What are the Best JSE Top 40 Shares to Watch in 2021?

The following table looks at South Africa’s Jse Top 40 Cash Index constituents, their long term broker ratings and price targets, as well as whether these targets are at a discount or premium to current share price valuations.

The long term (12 months +) broker ratings and price targets for these shares are a median of estimates sourced from Refinitiv Data (formerly Thomson Reuters). The ‘current’ share prices are derived at the time of writing, 17 February 2021.

Companies Reinet Investments and Investec Plc have been omitted from the list due to ratings and price targets not being available at the time of writing. The index constituent data is as of the last Jse Top 40 rebalancing which came into effect on the 21^st of December 2020. The next index constituent rebalancing will come into effect in the latter part of March 2021.

Gold mining share prices trade at largest discount to median price targets

Last year saw gold the second best performing major asset class after US tech counters (reflected on the Nasdaq100). However since the highs in August 2020, the price of the precious yellow metal has been drifting lower slowly as a risk on market environment follows hopes of vaccine efficacy and a return to global economic growth. The drift in gold prices over the last over the last six months accompanied with a resilient rand over the same period, would have bode negatively for local exporters of gold. Locally listed gold miners do however tend to exaggerate gains in the ZAR gold price on the way up as well as exaggerate losses on the way down.

The waning gold price over the last 6 months has seen locally listed miners AngloGold Ashanti, Harmony Gold and Gold Fields out of favour and broadening their respective discounts to a median of analyst forecasts. These counters do however now trade at the largest discount to these targets amongst the Jse Top 40 Index constituents. It should be noted that although the gold price has been under short to medium term pressure, at around $1800/oz it does still trade significantly above these producers all-in sustaining costs (AISC). In latest reports seen Anglo Gold ASIC was at around $1300/oz, Harmony’s AISC $1341/oz and Gold Fields’ AISC was at $987/oz.

Naspers share price discount the largest outside of the gold sector

Naspers continues to be a firm favourite amongst analyst and investors from both a retail and institutional background. The groups more than 70% holding in Prosus NV shares and in turn a 30% holding in China’s tech giant Tencent, accounts for roughly 90% of the company’s valuation at present. The remainder of the Naspers current valuation looks to account for the online classified, payments and food delivery businesses.

While Naspers trades at a discount of 24% to its long term median price target, the company trades at roughly a 50% discount to its Net Asset Value (NAV) as well. It is common for investment holding companies to trade at a discount to NAV, and there are two layers of investment holdings to discount for i.e. Prosus and Tencent. However many would argue that the current pricing trades too far from it valuation currently.

Nedbank share price at the deepest discount amongst banks, Capitec share price at a premium

Recent accusations of Nedbank’s involvement in local state capture, has seen the share price underperforming recent gains seen in sector peers Firstrand, Capitec and the Standard Bank Group. The Nedbank Group has however fervently denied these accusations claiming no wrong doing in the matter. The short term underperformance now sees Nedbank trading at the widest discount amongst the banks to the median of analyst long term estimates. Firstrand and ABSA while currently carrying consensus ‘buy’ ratings trade closer to a median fair value than Nedbank does.

Locally listed bank earnings remain benchmarked to local GDP which has been found wanting for a long time. In upcoming results investors and traders will want to keep an eye on both commercial and retail non-performing loans which have been on the rise and impacted further by the current pandemic and restrictions. Capitec, which carries a ‘hold’ rating and currently trades ahead of its long term price target, is the least diversified of the banks in terms of income streams and proportionately, the most exposed to the health of the retail client.

Industrial resource share prices running ahead of estimates

The BHP Group & Anglo American PLC

Major diversified miners, The BHP Group and Anglo American Plc while still maintaining ‘Buy’ recommendations, currently trade at premiums to their longer term price targets. Gains in underlying commodities such as iron ore and copper have been earnings accretive for these businesses. Should these base metals continue to gain or maintain current levels, we could see these companies longer term price targets rerate higher. However, for the time being base metal prices are looking overbought, and a short term correction could be more conducive for longer term gains.

Anglo American Platinum (Amplats)

Anglo American Plc subsidiary Anglo American Platinum (Amplats) has seen its share price rise along with Platinum Group Metals (PGMs). As the global economy looks towards a post Covid economic recovery, the metal has gained with the perception of increasing industrial demand from the automotive sector. Adding to the positive sentiment is talks of further reducing carbon emissions. PGMs are used by the automotive sector in catalytic converters to reduce pollutants. Amplats currently has a consensus hold recommendation by brokers, but trades roughly 7% above the median of long term price estimates.

Sasol Ltd

The turnaround strategy being implemented by Sasol with the aim of returning profitability and reducing the groups debt burden could be enough for the company to avoid a right issue in 2021. While the company embarks on Joint Ventures (JV’s) and asset disposals to strengthen its balance sheet, the sudden rise in oil prices would also have supported earnings. Oil markets are currently digesting the prospect of improving global demand against an extension of supply curbs from OPEC+. Sasol, while maintaining a consensus buy rating by brokers, has seen its share price exceeding long term targets in the near term.

Exxaro Resources

While Exxaro will have benefitted from improved economic sentiment and gains in commodity prices, the share price now having moved past a consensus of long term estimates could suggest the estimates are low due to concerns at Eskom. Eskom is one of Exxaro’s largest customers and ongoing stability and liquidity issues within the State Owned power utility remain a threat to the Exxaro business.

In Summary

• Gold miners currently trade at large discounts to median estimates although weary of recent weakness in the underlying commodity’s price
• Naspers appears to offer the largest discount to its median estimates while trading significantly below its current NAV as well
• Nedbank appears ‘cheaper’ than its sector peers, but largely due to recent corruption allegations
• Diversifed resource counters BHP Group and Anglo American Plc remain in investor favour but appear overbought in the near term
• Sasol remains a ‘buy’ in terms of consensus broker ratings, although trades ahead of the median target price
• Exxaro estimates may be stifled due to risks at Eskom
• Amplats has seen talk of reducing carbon emissions pushing the price of Platinum Group Metals