Chart Book and Outlook
Key message: Strong outperformance over the last six months, but in general still down from a year ago. The big movers were where balance sheet concerns drove down valuations – but we would be switching to the less-speculative better managed companies now. Gains in the second leg of a cyclical recovery are the domain of higher quality companies.
- As we move into 2021, we look at the performance of the Diversified Industrials through 2020 and make some adjustments to our recommendations after strong price moves.
- The sector has rebounded strongly over the past six months (outperforming the ALSI), although the 12-month performance is still mostly negative (underperforming the ALSI).
- The cyclical nature of the sector was highlighted through the Covid-19 lockdowns, with a number of large declines followed by significant recoveries in share prices.
- Balance sheet concerns was the primary driver of the volatility as some companies had to engage lenders for debt covenant relaxations.
- We can divide the sector along three main themes (with a direct link to volatility):
- Higher quality – Conservative balance sheet, more sustainable and stable businesses:
- Afrimat, Bidvest, Bidcorp, Cashbuild, KAP, Super Group, Raubex, WBHO
- Middle ground – High operational gearing, structural change in company or sectors:
- Barloworld, Invicta, Imperial, Motus
- Lower quality – Geared balance sheet, structural changes in business model and more cyclical businesses:
- Nampak, PPC
- We continue to lean towards the higher quality companies in our valuation ranking – there is still considerable gearing to an economic recovery in South Africa and relative outperformance is still possible.
- The Covid-19 impact seems to moved from lockdowns to disruption caused by high infection rates within companies. This could define the 1H CY21 results season as strong cost-cutting efforts implemented last year are impacted by these disruptions.
- The implementation of a global vaccination program in 1H CY21 should help some normalisation in 2H CY21, although this has likely been priced in already. However, valuations remain low in the Diversified Industrial sector and relative outperformance is possible should the economic outlook improve.