 70% of the ruling price. He says growth-oriented investors want a share that does not face an uncertain trading environment.
SAB, recommended as a short-term hold and long-term buy, has never reported a decline in earnings a share. BOE Securities has revised its earnings forecast downward, expecting it to report 13.3% higher earnings in financial 1999. SAB's share price is a barometer of overseas confidence in SA.
Like SAB, ABI is cheap relative to its international competitors, but BOE Securities reckons other shares offer better value. Gearing will be affected by high interest rates, and the company will also feel the effects of weaker demand and a 30% dilution in shares.
City Lodge, which BOE Securities thinks is a sell, is well managed, but operates in an industry where there is oversupply of rooms and weak growth in domestic travel. City Lodge has occupancies of 73% against an industry average of 52%.
Distillers faces high excise duties and prospects of pedestrian earnings growth. Van Zyl says the declining share market may see SAB dispose of its 30% interests in both Distillers and SFW.
On SFW, he says although it has been oversold, the rating is "justified by the disappointing performance in financial 1998 and a challenging trading environment".
Van Zyl also recommends selling KWV, which holds 30% in SFW and Distillers.