Top 40 up 2.71% this year

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1 September 2015 Stock Select Monthly Risk Factor Industrial shares best performers in September TOP 40 STOCK PICK Top 40 up 2.71% this year Small Cap in Focus Also inside this edition Top JSE Winners & Losers (page 3) Mr Price Group (page 8) EOH Holdings Limited (page 18) Invest in one of our portfolios Do not have the time to actively manage your portfolio? let us do it for you We have been managing wealth for our clients since We have well qualified and experienced portfolio managers and analysts to select the right shares for you. By paying a small management fee you can sit back and relax and see your money grow. Contact us on or mail us on [email protected] to find out more. 1

2 Executive Summary Welcome to the September 2015 edition of Stock Select Monthly, a monthly publication produced by Thebe Stockbroking for our private clients. In September the JSE All Share Index gained a marginal 0.23% in volatile market conditions. Factors contributing to the uncertainty and volatility in the local share market were the uncertainty surrounding a possible US interest rate hike and global growth concerns which extended to the local economy after the South African Reserve Bank (SARB) substantially revised local gross domestic product (GDP) growth prospects downward to 1.5% and 1.6% in 2015 and 2016 respectively, from 2.0% and 2.1% previously. The SARB left the repo rate unchanged at 6% at its September MPC meeting. South Africa s headline consumer inflation rate eased to 4.6% (y/y) in August from 5.0% (y/y) in July. In a predominantly bearish market, the JSE Industrial Index was the only sectoral index that recorded positive growth, rebounding by 3.73% (m/m) after a slide earlier in the month. The Platinum Mining Index fell by 27.51% (m/m) in September (August saw 8.4% recovery) pulled lower by the descending platinum price. The latter has been negatively impacted by the Volkswagen emissions rigging scandal which could potentially reduce demand for the metal. Table of Contents Top JSE Winners and Losers 3 JSE Indices Performance 4 Top 40 Focus 5 Top 40 Stock Pick Performances 5 Top 40 Stock Selection 6 Mr Price Group 8 Top 40 Share Price Moves 13 Mid-to Small Cap Focus 18 Mid-to Small Cap Share price Moves 21 Quarterly changes to the FTSE/JSE Top 40 Index took effect on 21 September A notable change was the inclusion of Redefine Properties (JSE code: RDF) and the exclusion of Kumba Iron Ore (KIO). Energy-focused Montauk Holdings (JSE code: MNK), a subsidiary of Hosken Consolidated Investments (HCI), maintained its position as the top performing share for the year thus far by increasing by %. However, in September, the shares of beer company SABMiller (SAB) soared and became the month s best performing share rising 26.73% (m/m) on renewed speculation that the company could be a takeover target of larger rival Anheuser-Busch InBev NV, the maker of Budweiser (see page 2). The rand exchange rate remained volatile in September as emerging market currencies in general suffered from risk-off sentiment during the month. By the end of September the rand has depreciated by 15.86% against the US dollar, 13.48% against the British pound and 6.34% against the euro since the beginning of the year. In our September issue of Stock Select, we review the performances of our recent Top 40 stock picks and profile the winners and losers on the JSE. On page 8, we review the performance of South African retail company, Mr Price Group (MPC) which carries a market consensus recommendation. In our Mid-to Small Cap Focus, we turn our attention to EOH Holdings Limited (EOH), on which we have upgraded to a recommendation from a SELL recommendation. We also discuss the best and worst small cap performers in In September analysts changed their recommendation for 5 out of 40 (12.50%) of JSE Top 40 listed companies. Analyst Top 40 Recommendation changes during September 2015 JSE Code Company Name Previous Analyst Recommendation Current Analyst Recommendation AGL Anglo American PLC SELL APN Aspen Pharmacare REM Remgro RMH RMB Holdings SAB SABMiller SELL Source: Bloomberg, inet BFA; Thebe Stockbroking Calculations Movement Up/ Down 2

3 Top JSE Winners & Losers Best Performing Shares (YTD 2015) Worst Performing Shares (YTD 2015) Company Source: inet BFA Ticker code Share Price Share Price Share Price Share Price Ticker (02/01/15) (30/09/15) % Change Company (02/01/15) (30/09/15) code cps Cps cps cps % Change Montauk MNK 260 1, % Lonmin LON 3, % Cashbuild CSB 16,464 30, % Aveng AEG 1, % Brait SE BAT 7,800 14, % Kumba Iron Ore KIO 24,700 7, % Fortress FFB 1,800 3, % ArcelorMittal ACL 2, % PSG Holdings PSG 12,942 22, % Harmony HAR 2, % Net 1 UEPS NT1 13,500 23, % Altron N AEN 1, % Trustco TTO % African Rainbow ARI 12,031 5, % Mondi Limited MND 18,843 29, % Altron A AEL 1, % Mondi PLC MNP 18,871 28, % Royal Bafokeng Plat RBP 5,200 2, % Rhodes RFG 1,500 2, % Exxaro EXX 10,514 5, % Capitec CPI 33,950 50, % Assore ASR 14,729 7, % Steinhoff SHF 5,909 8, % Impala Platinum IMP 7,485 3, % Advtech ADH % Aquarius AQP % Resilient RES 8,449 11, % Anglo AGL 21,370 11, % Capital & Counties CCO 6,631 9, % M&R Hold MUR 2,100 1, % Pioneer Foods PFG 14,580 19, % Coronation CML 11,247 6, % KAP Industrial KAP % Nampak NPK 4,332 2, % EOH Holdings EOH 11,156 14, % Invicta IVT 9,801 5, % Mpact Limited MPT 3,680 4, % Howden HWN 4,250 2, % SABMiller SAB 59,911 78, % PPC PPC 2,721 1, % Best Performing Shares (September 2015) Worst Performing Shares (September 2015) Company Ticker code Share Price Share Price Share Price Share Price (31/08/15) (30/09/15) % Change Company Ticker code (31/08/15) (30/09/15) cps cps cps cps % Change SABMiller SAB 61,550 78, % Lonmin LON % Hulamin HLM % Northam Platinum NHM 3,771 2, % Pallinghurst PGL % Anglo American Plat AMS 32,019 22, % Trustco TTO % Royal Bafokeng Plat RBP 3,299 2, % Afrox AFX 1,273 1, % African Rainbow ARI 7,104 5, % Wilson Bayly WBO 9,500 11, % Aquarius AQP % Ascendis ASC 1,416 1, % Aveng AEG % PSG PSG 19,800 22, % Harmony HAR 1, % Rhodes RFG 2,037 2, % Exxaro EXX 6,782 5, % Illovo ILV 1,486 1, % Impala Platinum IMP 4,952 3, % Richemont CFR 9,886 10, % Anglo AGL 14,685 11, % British American BTI 70,145 76, % PPC PPC 2,170 1, % AVI AVI 8,100 8, % Net 1 UEPS NT1 28,868 23, % Capevin CVH % Mr Price MPC 23,864 19, % Steinhoff SHF 7,946 8, % Datatec DTC 7,500 6, % Holdsport HSP 5,308 5, % Nampak NPK 3,086 2, % Santam SNT 21,300 22, % Sun International SUI % Reinet REI 2,775 2, % Group Five GRF 2,230 1, % Pick n Pay PIK 6,260 6, % MMI Holdings MMI 2,811 2, % Clover CLR 1,750 1, % Gold Fields GFI 4,259 3, % 3

4 JSE Indices Performance 170 JSE Sectoral Indices /01/14 02/04/14 02/07/14 02/10/14 02/01/15 02/04/15 02/07/15 JSE Resources JSE Basic Materials JSE Industrials JSE Consumer Goods JSE Healthcare 170 JSE Sectoral Indices - Continued /01/14 02/04/14 02/07/14 02/10/14 02/01/15 02/04/15 02/07/15 JSE Consumer Services JSE Telecommunications JSE Financials JSE Technology JSE All Share Source: Bloomberg Small Cap Index versus Top Jan-08 Jan-09 Jan-10 JSE Small Cap Index (J202) JSE Top 40 (J200) Small Cap Index Top Year-to-date -2.82% 2.71% % 6.0% Q4:14 5.7% -0.4% Q3:14 0.8% -3.9% Q2:14 4.9% 6.9% Q1:14 3.7% 3.7% Dividend Yield (DY) 4.22% 3.18% Price Earnings Ratio (PE) 15.30x 18.99x Source: inet BFA 4

5 Top 40 focus The JSE Top 40 index consists of the forty largest companies by market capitalisation listed on the JSE. While the index is well diversified across sectors, it is dominated by Tobacco (17.42%), Breweries (14.87%) and Banks (10.12%). Constituents of the Top40 Index Main Sub-Indices Diversified Industrials 3% Investment 3% Oil and gas 3% Breweries 15% Furniture manufacturers 4% Clothing and accessories 6% Banks 10% Retailers 3% General Mining 7% Life insurance 5% Platinum Mining 1% Healthcare 3% Food producers 1% Telecoms 6% Tobacco 17% Media 8% Paper 2% Source: inet BFA Property 3% The largest five companies by market capitalisation in the Top 40 index are British American Tobacco (R1,539bn), SAB (R1,314bn), Naspers (R726bn), Richemont (R556bn) and BHP Billiton (R442bn). Top 40 Stock Pick Performances Below we track the performance of our previously covered Top 40 Company Focus stocks. Date of Price at Current Median Remaining Previous analyst Current analyst Share Company initial initial spot price 12 month share price JSE Code consensus consensus Price company publication target price upside recommendation recommendation Growth Focus (cps) (cps) (cps) Aspen APN 28-Feb-14 27,780 29, % 35, % British American BTI 31-Mar-14 57,454 76, % 83, % Richemont CFR 30-Apr-14 10,543 10, % 9, % Steinhoff SHF 30-Aug-14 5,351 8, % 8, % Old Mutual PLC OML 29-Aug-14 3,500 3, % 4, % Tiger Brands TBS 30-April-15 31,000 30, % 33, % Vodacom VOD 30-June-15 13,870 13, % 15, % MTN Group MTN 30-June-15 22,875 17, % 21, % Mediclinic MDC 31-July-15 11,266 11, % 11, % Netcare NTC 31-July-15 4,039 3, % 4, % Source: inet BFA, Thebe Stockbroking 5

6 Top 40 Stock Selection Methodology Our monthly Top 40 Stock Selection Model is constructed by: Step 1: Compiling consensus analyst 2 Earnings per Share (EPS) forecasts on the constituents of the Top 40 index from Bloomberg and inet BFA. Step 2: Shares are filtered according to forecast EPS growth. Step 3: Share are filtered according to analyst 2 consensus recommendations. Step 4: Strong analyst 2 recommendations are filtered by reviewing MTD and YTD share price movements to highlight potential over-bought and over-sold companies. Step 5: We then apply our consensus Target Price Model (mean 12-month analyst 2 Target Price (TP) forecast) to selected companies and calculate potential share price upside to arrive at our Top 40 Company Recommendation. Top 40 - Median Analyst EPS and 12-Month Target Price Forecasts and Consensus Recommendations Median Analyst 1 Analyst 1 Forecast Current Spot Share Implied Share Price JSE Code Company Name 12-month TP EPS Growth (next Price Return (%) Forecast 12-months) Consensus Analyst 1 Recommendation AGL Anglo American PLC 11,560 15, % -13.8% SELL AMS Anglo American Platinum 22,908 33, % 199.3% ANG AngloGold Ashanti 10,949 12, % 387.6% APN Aspen Pharmacare 29,400 35, % 20.4% BAT Brait SE 14,050 12, % No Forecast SELL BGA Barclays Africa 17,020 19, % 10.6% BIL BHP Billiton 21,000 24, % -45.6% BTI British American Tobacco 76,029 83, % 32.0% BVT Bidvest Group 32,622 33, % 10.9% CCO Capital & Counties Prop 9,080 10, % No Forecast CFR Compagnie Richemont 10,760 9, % 101.0% CPI Capitec Bank 50,100 41, % 22.8% SELL DSY Discovery 13,766 11, % -12.6% SELL FSR FirstRand 4,915 5, % 9.6% GRT Growthpoint 2,565 2, % 22.9% INL Investec Ltd 10,585 12, % 39.5% ITU Intu Properties 6,900 7, % No Forecast MDC Mediclinic 11,043 11, % 5.7% MMI MMI Holdings 2,379 3, % 30.9% MND Mondi Ltd 29,021 25, % 27.6% MPC Mr Price Group 19,300 22, % 15.4% MTN MTN Group 17,800 21, % -10.1% NED Nedbank 21,970 26, % 9.8% NPN Naspers 173, , % 151.4% NTC Netcare 3,630 4, % 22.5% OML Old Mutual PLC 3,963 4, % 80.6% RDF Redefine Properties 1,170 1, % 27.7% REI Reinet 2,941 2, % No Forecast REM Remgro 25,212 28, % -2.1% RMH RMB Holdings 6,592 7, % 10.2% RMI Rand Merchant Insurance 4,142 4, % 15.6% SELL SAB SABMiller 78,000 82, % 24.0% SBK Standard Bank 13,500 16, % 26.9% SHF Steinhoff 8,490 8, % 25.4% SHP Shoprite 15,716 17, % 14.0% SELL SLM Sanlam 5,980 7, % 7.7% SOL Sasol 38,760 48, % -21.8% TBS Tigerbrands 30,479 33, % 3.1% VOD Vodacom 13,750 15, % 6.6% WHL Woolworths Holdings 9,680 10, % 29.6% 1) Analysts from Barclays, Renaissance Capital, Deutsche Bank, BPI, UBS, JP Morgan and SBG Securities are included. Source: Bloomberg, inet BFA; Thebe Stockbroking Calculations 6

7 Top 40 Stock Selection We use a Price/Earnings to Growth (PEG) ratio for the shares included in our Top 40 coverage. The PEG ratio compliments the traditional P/E ratio in reviewing company valuations. While the traditional P/E ratio only looks at past earnings, the PEG ratio gives an indication of a company s future earnings growth prospects. The PEG ratio is calculated by dividing a company s current Price Earnings Ratio (P/E ratio) into the company s expected 12 month forecast Earnings Per Share (EPS) growth rate. A PEG ratio of one indicates a theoretical equilibrium between the spot share price and anticipated 12 month earnings growth, indicating that the share price is FAIRLY VALUED. A PEG ratio of less than one indicates that the market has not fully priced in the company s future 12 month earnings growth, implying that the stock is UNDERVALUED. A PEG ratio of more than one indicates that the market is overestimating a company s future 12 month earnings growth, implying that the stock is OVERVALUED. Top 40 Share Price Change September 15 (%) Top 40 EPS Forecast Top 40 PEG Ratio AMS AGL MPC MMI APN NTC SOL SBK FSR BIL NED SLM MND MNP BAT SHP VOD WHL INP BGA GRT INL RMH RMI CCO REM OML MTN NPN TBS RDF BVT ANG DSY MDC CPI ITU REI SHF BTI CFR SAB BIL SOL AGL DSY MTN REM TBS MDC VOD SLM FSR NED RMH BGA BVT SHP MPC RMI APN NTC GRT SAB SHF SBK MND RDF WHL MMI BTI INL OML CFR NPN AMS ANG REM DSY MTN AGL SOL BIL ANG OML CFR AMS MMI INL SBK NPN RDF MND GRT BTI WHL SHF BGA NTC NED RMI APN RMH FSR SAB SHP MPC BVT SLM VOD MDC TBS -40.0% -20.0% 0.0% 20.0% 40.0% Share Price % - Sept (M/D) % 0.0% 200.0% 400.0% 600.0% Expected EPS Growth over next 12 months (%) ) Based on Median Forecasts of analysts representing Barclays, Renaissance Capital, Deutsche Bank, BPI, UBS, JP Morgan and SBG Securities. Source: Bloomberg, inet BFA; Thebe Stockbroking Calculations 7

8 Turnover in R billion Operating margin % MPC share performance J537 share performance Stock Select Monthly September 2015 za Top 40 - Company Focus Tiger Brands (JSE code: TBS) Mr Price Group GROUP OVERVIEW Mr Price Group (JSE code: MPC) is an omni-channel fashion value retail company based in South Africa where the Group s operations span approximately 1,066 stores. Mr Price was founded in 1985 and the Group s first store was opened in 1987 and since then, Mr Price has become a household name, particularly in the South African retail shopping space. The Group also has significant presence in several African countries such as Namibia (37 stores), Botswana (20), Swaziland (7), Nigeria (6), Ghana (5), Zambia (5) and Lesotho (4). Furthermore, Mr Price has franchise stores in Kenya, Mozambique, Rwanda, Tanzania and Uganda. The Group s business model differentiates itself by being predominantly cash-driven as approximately 82% of the Group s sales are for cash. Mr Price targets younger customers in the mid to upper living standards measure (LSM) and the Group mostly retails Mr Price-branded merchandise. From a share price perspective, the Group s shares have not shown a resilient performance historically as depicted in Figure 1. Figure 1 shows MPC s share price performance relative to the JSE General Retailers Index (J537). The figure shows that MPC s share price has been relatively volatile throughout the 10-year period. Between the years 2004 and 2014; the Group s shares underperformed the J537 significantly. However, in FY2015, MPC s shares appear to have performed more in line with the index. The shares of Mr Price are also included in the MSCI Emerging Markets Index. FINANCIAL PERFORMANCE OVERVIEW As shown in Figure 2, the Group has recorded healthy revenue growth from FY2010 to FY2015, making gains of approximately 13% CAGR over that period. MPC s revenue has reflected a constant positive growth trajectory since FY2015. Figure 2 also shows that the Group s operating margins have grown consistently throughout the same period, rising from 10.5% in FY2010 to 17.1% in FY2015. Based on the Group s latest results, the main drivers behind the firm retail sales have been; strong online sales growth, healthy performance of the Apparel and Home segments and financial services growth. The Group has also managed to grow its headline earnings per share on a consistent basis from 120cps in FY2005 to 920cps in FY2015.Further supporting the Group s firm HEPS growth is the 29-year CAGR in HEPS which is currently 23.3% CAGR (Figure 3). Company name Share Code Consensus Recommendation Mr Price Group MPC 12m median target price R Spot price R m implied return 16.0% 12m forecast EPS growth 19.1% Sub Industry GICS JSE ICB Consumer Services General Retailers Market Cap (ZAR bn) Latest Results Reported Source: inet BFA, Bloomberg Figure 1: MPC vs. J Release date: 01-Sept-2015 Trading Update for 21 weeks Ended 22 August Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec Mr Price Group 10.5% % % 13.7 JSE General Retailers Index Figure 2: MPC Revenue and Operating Margin % % % 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% FY2010 FY2011 FY2012 FY2013 FY2014 FY % 0.0% Turnover Operating Margin Sources: inet BFA, Mr Price Annual Reports 8

9 MPC s ROE has also performed above standard when compared to industry competitors, Truworths (TRU) and The Foschini Group (TFG). MPC s ROE was recorded at 51.6% for FY2015 (FY2014: 52.2%) while TRU and TFG s ROEs have been recorded at 36% (FY2014: 38%) and 25.3% (FY2014: 26.4%) respectively for FY2015. The relatively higher ROE indicates that the Group is able to use its capital efficiently to generate profits and grow the company. MPC s dividend payments have also shown strong growth in the past 29 years, recording growth at 25% CAGR. In FY2015, the Group increased their annual dividend by 20.3% to 580 cents per share from 482 cents per share recorded in FY2014. However, from a dividend yield (DY) perspective, MPC s DY of 2.98% is relatively lower than competitors, TFG (4.17%) and TRU (4.77%) and lowers than the JSE Top 40 Index DY of 3.18%. This is supported by MPC s dividend payout ratio of 63.1% which comes below the payout ratios of both TFG (65.8%) and TRU (68.5%). Figure 3: MPC HEPS Growth ( ) 2015A A A A A A A A A A A HEPS (cents per share) Sources: inet BFA, Thebe Stockbroking calculations SEGMENTAL ANALYSIS Although the Group s operations are recognised under five brands, namely, Mr Price (Apparel), Mr Price Home, Mr Price Sport, Miladys and Sheet Street, the Group s business units are categorised into three reportable segments and these are; Apparel, Home and Central Services. The Apparel segment includes; retails clothing, sportswear, footwear, sporting equipment and accessories. The Home segment retails homeware and Central Services provides services to the trading segments including Information Technology, internal audit, human resources, group real estate and finance. Figure 4 shows the revenue segmental contribution for MPC. Although MPC has diversified its operations throughout the years by expanding into the home market (through the Group s Sheet Street and mrphome brands), the Apparel division still dominates the revenue figures. In the Group s latest FY2015 results, Mr Price (Apparel) stores recorded revenue of R 10.1 billion (59% revenue contribution), Mr Price Home added R3.3 billion (19%), Sheet Street and Miladys added R1.4 billion each (8% contribution) respectively and lastly, Mr Price Sport added R1.1 billion (6% revenue contribution). From a brand perspective, although the traditional Mr Price apparel store still dominates almost 60% of the Group s revenue, the Mr Price Home brand is also gaining traction due to the almost 20% contribution it has made to overall revenue in FY2015. With regards to earnings before interest and tax (EBIT) (figure on the right), the Home division earns lower margins (21%) when compared to the Apparel division (74%). Figure 4: MPC Segmental Contribution to Revenue and EBIT Contribution to Revenue Central Services 1% Home 26% Contribution to EBIT Central Services 5% Home 21% Apparel 73% Apparel 74% Source: Mr Price Group Annual Results, March

10 INVESTMENT CASE MPC is currently trading on a Price Earnings (PE) ratio of 22.55x, which reflects a premium to the General Retailers Index (J537), currently trading on a PE of 19.71x. We believe the company shows value for the following reasons: Robust cash generative business model As mentioned above, approximately 82% of the Group s sales are cash sales and this cash-based business model has been carefully managed by the Group as cash sales continue to grow at a faster pace than credit sales. In the Group s FY2015 results, cash sales growth was recorded at 14.9% while credit sales grew by 7.5%. Some of the benefits of having a high cash sales component include; less exposure to bad debt, the ability to fund and support prospective growth without incurring more debt and less reliance on credit to drive sales growth. Competitors such as Truworths have taken on major strain as their models are still based on the old-fashioned credit model which is no longer relevant as international retailers such as Zara and Cotton On and locally, Mr Price have adopted lucrative cash-based models. Rapidly growing online presence MPC s online store was first launched in South Africa on the 30 th of July Within the first six months of being operational, MPC s online store was rated as the most searched retail brand on Google SA for The Group s online presence has not only recorded remarkable growth but it has also attracted new customers. In the Group s FY2015 results, for South African operations, sales from traditional brick-and-mortar stores grew by 12.2% while online sales grew by 110.6%. In terms of the increase in the online sales figure, 85% of the increase was attributable to new customers. Due to the pleasing customer response to the online platform, the Group now offers online access to all of its branded stores excluding Miladys. The Group s online offering has also been a complementary value-add to the performance of Mr Price-branded stores. Fashion-value offering MPC s fashion offering comprises merchandise that is updated and relevant in terms of the latest fashion trends and retails at competitive prices. The Group s business model is based on offering low prices which allows MPC to increase market share (by supporting cost-conscious customers who remain loyal to the brand) even in difficult economic conditions. RISKS TO THE BUSINESS Macro-economic challenges The retail industry is particularly cyclical in nature and as a result, there are many macroeconomic factors that may either contribute positively to the business in periods of economic prosperity or negatively in periods of economic downturn and contraction. Potential macroeconomic factors that may influence MPC s business are government fiscal changes such as the potential for interest rate hikes (affecting overall consumer spending), inflation, changes in the International Trade Administration Act (affecting imported and exported merchandise) and the National Credit Act could have a negative impact on the financial performance of the Group. That said, as MPC is seen as a fashionvalue offering, opportunity for continued growth in a depressed macro-economic environment as the Group captures market share through consumer down trading to more affordable clothing. Rand weakness Continued rand weakness escalates the issues of higher inventory costs (as Mr Price imports most of its stock), which will ultimately be passed onto consumers through higher sales prices to retain margin. The lack of dynamism in the local textile, clothing and footwear industry The local textile, clothing and footwear manufacturing industry is not currently thriving caused by many factors including the penetration of cheaper Chinese imports. As expected, the cheaper Chinese imports have had substantial negative impacts on local businesses such as job losses, declines in business sales and profit and severe harmful impacts on cash flow generation and return on investments. The fragility of labour relations in South Africa The threat of unprotected strikes remains as an industry-wide threat and poses a threat to productivity and costs in the long-term. In the South African context, strikes are a critical threat to the economy and have seen many industries, particularly mining, lose significant production output and placed pressure on the performance of the rand currency. PROSPECTS The Group intends to increase access to their online business to other African operations. However, MPC has indicated that future online business will be driven only once they have established a physical store presence in a particular market due to the operational requirements and high costs involved in operating an international online business. The Group is actively seeking new markets for expansion, particularly in their Mr Price (Apparel) and Mr Price Home brands which garner the majority of Group revenues. The Group has identified Australia as a growth opportunity outside of Africa after investigating its viability using online testing and detailed desktop and on-the-ground research. Therefore, prospectively we can expect MPC to open Mr Price test stores in Australia this year. 10

11 R per share Turnover in R billion Operating margin in % Stock Select Monthly September 2015 To fulfil the Group s local and international expansion plans, capital expenditure of R3.5 billion has been budgeted over the next five years. Part of the costs is expected to cover new ERP and merchandise planning systems and a new distribution centre. FORECAST Figure 5 shows the analyst consensus headline earnings per share (HEPS) forecast and the revenue and operating margin forecast for MPC. For the HEPS forecast, analysts expect continuous positive growth from FY2016 to FY2018. For the next financial year results (FY2016), analysts expect HEPS to increase 11.95% from FY2015 to R10.30 and 14.6% from FY2016 to R11.80 in FY2017. In FY2018, analysts expect continued growth at 13.55% from FY2017 to R The forecast for MPC s revenue and operating margin shows a positive linear pattern of growth. With regards to MPC s revenue and operating margin forecast, total Group revenue is expected to increase from R18.1 bn in FY2015 to R26.7 bn in FY2019 and the Group s operating margin is forecast to grow from 18.4% in FY2015 to 21.4% in FY2019. Figure 5: TBS Actual vs. Estimated Headline Earnings, Revenue and Operating Margin MPC Headline Earnings Per Share Forecast 16.0 MPC Revenue and Operating Margin Forecast % % 20.9% 21.2% 21.4% 21.0% 20.0% % % 18.0% % A 2016F 2017F 2018F A 2016F 2017F 2018F 2019F 16.0% Source: Mr Price Group, inet BFA, Bloomberg SALES EBITDA % RECOMMENDATION AND TARGET PRICE Table 1 reflects Bloomberg analyst recommendations and 12m TP on Mr Price Group. The Bloomberg analyst consensus median 12m TP is R223.96, implying a 16.0% price return on the current share price of R The majority of analysts have placed a recommendation on MPC. Table 1: Bloomberg broker consensus Firm Recommendation Target price (cps) Last updated Implied return Investec SELL 19,652 9/23/ % Barclays OVERWEIGHT 26,200 9/21/ % HSBC 19,500 9/16/ % Avior Capital Markets 22,396 9/16/2015-5% UBS SELL 21,700 9/14/2015-8% Renaissance Capital OVERWEIGHT 26,600 9/9/ % Credit Suisse OVERWEIGHT 26,400 9/4/ % Current share price (cps) 19,300 Median Bloomberg Consensus (cps) 22,396 16% Source: Bloomberg 11

12 Top 40 Share Price Movements BTI SAB BTI 0 SAB BIL BIL CFR CFR NPN NPN AGL AGL MTN MTN SOL SOL Source: inet BFA 12

13 SBK FSR SBK FSR VOD VOD OML OML APN APN AMS AMS BGA BGA SLM SLM Source: inet BFA 13

14 NED SHF NED SHF REM REM BVT BVT 2 SHP 4 ANG SHP ANG CPI CPI RMH RMH Source: inet BFA 14

15 MND NTC MND NTC ITU ITU MDC MDC WHL WHL RMI RMI CCO CCO INL INL Source: inet BFA 15

16 MPC MPC TBS TBS DSY DSY GRT GRT BAT BAT MMI 3000 MMI REI RDF REI 500 RDF Source: inet BFA 16

17 Mid- to Small Cap Focus Thebe Stockbroking Analyst Share Recommendations Company Ticker code Latest recommenda tion 1 Date of initiation of coverage Price at initiation Current spot price 12 month target price Growth 2 (cps) (cps) (cps) Remaining share price upside Afrimat AFT 16-Jul-15 1, % % ARB Holdings ARH 14-Jan-13* % % Blue Label Telecoms BLU 23-May % % Clover Industries CLR 15-Sep-12 1, % % Datacentrix DCT 11-Jul % % Datatec DTC 28-Feb-11 3, % % Ellies ELI SELL 31 Jul 14* % 60-8% EOH EOH 26-Jan-11 1, % % Pinnacle Technology PNC 27-Nov-12 1, % % Raubex RBX 10-Jun % % : 12m target price (TP) produces a total return in excess of 15%, : 12m TP produces a total return from 5% to 15%, SELL: 12m TP produces a total return less than 5%. 2) Since initiation. *Transfer of coverage Source: inet BFA, Thebe Stockbroking Mid- to Small Cap - Company Focus EOH Holdings (EOH) EOH Holdings Limited Positioned for African Growth FY15 Results EOH Holdings reported FY15 revenue growth of 35% to R9.733bn (FY14 R7.220bn), lifting HEPS by 29% to 575cps (FY14 447cps). Organic growth accounted for 56% (or R1.407bn) of revenue growth, contributing 51% (or R143.9m) to profit before tax growth. The Group reported revenue growth across all segments. Infrastructure grew aggressively by 58% and Software by 60%. Segmental revenue in the Services segment rose by 27% as BPO (up 48%) and Industrial Technologies (up 76%) remain growth drivers in the local market. Gross profit rose by 23.6% to R3.201bn (FY14 R 2.588bn), with the GP margin slipping 300bps to 32.9% (FY %). Profit before tax rose by 42% to R951.3m (FY14 R669m), reflecting a stable PBT margin at 9.77%. Investors should take note of the following in the results: Finance cost The Group recorded a 47% increase in finance cost from R80.4m to R118.8m over the period as a result of a number of acquisitions made; totalling R1.090bn of which R236.5m was paid in cash and an additional R403.9m remains outstanding. Share of profit from equity-accounted investments The contribution from TTCS amounted to R10.7m, as it was only announced on 4 June 2015; it represents only a month s contribution. Goodwill and intangible assets Increased 49% to R2.989bn (FY14 R2.001bn) as acquisitions during the year added R325m to intangible assets and R651.2m to goodwill through the consolidation of CCS, MIE and various smaller acquisitions. Trade and other receivables increased 45% to R2.307bn (FY14 R1.588bn), growing 10% above current revenue growth. Cash and cash equivalents reflects growth of 56% to R1.663bn (FY14 R1.064bn), it is important to note that vendors for acquisitions currently amount to R403.9m. 17

18 Equity rose 72% to R4.499bn (FY14 R2.618bn) due to increased retained earnings and as a result of shares still to be issued for acquisitions made. During FY15 EOH issued shares to the value of R209.5m to vendors, while an additional R240.4m worth of shares still needs to be issued. Acquisitions EOH spent R1.090bn on acquisitions in FY15. The Group made two sizable acquisitions during the period totalling R589m as well as a number of smaller bolt-on acquisitions totalling R502.7m. Construction Computer Software (CCS) is a specialised developer of software products used by the construction industry. The CCS acquisition became effective from 19 September 2014, contributing c.9months revenue to the Group. Managed Integrity Evaluation (MIE) and Afiswitch offer verification services to the financial services sector and complements its current financial services outsourcing offerings. This acquisition became effective on 1 November 2014, contributing 8 months revenue to the Group. During the year EOH had a R550m share placement for the partial payment to the vendors at R per share. Our Thoughts: Positioned for African growth Management s outlook statement guided for continued growth in FY16, through a combination of organic and acquisitive growth initiatives. We expect that the investments made in FY15 will add additional earnings momentum to the Group in FY16 as the full year contributions of MIE, CCS and TCCS filter to the bottom-line. The Group has gained significant critical mass over the last five years, enabling it to tender and win much larger contracts and gain market share through its integrated product offering. With the internal development (and acquisition of businesses with) proprietary software, EOH has turned into a turnkey outsourcing services provider with capabilities that span across a wide range of industries including Financial Services (Sybrin), Telecommunications, Retail, Manufacturing, Transport and Logistics, Mining, Health, Energy, Water, Construction (Smart Build and Candy) as well as Local and Central Governments. The Group expects to increase its revenue from the local public sector, currently 25%, across the spectrum from National, Provincial, local authorities and Parastatals as there is significant pent up demand on technology, in infrastructure and applications. Management sees major opportunities through its Industrial Technologies offering for infrastructure development into Energy, Water, Utilities and Local Government. Timing of this spend is however unclear. EOH currently service in excess of 100 of the 226 local municipalities and 5 of the 8 metropolitan municipalities. Africa remains a target growth driver as it expands its footprint further into the continent. EOH is currently operational in 33 countries outside South Africa through in-house country presence, partnerships and joint ventures. Africa currently contributes c.10% to Group revenue. The acquisition of equity stakes in TTCS is expected to increase the Group s African footprint significantly opening cross selling opportunities. This is expected to increase the contribution from Africa to Group revenue significantly over the short term. Forecast Update We have made the following changes to FY16E and added estimates for FY17E and FY18E: o We have raised our Group revenue expectation for FY 16E from R12.18bn to R12.474bn. Our revenue expectation for FY 17E is R15.945bn and FY 18E is R20.551bn, reflecting revenue growth of c.28% per annum. Services Top-line growth is expected to track 29% in FY16E to R9.043bn, 30% in FY17E to R11.794bn and 32% in FY18E to R15.523bn. Software With the consolidation of MIE and CCS, we expect more normalised revenue growth for the forecast period. Revenue expectation for FY16E is forecast at R1.383bn (17% growth), FY17E at R1.590bn (15% growth) and R1.829bn (15% growth). Infrastructure We have increased our FY16E revenue expectation at R2.047bn (previously R1.88bn), which reflects 32% top-line growth on FY15. FY17E revenue is forecast at R2.559bn (25% growth) and FY18E is forecast at R3.199bn (25% growth). o We have reduced our gross profit expectations, forecasting a GP margin of 33% for FY16E to FY18E (previously 36%). o Our operating expense ratio remains pegged at 25%. o Our operating profit expectations are based on a Group OP margin of 11% (unchanged) and PBT margin of 11.1% (previously 10.3%) as the contribution of TCCS makes a meaningful contribution going forward. Segmental PBT margin as follow: Services FY16E at 10.0% (previously 9.8%), FY17E at 10.2% and FY18E at 10.4%. 18

19 Software FY16E to FY18E at 15.0% (previously 13.0%). Infrastructure FY16E to FY18E at 4.5% (previously 6.8%). o We have increased our weighted average shares in issue for the period to 126.1m for FY16E and 129.3m for FY17E. o This result in our FY16E HEPS forecast increasing to cps from cps, mainly as a result of our revenue and profitability expectation changes as well as the increased share in profits from associates (TCCS). FY17E and FY18E HEPS are forecast at 974.6cps and 1226cps respectively. Valuation and Recommendation Our preferred valuation methodology remains the Discounted Free Cash Flow (DCF) model (Table 4). We have updated our DCF model to reflect our forecasts discussed above: Table 4: DCF Model for EOH FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 Terminal Year R m Operating Profit Add: Depreciation and Amortisation EBITDA Tax Working Capital Capex Acquisitions (cash portion) Free Cash Flow (FCF) Shares in issue (millions) FCF per share (cps) Discount Factor Discounted FCF (cps) Enterprise Value (cps) Add: Net Cash (cps) 502 Fair Value of Equity (cps) Implied Price Earnings (x) 12m TP (cps) Implied Exit Price Earnings (x) Implied Return (%) 6% Sources: inet BFA, EOH, Thebe Stockbroking calculations, forecasts and workings We arrive at a fair value of 13,371cps (previously 11,204cps) on an implied PE of 24.11x, which is at a premium to the sector PE of 22.06x. It must be said given the re-rating in the share price as a result of its continued growth and evolution into an end-to-end services company, the historic 5 year average PE of 14.36x does risk being too low and perhaps justifies an above-mean Exit PE given its current growth trajectory. While most investors appear to view EOH as a tech stock, we believe that EOH is best considered a service business operating predominantly (but not exclusively) in the ICT sector. Rolling our fair value forward, we arrive at our 12m TP to 16,118cps (previous 12m TP: 12,842cps) on a generous Exit PE of 28.0x. Recommendation Our 12m TP of 16,118cps (previous 12m TP: 12,842cps) implies a return of 6%, thus we upgrade EOH from a SELL recommendation to a recommendation. The main factor contributing to our change in valuation and recommendation is that the Group s recent acquisitive activity (including TCCS) is expected to prolong EOH s growth trajectory and increase its footprint into Africa where we expect significant cross-selling opportunities of its current products and services. The major upside risk to our valuation lies around any future acquisitive activity. The major downside risk to our valuation is the Group s medium-term growth rate. 19

20 Mid- to Small Cap Share Price Movements Cps ARB Holdings Upgrade to Afrimat Resumption of Coverage: Jan-10 Jan-11 Feb-12 Mar-13 Mar-14 Apr Cps Initiation: Transfer of coverage: ARH Blue Label Telecoms Transfer of coverage: 200 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 BLU SELL Transfer of Coverage: Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan Cps Initiation: AFT Clover Industries Transfer of Coverage: 800 Dec-10 Oct-11 Aug-12 Jun-13 Apr-14 Feb-15 CLR Cps Datacentrix Datatec SELL Cps SELL 350 Initiation: 3030 Initiation: Transfer of coverage: 300 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 DCT 2030 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 DTC Source: inet BFA; Thebe Stockbroking 20

21 Cps Cps Ellies Transfer of coverage: 0 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 0 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 ELI Pinnacle Technology Initiation: PNC Transfer of Coverage: SELL Cps SELL Initiation: EOH SELL 30 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 EOH Raubex Group SELL Transfer of Coverage: 0 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 RBX Initiation: Source: inet BFA; Thebe Stockbroking 21

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23 Disclaimer Certification The analyst(s) who prepared this research report hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s') personal views about the subject investment(s) and issuer(s) and (ii) no part of the analyst/s compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report. Rating & Risk Factor Definitions for Mid- to Small Cap Focus : 12m TP produces a total return in excess of 15% : 12m TP produces a total return from 5% to 15% SELL: 12m TP produces a total return less than 5% Risk Factor Red: Stocks outside of Top 40 than can be more volatile and low levels of trading liquidity. Small Cap / Mid Cap Definitions & Prices All companies outside of the Top 40 index on the JSE. Every effort has been made to use JSE closing prices, market ratios, implied returns and all other market-related variables from the close of 30 September Despite this, we do not warrant the completeness or accuracy thereof. Frequency of Next Update This is a monthly report. Conflict of Interest It is the policy of Thebe Stockbroking (Pty) Ltd that research analysts September not be involved in activities in a way that suggests that he or she is representing the interests of Thebe Stockbroking (Pty) Ltd or its clients if this is reasonably likely to appear to be inconsistent with providing independent investment research. In addition research analyst/s reporting lines are structured so as to avoid any conflict of interests. For example, research analysts cannot be subject to the supervision or control of anyone in Thebe Stockbroking (Pty) Ltd sales and trading departments. However, such sales and trading departments September trade, as principal, on the basis of the research analyst/s published research. Therefore, the proprietary interests of those sales and trading departments September conflict with your interests. Disclosures* A. The analyst is an officer, board member, or director of the Company B. The Company is a client of Thebe Stockbroking (Pty) Ltd C. This research report has been communicated to the Company and following this communication, its conclusion(s) has been amended before its dissemination D. Analyst (s) holds long or short personal positions in a class of common equity Stockbroking of this company Anglo Platinum Remgro BHP Billiton Richemont Ellies MTN Sanlam Woolworths British American Tobacco Previous Ratings This is a sector note. Legal Entities To South African Residents: Thebe Stockbroking (Pty) Ltd is an Authorised Financial Services Provider. General For the purposes of this report Thebe Stockbroking (Pty) Ltd refers to all employees of Thebe Stockbroking (Pty) Ltd. This research report is based on information from sources that Thebe Stockbroking (Pty) Ltd believes to be reliable. Whilst every care has been taken in preparing this document, no research analyst or employee or director of Thebe Stockbroking (Pty) Ltd gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy or completeness of the information set out in this document (except with respect to any disclosures relative to members of Thebe Stockbroking (Pty) Ltd and the research analyst/s involvement with any issuer referred to above. All views, opinions and estimates contained in this document September be changed after publication at any time without notice. Past performance is not indicative of future results. The investments and strategies discussed here September not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. The investments discussed September fluctuate in price or value. Changes in rates of exchange September have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Employees of Thebe Stockbroking (Pty) Ltd and/or their respective directors September own the investments of any of the issuers discussed herein and September sell them to or buy them from clients on a principal basis. This report is intended solely for clients and prospective clients of Thebe Stockbroking (Pty) Ltd and is not intended for, and September not be relied on by persons to whom this report September not be provided to by law. This report is for information purposes only and September not be reproduced or distributed to any other person without the prior consent of a member of Thebe Stockbroking (Pty) Ltd. Unauthorised use or disclosure of this document is strictly prohibited. By accepting this document, you agree to be bound by the foregoing limitations. D D D D D D D D D 23