Best of Finance Ghost - What local stocks are moving?

There's a new listing on the block and it will come after the Barloworld Limited unbundling. In this week's ghost bites, Finance Ghost (one of South Africa's loved market analysts) takes a look at: 

• Bidding on Bidcorp and Bidvest
• Following the recent spike, how much higher can City Lodge go?
• Banking on the banks
• There’s a new listing in town

Bidcorp and Bidvest 

Bidding on Bidcorp and Bidvest

Much like Grindrod and Grindrod Shipping, you need to be careful when looking at Bidcorp and Bidvest. It’s easy to get confused.
Bidcorp is a global food service business that has managed to grow on almost every continent. With a diverse client base and a business model that is highly lucrative, Bidcorp tends to trade at high valuation multiples. This is half the problem.

Bidvest incubated Bidcorp before it was spun-off to become a separate listing (much like Barloworld is doing with Zeda). There are numerous remaining businesses in Bidvest, ranging from cleaning services through to freight and financial services businesses.

Other than the first syllable in the name, the companies have something else in common: the ability to bank a strong financial performance in difficult times. Bidcorp has bucked the trend by growing its margin in the past few months despite consumer pressures and all the difficulties facing restaurant and hospitality clients in Europe. Bidvest has also put in a solid margin performance, with a focus on managing return on capital for shareholders. This is exactly what you want to see in tough times.

The year-to-date winner is clear: Bidvest is up more than 18.5% and Bidcorp is only 2% higher despite a meteoric rally this month. As is always the case, the valuation matters. Bidcorp is back to being priced for perfection in my view, with more downside risks than obvious upside potential in the share price.

As for Bidvest, there are reasons to think that the core businesses can continue to perform well. If I were forced to pick one, I would choose Bidvest to continue outperforming Bidcorp over the next year.

 City Lodge Limited 

How much higher can City Lodge go?

The terrible lockdowns of 2020 almost feel like a lifetime ago. China is still living that nightmare, with most of the rest of the world having moved on to other problems like a lack of electricity or a politically charged FIFA World Cup.

The damage done to City Lodge may never be fully recovered, with a share price at the start of 2020 of R14.70 and current levels just over R5. This is despite a strong recovery in the business, with key metrics running ahead of pre-Covid levels.

The problem is that there are many more shares in issue now than there were at the start of 2020. This is the result of nasty, highly dilutive equity capital raising efforts that were necessary to unwind the B-BBEE structure and keep the lights on during the pandemic (Eskom permitting). A 13-for-1 rights issue is no joke!

When the number of shares has changed materially, it’s more helpful to look at market capitalisation (the share price multiplied by shares in issue) rather than just the share price. This gives a better sense of whether the valuation of the underlying business has recovered.

City Lodge’s market capitalisation has returned to pre-Covid levels, which makes sense in the context of the company’s latest announcement. Occupancies are in line with 2019 levels and in some cases ahead of them, with the added benefit of higher room rates than in 2019 thanks to inflation.

Hotel groups have high levels of operating leverage (a significant portion of fixed costs in the cost base), which means the good times are great and the bad times are terrible. With November occupancies looking strong and the outlook for December getting the market excited, the question is whether the market has now fully priced the recovery into the share price.

City Lodge bulls don’t think so, citing significant strategic steps forward like an enhanced food and beverage offering that has helped reposition the hotels away from being purely for business travel. Bears are pointing out the full recovery in the market capitalisation to pre-pandemic levels, which suggests that the rally may run out of steam.

With a return of nearly 40% since the end of September, it’s probably not wise to chase this one if you missed out on it.

Standard Bank Limited

Banking on the banks

With higher interest rates and growing corporate balance sheets in inflationary conditions, 2022 has been kind to those who invested in banks. Standard Bank is up 26% this year, well ahead of FirstRand but slightly behind Absa and Nedbank. In a celebration for value investors, the “cheap” banks were the ones you wanted this year, with Capitec slightly in the red year-to-date.

The recipe is simple…

Higher inflation means more capital is needed by companies to support their growth. This capital is financed as a mix of debt and equity to achieve the appropriate risk-return trade-off for investors. At consumer level, demand for credit increases as consumers come under more pressure. An increase in real asset prices like cars and houses also means that consumer demand increases.

Demand for credit is the lifeblood for banks, with the added bonus of higher interest rates meaning that the banks can make more net interest margin on each rand that flows out the door to a borrower.

More credit + higher rates = happy banks.
Of course, the party can stop abruptly if a severe recession hits, as a sharp increase in the credit loss ratio can quickly erase the gains made in net interest margin. In a trading update covering the ten months to October, Standard Bank confirmed ongoing growth in the core lending business and (perhaps more importantly) gave an outlook for the full year numbers that reflects the credit loss ratio being in the lower half of the through-the-cycle target.

Despite the near-term economic risks, Standard Bank is aiming to ramp up return on equity from the current levels (mid-15%) to between 17% and 20% by 2025. If this can be achieved, the price-to-book multiple is likely to increase, thereby turbocharging returns to shareholders.

Although nothing is ever guaranteed in this world, one of South Africa’s best economic characteristics is the strength of our banks.

Barloworld Limited

There’s a new listing in town

JSE investors tend to be starved of new listings. The JSE has been suffering far more delistings than new listings every year, giving us an ever-shrinking universe of companies to choose from. Although this trend will slow down at some point, it’s still worth celebrating every new listing and the opportunities that they bring.

Having said that, I avoid new listings as a rule. Although an unbundling isn’t the same as an initial public offering (IPO), there’s the risk of market exuberance creating a frothy share price that goes on to disappoint investors.

Zeda will be the new kid on the block in December and those wanting to do detailed research will be thrilled to learn that the company’s pre-listing statement is now available.

This gives all the important information needed to assess this group that includes the Avis and Budget businesses. Barloworld is unbundling Zeda to its shareholders during December, giving the JSE investor universe a lovely Christmas present to end off the year.

With a fleet of 33,000 vehicles across the rental and leasing businesses, along with a further 215,000 vehicles being managed by the leasing business, Zeda is a group of great substance. Revenue for the year ended September was over R7.6 billion and EBITDA was nearly R2.2 billion, so there’s plenty of meat on the bones here. With more than 58% of shares in Zeda to be held by the public (loosely defined as the people who are likely to trade in the shares vs. long-term strategic holders), there will also be no shortage of liquidity in this stock.

With a variety of mobility solutions offered across several countries in sub-Saharan Africa, Zeda brings pure-play exposure to this industry to the JSE. For Barloworld, this is another example of how the company is actively managing its balance sheet and its investment portfolio to try and maximise value to shareholders.

I’m just happy to see a new name on the JSE, even if the confusion between Zeda and Zeder is likely to join the Bidvest/Bidcorp party!

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Read: Can Berkshire Hathaway Ride Out a Recession?

Sources – EasyResearch, Finance Ghost