Our selection reflects a leaning towards higher growth and quality stocks in an environment where growth is under pressure, particularly for SA Inc. companies.
Momentum (MTM): Last year Momentum specified aggressive growth targets to 2027, which implied growth of c17% p.a. It is tracking ahead of these targets thanks to a turnaround in some of its businesses (health and short term insurance) and a strong focus on driving efficiency in its local operations. Allied to this is an emerging growth vector through its Indian health insurance investment. On our metrics it scores particularly well on growth and quality.
Clicks (CLS): Clicks is one of the highest quality stocks on the JSE with a ROE of 52%, strong cash generation and a high level of earnings certainty. Clicks continues to show solid real growth, largely through expansion of its store network, where we believe it still has runway, and an improved performance from its distribution business.
OUTsurance (OUT): OUTsurance appears slightly expensive relative to the JSE, but we believe it will maintain its premium rating and its performance will be underpinned by market share gains in Australia and continued strong cash returns in its SA business. OUTsurance has an ROE of 34%, supporting its quality rating and a strong growth rating due largely to the strong growth in its Australian operation. We are cognisant of the potential volatility in OUTsurance’s earnings that may be caused by climate related events, but we see management as well prepared to manage through these events.
Capitec (CPI): Capitec continues to grow strongly through development of new business initiatives, such as insurance and its sale of value-added services, and through the broadening of its banking offering, e.g. growth in business banking. It has one of the best growth profiles on the JSE and its quality is underscored by its high ROE (29%). Its valuation looks expensive compared to other SA banks, but there is an argument suggesting its valuation is not inappropriate for a fintech platform business.
Life Health Care (LHC): Life Health Care has made some bold capital allocation decisions over the past few years, selling its international operations and returning funds to shareholders. This contributes to an improved quality rating and we see its renewed focus on its SA operations as positive for growth, which is underpinned by selective hospital development (investing R2bn in expansion projects) and a continued improvement in paid patient days (up 2% in its interim results to March).
