4 Stocking fillers from Adrian Saville

Adrian Saville, CIO of Cannon Asset Managers, suggests shares to buy with your December bonus

  1. I have been using the Samsung I9000 Galaxy for the past year and I am hooked. Given the incredible agility and resilience of this device, together with its affordability, it is a new must-have.

    In a way, the Galaxy represents everything that is right about Samsung, the company, at present. Over the past fifteen years, the company has reinvented itself from producing cheap, second-grade goods in the 1990s to being a leading electronic goods firm today. I predict that the next step for Samsung will be to start writing code, which is likely to be another big industry disruptor.

    Chairman Lee Kun-hee, on returning to Samsung following his brief imprisonment due to the Slush Funds scandal, was quoted as saying: “Over the next ten years, expect every one of our leading products to be obsolete.” This attitude demonstrates Lee’s attitude to running the business and the importance he accords innovation. It is how Samsung got ahead and is staying ahead.

    This is one reason I believe that Samsung represents a good buying opportunity. In addition, this is a highly competitive company, operating in a highly competitive industry, in a highly competitive region – South East Asia. Shrouded in global competitiveness, Samsung is likely to outperform pretenders to the crown.

  2. The BMW Group – one of Germany’s largest industrial companies – is a successful car and motorcycle manufacturer. It also represents an interesting investment opportunity. Financial stress in the euro zone has resulted in investors reacting negatively to the German-listed BMW. The share has slipped from a peak of €74 in mid-2011 to €43 in October 2011. It has since recovered to about €50, but that still is 30% off the high. On a 6.5 times trailing price:earnings ratio and trading at a little more than book value, a company of this stature is extremely appealing.

    Apart from being exceptionally well-established as a brand, BMW is attractively priced, has a robust balance sheet, good cash flow, pays dividends and has a world-class management team that has taken the firm through good and bad economic times. During 2011, BMW sales into North America rose by 17%, in part due to the relaunch of the X3. In the Asia-Pacific region, vehicle sales are 45% up on 2010 figures. Having overtaken North America in terms of sales, it is likely that in the next 24 months, the Asia-Pacific region will overtake Europe (excluding Germany) to become the most important market for BMW.

    Although a European company, over 50% of BMW’s revenue is derived from other markets, which investors need to take into account.

  3. Metair is an investment vehicle with a portfolio of companies that manufacture and distribute products destined, predominantly, for the South African automotive industry.

    Over the last ten years, while earnings have been volatile, Metair has grown operating profit at an average of 15% p.a. – not glamorous but a steady march upwards over a decade. The quality of the company is further underscored by a return on equity in excess of 20%. Moreover, with retained earnings exceeding shareholders’ equity the implication is that the company’s balance sheet has been funded by historical profits as opposed to debt or other outside capital.

    The stock is trading on a trailing price:earnings ratio of 8 times and a dividend yield of 4% with a balance sheet that is exceptionally strong. The company has no long-term debt and has more than R300m cash on the balance sheet. In the difficult economic setting, it also is comforting that interest cover is 30 times and the company is a consistent payer of dividends.

    Aside from the intrinsic value of the operating businesses that Metair owns, we also see exceptional value in the balance sheet of the business. Metair owns industrial property of some 227,000m2 that we value at as much as R750 million. This is a material component of Metair’s market capitalization of R2.7 billion.

    One guide to prospective returns is to know what insiders are doing. Of the last 120 director dealings, 106 represent directors buying i.e. 88% of the deals by those close to the business have been to purchase the shares.

  4. Our final stocking filler is Anglo American (Anglos) which has been undergoing thorough corporate streamlining that is progressing well. On this front, Cynthia Carroll is proving to be very effective is getting the firm leaner and more focused. She has demonstrated effectiveness and ability in managing the company. In 2009, she saw off the audacious Xstrata bid for Anglos. More recently, she has negotiated a sincerely good deal in acquiring the Oppenheimer’s 40% stake in De Beers for $5.1bn.

    Notwithstanding the failed Xstrata offer, Anglos remains a promising take-over target particularly as the company should soon be net cash positive. All debt should be extinguished by the sale of a 24.5% stake in its Chilean copper unit, Anglo American Sur (Sur), to Japan’s Mitsubishi for $5.4bn. And at this price, it places a value on Sur of $22bn, which is equivalent to 42% of Anglos’ market capitalisation.

    Just the holdings of Sur, Anglo American Platinum (79.7% held) and Kumba (65.3%) explain Anglos’, market capitalisation. This means that an investor will acquire all its other holdings “for free”, including the coals interests, which accounted for 22% of revenue in 2011, and Anglos stake in De Beers.

    If the advanced world does slip into recession, this would pose a greater threat to the oil industry than to other commodities, which would imply that BHP Billiton would be more vulnerable than Anglos. In addition, it is unlikely that China is going to experience negative economic growth in the near future, which provides a safety net for the base metal market and thus Anglos. Specifically, iron and copper account for some 50% of Anglos’ revenue.

    In sum, there are good reasons for Anglos to be on your shopping list. It is a world-class resource player which is attractively valued. The company is well positioned for a world which is migrating from traditional developed markets to the emerging markets and recent investor anxiety around resource companies places the business on an extremely attractive through-the-cycle valuation multiple.