Tuesday, 13 March 2012 - 20:00

 

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Basic Share Selection ? Tiger Brands vs. Nampak

When it comes to selecting shares to construct your share portfolio, several factors can be used to evaluate shares for inclusion. At Seed our Model Portfolio has a tilt towards value shares, buying shares with dividend yields higher than the market and PE ratios lower than the market average. Our process also favours shares where earnings and dividends are expected to grow in future.

When deciding between two shares, an investor first must decide which criteria to use to provide the best indication of the return that can be achieved, and then compare the universe of shares using these criteria. There are always shares with compelling stories making headlines, but as a rational long term investor fundamental factors and ratios should be the main drivers behind your share choices. The two factors most familiar to investors are probably the Price Earnings (PE) ratio and Dividend Yield (DY).

PE ratio

The PE ratio is calculated as the current market value per share divided by the company’s earnings per share over the past twelve months. A further variation on this figure is the forward PE ratio, which uses forecast earnings over the next twelve months in the calculation. Using forecast earnings to calculate a PE ratio is not as reliable as using actual past earnings data, because forecasts can be inaccurate (especially at turning points). However, the forward PE has a prospective nature, which can sometimes be more useful to evaluate the share’s future performance.

Dividend Yield

A share’s dividend yield is calculated very simply as the annual dividend received per share divided by the share price. A healthy dividend yield is an important factor for investors that rely on dividends as an avenue of income. Although large and consistent dividend declarations are often regarded as a sign of a company’s good financial health, some companies may have very valid reasons for not declaring dividends, e.g. setting profits aside for expansion or acquisition activities. The forward DY can be calculated on a similar basis, but using an estimate of the next 12 months’ dividends to create a prospective measure of the DY.

Tiger Brands vs. Nampak

Nampak Ltd (NPK) and Tiger Brands Ltd (TBS) both form part of the Industrials super sector on the JSE, and although very different in operations and market capitalisations they can still be compared on a PE and DY basis.

Nampak was listed in 1968 and has grown to be Africa’s largest and most diversified packaging company through various acquisitions. It produces packaging products for various products from metal, paper, plastics, and glass, and also collects and recycles used packaging.

Tiger Brands was formed in 1952 with the launch of Tiger Oats, and has grown to become one of SA’s largest consumer goods companies. The company owns a wide assortment of brands including Purity, All Gold, Energade, Beacon, and Albany.

These companies’ share data as on 05/03/2012 can be summarised as follows:

Tiger Brands’ share price has increased by 46.1% over the last 12 months, pushing the PE up to 16.8 which is well in excess of the JSE ALSI PE of 13.3. The forward PE of 15.3 implies 9% earnings growth in the next year.

On the other hand, Nampak’s share price has not run as hard over the past 12 months, increasing by only 8.6% but showing strong growth over the last 30 days with a 5% increase. The PE of 13.7 compares favourably to the ALSI, and the forward PE is a further 14% lower at 11.8. This is a very reasonable price to buy into a quality company. On the dividend yield side, Nampak has the upper hand with a 4.6% yield compared to Tiger Brands’ 3.0%. Both companies have a DY in excess of the ALSI (2.8%).

Conclusion

Tiger Brands has rewarded investors with phenomenal growth over the past 3 years, but given the high current PE and modest DY we believe that there are better buying opportunities out there. Seed has recently included Nampak into our model portfolio, at the expense of Tiger Brands, as the current valuations are very favourable and we believe that further growth in earnings can be expected as SA’s manufacturing sector grows.

Kind regards,

Cor van Deventer
info@seedinvestments.co.za
021 9144 966

Tue, 13 Mar 2012

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