• Alcohol & Tobacco
These are seen as defensive sectors and have been known to perform better than food in times of recession. The relaxation of alcohol sales by some countries in the SADC region from the beginning of June should see sales return to normal as people stock up after nine weeks of constrained supply. This will be a welcomed boost for alcohol makers and retailers.
One of our favorites to buy in this sector is Distell.
Distell is down almost 40% for the year to date. Its trading statement indicates a poor half year result to June 2020, headline earnings per share are expected to range between 391.7c and 522.3c.
We believe this will be the bottom of the cycle for Distell.
Management have implemented significant measures to ensure the balance sheet remains strong with extensions of funding facilities and incentives for early payments from customers.
They will be offloading two premium wine farms to unlock value and bolster the balance sheet.
Buy Distell below R76 for a move back above R100 by year end.
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• Oil and Telecoms
The next theme is Oil, including stocks that will benefit from a recovery in the oil price.
Today’s buy straddles both the Oil and Telecoms theme of last week and the oil theme this week.
The company is MTN, who’s share price is discounting far worse news than what can be expected.
Following a dramatic sell off in April during which some Oil futures traded in the red, oil prices have recovered boosting the revenues of the regions in which MTN operates, namely Nigeria and the Middle East.
A long run Oil price above $35 per barrel is expected as most of the industry isn’t viable below this price.
MTN’s first quarter trading update was positive. Revenue grew 11.1% year on year in constant currency terms.
The business has a few positives that could be realised in the near term, that would see the share rally.
The most important will be its potential dividend from Nigeria of $131 million and R2bn fund raise there.
Other things in the pipeline are the listing and subsequent sale of IHS Group that forms part of the R25 billion asset realization strategy and a reduction in Capex of R6 billion due to Covid-19 delays.
These should allow it to maintain its dividend and grow it by between 10% and 20% per year.
It’s on a historical dividend yield of 10.9% with a forward dividend yield of just over 12%. And there should be some decent capital growth as the global economy recovers towards next year.
Buy MTN below R52.50 for a rally above R75.
See you next week.
Contributing Editor, Money Morning