Equity Research:

South Africa - Equity Strategy

SA OUTLOOK 2009
Defensive Play Recommended to
2H09.

• We recommend investors to adopt a defensive strategy (avoiding high

16 January 2009 beta stocks) until stability is reached in 2H09. Our rationale is based
on (1) our anticipation of persistence in volatility, (2) the fact that
South Africa out performed our Emerging Market (EM) universe
in both 2008 and on a 10-year return basis in USD terms, and (3)
our expectation of markedly subdued corporate earnings due to
the slowing economy.
• Although our 2009 theme is centered on a largely negative economic
and trading outlook, the expected reduction in interest rates and
the JSE’s compelling relative valuations in the historical context
should provide major justification for market re-entry in 2H09.
• We prefer shares that exhibit non-cyclicality, relatively robust balance
sheets and low debt-to-equity ratios in 1H09. Our picks include MTN,
Shoprite, Bidvest, Tiger Brands, Aspen and BAT among others.
Interest rate sensitive shares should provide opportunities in 2H09.

Y2008 Performance Index for Some of Our 2009 Top picks

1.40

1.20

1.00

0.80

0.60
Shoprite

T iger Brands
0.40
BAT

MT N

0.20 OML

0.00
1/2/2008

2/2/2008

3/2/2008

4/2/2008

5/2/2008

6/2/2008

7/2/2008

8/2/2008

9/2/2008

10/2/2008

11/2/2008

12/2/2008

1/2/2009

Peter Mushangwe,
Sifiso Malinga Source: Bloomberg, Legae Calculations
+27 11 551 3675
peterm@legae.co.za
 Contents

Executive Summary 3

1. Market Performance 6

1.1 Y2008 in Review 6

1.2 2008’s Diamonds and Dogs 13

1.3 Large Cap versus Small Cap 15

2. Politics 17

2.1 Political Landscape in 2009 17

2.2 Implications to Equity 18

3. Our 2009 Themes and Implications to Equity 19

3.1 GDP Growth rate deceleration 19

3.2 Interest Rates to Fall in Synch with Growth 21

3.3 Compelling Valuations May Persist 24

3.4 Volatility May persist on Earnings Surprises 36

4. Valuation 37

4.1 JSE Valuation 37

4.2 Our 2009 Top Stock Picks 39

Page 2 of 43
Executive Summary
• The JSE ALSI lost 25.7% in 2008. The Top 40 was not far behind
at -25.9%. The worst loss was incurred by the Small Cap index
which shed 34.3% of its value in 2008. The sharp downward trend
in share prices that began in June 2008 lasted 5 months, with positive
returns only witnessed in November and December. The ALSI
incurred a cumulative loss of 51.6% from its May peak of 31,841.27 to
settle at 20,991.72 by end of October 2008.
• Relative to our EM universe, SA was the third best performer with
a USD return of -46%. Our universe had an average return of -56%,
and SA outperformed markets such as Russia, China, Brazil and
Egypt by a wide margin. On a 10-year return basis, SA was the third
best performer in USD terms, again out-performing Russia, China,
Brazil and Egypt.
• Foreigners were net sellers of the SA equities in 2008. While this
might normally account for most volume-based trading volatility,
should the global economy and liquidity conditions improve, the return
of foreign buyers may act as a catalyst for a re-rating of market
valuations;
• The Small Cap sector outperformed the ALSI, Top 40 and the Mid Cap
since 2004 when indexed to CY2000. The out-performance spread is,
however, narrowing. In 2008, the Small Cap sector was the worst
decliner with a return of -34.3% (local currency). We expect the
Small Cap sector to under-perform the Large Cap sector again in
2009.
• Our 2009 themes are centred on a marked deceleration in both the
economic and corporate earnings outlook. However, gross fixed
capital formation should remain positive, even though spending by the
private sector is set to slow. We expect interest rates to fall by a
cumulative value of between 250 and 275bp by the end of
CY2009. Inflation is set to fall rapidly due to the impact of lower rand
commodity prices, especially oil and food, and the re-weighting in the
inflation basket. Forecast risk to the inflationary outlook remains,
however, given the depreciating rand, “sticky” unit labour costs and
the precarious balance of payment position.

Page 3 of 43
• We expect current compelling valuations to persist in 2009. On a
relative valuation, the JSE ALSI is trading near the historical mean of
our EM universe at 7.3x (the mean is 7.7x). South Africa’s historical
P/E ratio is, however, 2.2x that of Russia which is 3.5x. On a PEG
ratio basis, South Africa is the most expensive market (at a PEG
ratio of 3.5x) when compared to the BRIC countries;
• We expect volatility to persist at relatively higher levels than in
previous years. While we expect volatility to continue on earnings
surprises – both positive and negative – we also note that historically
volatility took a period of about 2 years during phases of market
dislocations and recessions to revert to normal levels. Current volatility
is over 2x the norm of 15%;
• We recommend investors to adopt a defensive bias in 2009, until
stability is reached in 2H09. Increased exposure to cyclical and
Small Cap stocks can be adopted in 2H09. Our suggested
defensive industries are food producers and cash retailers, healthcare
(including pharmaceuticals), tobacco, telecommunication and
breweries. Hence, we recommend exposure to non-cyclical
companies with the ability to grow earnings at a premium rate to the
market (i.e. MTN, Shoprite, BAT, and Tiger Brands).
• Infrastructure spending will be key to economic growth in
CY2009. About R500bn worth of projects in transport and power
infrastructure and low-cost housing is expected to offset a slowing
GDP growth rate beyond 2010. Politically, it is imperative for the
government to loosen up fiscal policy in order to absorb excess labour
in the economy as well as stimulating the economy. Notwithstanding
the fact that South Africa’s bank balance sheets are relatively healthy,
and access to bi-lateral financial institutions such as the IMF and
World Bank remain open, we remain sceptical of the sustainability of
the financing options given the current global credit crisis.
• Should weak growth outcomes persist in 1H09, sharp interest
rate cuts should be expected in the next 6-9 months. Discretionary
retailers, banks and construction stocks will consequently be the main
beneficiaries in those conditions. Our picks in this scenario (i.e. 2H09)
include Murray and Roberts, Truworths, Richemont, Absa Group,

Page 4 of 43
 Nedbank Group and PPC. Interest rate cuts will also underpin
valuations as the cost of equity will decline.
• We expect a lacklustre performance by the JSE in 1H09, mainly
dragged down by resources and financial counters. On resources,
we expect waning demand to continue, and at the current rating (P/E
ratio around 9X) we do not believe our expectations are priced in yet.
Banks will be negatively impacted by relatively higher private sector
defaults. Low interest rates and lethargic growth rates of lending
books due to the impact of the economic slowdown will negatively
affect interest margins.
• Our expectation of the fair value of the JSE ALSI is 24,233.91, just
about 9% from the current valuation. This provides no
fundamental value for the next 6 months.

Page 5 of 43
1. Markets Performance (CY2008)

1.1 CY2008 in Review

• The year registered only five months of positive monthly returns. The
best month was February while the worst month was September.
August returns were negligible.
• The year 2008 recorded a negative return. The JSE ALSI lost 25.7%.
November and December witnessed positive returns. This was largely
a result of market correction after heavy negative returns in
September and October.

Monthly Average Returns

15.0%

10.0%

5.0%

0.0%

November

Average
June
January

July
March

September

October
April

May
February

August

10-Dec
-5.0%

-10.0%

-15.0%

-20.0%

Source: Bloomberg, Legae Calculations

• With falling prices, the dividend yield rose to a high of 6.1% in

November from 2.9% in January. The dividend yield is currently at
4.7%, still significantly higher (23.7%) than the average dividend yield
for the year (3.8%).
• We expect the dividend yield to migrate towards 3% in 1Q09, and this
happens on (1) share price rises and/or (2) dividend cuts by
companies on poor earnings. We see the latter probably happening
more than the former as we expect earnings to register muted growth
rates at best, and negative growth in general.

Page 6 of 43
 Dividend Yield (%)

5
4.67

1
1/2/2008

2/2/2008

3/2/2008

4/2/2008

5/2/2008

6/2/2008

7/2/2008

8/2/2008

9/2/2008

10/2/2008

11/2/2008

12/2/2008
Source: Bloomberg, Legae Calculations

• Comparing 2008’s performance to the past 10-years performances of

the JSE indicates that 2008 is the worst year over that period. There
are only three occasions, post-1994, where the JSE posted negative
returns: 1997, 1998 (Asia-Tiger and Russian currency crisis) and 2002
(recession in America after the dot.com bubble).
• The JSE’s ten year average return is 15.5%, a difference of 41.2
points from the current -25.7%. To incorporate the 1997-1998 market
downturn, the average return since 1996 falls to 13.8%

Page 7 of 43
 JSE Annual Returns: 1996-2008

80.0%

Returns
60.0% Average = 13.8%

40.0%

20.0%

0.0%
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
-20.0%

-40.0%

Source: Bloomberg, Legae Calculations

• Comparing the JSE performance to our EM universe, we note that

South Africa’s outperformed markets like Russia, China, Brazil, and
Egypt with a return of -46% in USD terms.

Returns of Select Emerging Markets 2008 LC

-25.7% South Africa

-36.1% Mauritius

-41.2% Brazil

-45.8% Nigeria

-46.2% Israel

-51.2% Poland

-53.9% Egypt

-65.4% China

-70.5% Rom ania

-71.3% Russia

-80.0% -70.0% -60.0% -50.0% -40.0% -30.0% -20.0% -10.0% 0.0%

Source: Bloomberg, Legae Calculations

Page 8 of 43
• The average return of our select EM universe is -56%, giving SA
significant out performance.
• We note that the rand depreciated worst against the US dollar.
Performance relative to the Russian ruble, the Chinese yuan, the
Brazilian real and the Egyptian pound was recorded at -27%, -16%,
+7%, and -23% respectively. This indicates the underlying over-
performance of the SA equities against our select EM.

Returns of Select Emerging Markets 2008 USD

-43.3% Mauritius

-45.1% Israel

-45.8% South Africa

-49.0% Poland

-53.7% Egypt

-54.3% Nigeria

-54.8% Brazil

-63.0% China

-75.0% Rom ania

-75.9% Russia

-80.0% -70.0% -60.0% -50.0% -40.0% -30.0% -20.0% -10.0% 0.0%

Source: Bloomberg, Legae Calculations

Page 9 of 43
 USD Returns of Select Emerging Markets (1998-2008)

300%

250%

200%

150%

100%

50%

0%

South Africa
Israel
Nigeria

China

Russia

Romania

Poland
Brazil
Egypt
Mauritius

Source: Bloomberg, Legae Calculations

• Using the 10 year returns of our EM universe, SA outperforms markets

like Russia, China, Brazil and Egypt. In fact, SA’s USD return over
the 10 years is above the average of our universe, which should
provide little upside risk if one believes in mean reversion to the
long term EM average.

Yearly Returns for select Emerging markets (1998-2008)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 LC 2008 USD
Brazil -30.2% 151.9% -10.7% -11.0% -17.0% 97.3% 17.8% 27.7% 32.9% 43.6% -41.2% -55%
Romania -49.6% 28.9% 15.2% 38.6% 119.8% 30.9% 101.0% 50.9% 22.2% 22.1% -70.5% -75%
Nigeria -11.9% -7.2% 54.0% 35.2% 10.7% 65.6% 15.9% 2.7% 38.7% 74.7% -45.8% -54%
Russia -79.3% 197.4% -18.2% 81.5% 38.1% 58.0% 8.3% 83.3% 70.7% 19.2% -71.3% -76%
Israel 10.8% 57.2% 4.4% -9.2% -27.3% 51.0% 22.6% 33.3% 12.5% 31.4% -46.2% -45%
Poland -0.2% 24.1% -1.3% -22.0% 3.2% 44.9% 27.9% 33.7% 41.6% 10.4% -51.2% -49%
Egypt -21.3% 42.5% -41.9% -30.3% 1.9% 116.7% 105.3% 131.7% 10.7% 51.3% -53.9% -54%
China -6.2% 19.2% 51.7% -20.6% -17.5% 10.3% -15.4% -8.3% 130.4% 96.7% -65.4% -63%
Mauritius 15.0% -6.4% -10.5% -12.6% 17.1% 37.6% 28.8% 13.6% 49.8% 53.8% -36.1% -43%
South Africa -14.4% 66.8% -2.6% 28.1% -11.3% 12.0% 21.9% 43.0% 37.7% 16.2% -25.7% -46%

Source: Bloomberg, Legae Calculations

• It is interesting to note that when comparing 2008 returns to the 1998

market performance, Russia actually performed better in 2008 in local
currency. South Africa performed worse, with 1998 and 2008’s
returns being -14.4% and -25.7% respectively in local currency.

Page 10 of 43
The graph below indicates the progression of the JSE ALSI historical P/E
ratio over CY2008.

Market P/E ratio

17

15 14.94

13
12.28
11

7.65
7

3
1/2/08

2/2/08

3/2/08

4/2/08

5/2/08

6/2/08

7/2/08

8/2/08

9/2/08

10/2/08

11/2/08

12/2/08
Source: Bloomberg, Legae Calculations

• The current JSE ALSI P/E ratio indicates massive undervaluation

relative to its historical context. Expectations of steeper declines in
corporate earnings growth in 2009 would expose the fallacy of buying
SA equities exclusively on this metric. However, investors with longer
term investment horizons could progressively increase their equities
exposure from late 1H09. Our expectations of a global economic
recovery in 2H09 should provide a catalyst for a re-rating of market
valuations.

Page 11 of 43
 Foreigners were net sellers of equities in 2008 (R bn)

800

Purchases
600
Sales
Net Purchase/-Sales
400

200 117.8
49.5 71.7 64.2
14.8 29.8
(5.6) (0.4)
-

2000

2001

2002

2003

2004

2005

2006

2007

2008
(55.4)
(200)

(400)

(600)

(800)

Source: I-Net , Legae Calculations

• We note that since 2000, foreigners were net sellers of SA equities in

2002 and 2003 (R5.6bn and 0.4bn respectively). This year, foreigners
are net sellers of over R55.4bn, a colossal figure relative to the period
under review – and about 2.2% of the country’s GDP.
• We believe that foreigners will eventually return to the SA market – a
relatively important EM asset class and member of the MSCI - should
EM risk premiums subdue. Subsequent liquidity injections will
materially improve valuations. We do not attempt to speculate as to
when foreigners may return to the SA market, but we do expect
sustainable opportunities to prevail once trading volatility subsides. It
is therefore reasonable to presume that foreigners will be net-
purchasers of SA equities by 1H10.

Page 12 of 43
1.2 2008’s Diamonds and Dogs
Below we show the best and worse performers for the year 2008.

Top 40: Gainers and Losers 2008

Harmony Gold 39%

Shoprite 23%
Tiger Brands 12%
Remgro 10%

Naspers 3%
Reinet 0%
Grow th Point -2%
ABSA Group -3%
Pik n Pay -4%

Gold Field -7%

-36% Investec Plc

-41% SAPPI Ltd
-43% Impala Plat
-43% Kumba
-48% Mondi Ltd
-49% Anglo Platinum

-49% Anglo Amer plc

-54% Liberty Int Plc

-67% Old Mutual

-68% Lonmin

-80% -60% -40% -20% 0% 20% 40% 60%

Source: Bloomberg, Legae Calculations

• Some of the best performers of the Top 40 are actually losers in real
terms as the year-end returns are either negative or below inflation
rate, an indication of the severity of the downward movement in share
prices in 2008.
• It is crucial to note the defensive switch that has played out already
in the market. As indicated below, about 6/10 top gainers of the
ALSI are in defensive industries, mainly food retailers and
producers.

Page 13 of 43
 JSE ALSI: Gainers and Losers 2008

Harm ony Gold 38.66%

Truw orth INTL 26.3%

Shoprite 23.1%

New Clicks 20.7%

Massm art HLD 17.4%

Convergenet HLD 16.3%

Oceana Group 12.8%

Mr Price Grp 12.5%

Tiger Brands 11.5%

Rem gro 9.7%

-63.7% Merafe Resource

-64.2% Buildm ax

-66.8% Old Mutual Plc

-68.4% Lonm in plc

-72.7% Bell Equipm ent

-75.7% Sentala Mining

-78.3% WeSizw e

-82.6% TWP Holdings

-85.6% Super Group

-90.8% Metorex

-100.0% -80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0%

Source: Bloomberg, Legae Calculations

• Notably, the majority of losers in the JSE ALSI are shares outside the
Top 40. The only Top 40 members in the bottom 10 is OML and
former Top 40 member Lonmin. Four of the top 10 gainers are,
however, members of the Top 40.
• We highlight that 2008’s worst performers may outperform as share
prices may recover primarily on a mean reversion basis. YTD the Top
40 members who were members of the worst 10 performers in 2008
indicated strong performance. OML has a YTD return of 19.7% and
Lonmin has already gained value by 18.5% (12.01.09)

Page 14 of 43
 1.3 Large Cap versus Small Cap

Performance Indexed to 2000

6
Top 40
Small Cap
5
Mid Cap
All Share
4

0
Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08
Source: I-Net, Legae Calculations

• We are not convinced that small-caps will re-rate given the

current liquidity crisis and the expected global recession. The
wide gap between the Small Cap sector and the other three major
indices that typified the period from around 2004 to mid-2008 is
unlikely to endure in 2009. We expect smaller companies with
unsustainable debt levels and weak cash reserves to be worst hit by
the recession. We caution investors against prematurely reducing risk
premiums in this sector. Given the endemic negative bias and current
systematic weaknesses in this sector, underperformance of the Small
Cap could persevere. The Small Cap index provided the worst
performance in 2008 at -34.3%

Page 15 of 43
 Small Cap Sector Was the Worst Performer in 2008

0%
All Share Top 40 Mid Cap Small Cap

-5%

-10%

-15%

-20%

-22%
-25%
-26% -26%
-30%

-35% -34%

-40%

Source: I-Net, Legae Calculations

Page 16 of 43
2. Politics
2.1 Political Landscape in 2009

• It is anticipated SA will hold national elections in early April 2009. The

landscape has become diverse, with the formation of COPE as a
breakaway opposition party from the ANC.
• It is difficult to assess if there will be substantial shifts in support form
ANC into COPE. However, private institutions that carried out their
own polling indicate that support for ANC is being eroded in key
provinces such as Eastern Cape, Western Cape and Northern Cape.
COPE’s gains in these regions are mainly attributed to the party
spending most of the festive season campaigning in these provinces.
• We expect the ANC to win the presidential elections. Should our
expectations materialise; the ANC will have the prerogative to appoint
its presidential candidate, Mr Jacob Zuma, as the President of the
Republic. At the point of issuing this research note, the ANC’s
president is campaigning under a cloud of legal battles. The NPA
appealed to have corruption charges against Mr Zuma reinstated, and
the judgement was in the NPA’s favour. It is widely expected for Mr
Zuma to approach the Constitutional Court in a bid to challenge the
decision.
• Most political analysts have highlighted the fact that Mr Zuma’s
administration will adopt a mostly leftist policy approach. The ANC
reiterated in various forums its commitment to most of the existing
macro-policies. While both the ANC and its alliance partners have
attempted to allay investor fears, they seem to have taken root in
some quarters.
• We do not believe that the fiscal policy will be loosened to an extent
that will have a significant negative effect to the consumer. While
government expenditure may create jobs, and stimulate the economy,
it may also worsen our inflation outlook. It is our cautious opinion that
both COSATU and ANC are aware of this.

Page 17 of 43
2.2 Implications to Equities

• Global financial markets apprehension with a Zuma-led government

has been aired in various media houses. We believe expectations
that Mr Zuma may lead the SA government may have already
been priced in, although we would not rule out further (negative)
impact on both the equity market and the rand.
• Failure to convince global & local financial players that inflation will
remain a basis for monetary policy formation may lead to loss of
confidence. While we do not forecast a quasi Zimbabwe scenario
playing out in SA, foreign institutional managers may not interpret the
scenario positively, and a sell off of SA equities may ensure.
• Post election, political uncertainty should reduce. It is difficult to infer
whether a political settlement in Zimbabwe will affect the local market,
and that is if it does take place. However, reduced political uncertain
and tension post elections should support valuations.

Page 18 of 43
 3. Our 2009 Themes and the
Implications to Equity

3.1 Growth Will Decelerate Markedly.

We expect the GDP growth rate in South Africa to decelerate markedly on
account of (1) diminishing capital inflows (2) tighter liquidity and (3) waning
exports.

• We expect capital inflows to diminish due to the current global

economic challenges, and should the global economy slide into a
recession, we expect FDI to be severely impaired. The creation of
productive assets by foreign money will therefore decelerate, affecting
the growth rate of the country.
• While we expect the Reserve Bank to reduce REPO rate in 2009 for
economic stimulation and also because inflation is expected to fall to
around 7%, we do not expect liquidity to be abundant as was the case
pre the National Credit Act era. The South African population is
probably optimally-borrowed already and liquidity in the market will not
be ease.
• Waning exports will significantly affect the resource sector. Exports in
metals – both base and special - will reduce on account of falling
demand from the major consumers such as USA, Europe, India and
China.

SA Economic Indicators

2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F
Real GDP (yoy %) 4.15 2.75 3.68 3.1 4.85 5 5.35 5.1 3.4 2.15
CPI (yoy %) 5.33 5.73 9.15 5.97 1.39 3.4 4.64 7.08 11.65 7.1
Central Bank Rate (%) 12 9.5 13.5 8 7.5 7 9 11 11.5 9.5
3-Month Rate (%) 10.53 9.78 13.49 7.73 7.47 7.05 9.18 11.25 11.43 11.37
2-Year Note (%) 10.72 10.5 8.15 6.98 7.65 8.8 9.95 7.33 8.29
10-Year Note (%) 8.08 7.43 7.71 8.4 7.31 7.73
USDZAR 7.58 11.96 8.57 6.68 5.67 6.33 7.01 6.86 9.53 10.17

Source: Bloomberg

• The Leading Indicators Index is already pointing to a decrease of

GDP, having decreased to below zero already.

Page 19 of 43
 Leading Indicators Index

20

15

10

0
Nov-02

Mar-03

Jul-03

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08
-5

-10

Source: Bloomberg, Legae Calculations

• Risks of a steeper deceleration in GDP growth rate to below the

Bloomberg consensus are understandable. However, we expect
infrastructural spending to underpin GDP growth rate this year. About
R500bn worth of projects in transport and power infrastructure,
and low cost housing are expected, limiting the extent of decline
in GDP growth rate. Our opinion is that it is a political imperative
for the government to roll-out the projects as a means of
absorbing excess labour in the economy.
• South Africa’s interest rates are relatively high, (refer to section 3.2)
and internal demand can be stimulated by rate cuts. South Africa
simply posses leeway to stimulate the economy using interest rates.

Page 20 of 43
3.2 Interest Rates to Fall in Synch with Growth.
We expect 2009 to be punctuated by interest rates cuts. The major reasons
would be to stimulate the economy. Expectations of lower inflation would
also support interest rate cuts as demand would fall on account of lower
export demand and lower local spending capacity. The interest rate cuts will
have major implications to the equity markets, namely that it:

• will lower the South African equities discount rate. The extent will
however be limited by the rising equity risk premium as we expect it to
go up from the general 5%-6% due to the global risk aversion. The
discount rate for South African equities should be much lower in late
2H09 on account of a lower risk free rate, and expectation of an
improving global economy – supporting valuations, and may catalyse
equity purchases.
• should push up property technical values - thus reducing credit risk
faced by banks. Rather steady property prices were putting
considerable credit risk on bank balance sheets and an improvement
in property prices should reduce this risk. Nominal loan repayments
will also reduce in line with falling interest rates, which should ease the
default rates in banks.
• stimulate growth in the real sector as working capital becomes
cheaper. Companies exporting to Africa may have a competitive
advantage despite the lower buying power capacity of the Sub Sahara
African (SSA ex SA) populace. The main advantage is that the
consumers in SSA ex SA are not overly debted, and transactions are
mainly on a cash basis. Average bank penetration rate in SSA ex SA
is only about 30%.

Page 21 of 43
 3 Month TB vs. 10 Year SAGB Yields

24

22
3 Month TB
20 SABG 10YR

18

16

14

12

10

4
Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08
Source: I-Net, Legae Calculations

• The widening gap between the 3 month TB and the 10 year SAGB
yields indicates an inverted yield curve. Theoretically an inverted
yield curve is an indication of investors’ expectations of falling interest
rates in the future.

There is a concern that low interest rates will become inflationary. While this
view has some merit, we do note that:
• interest rates remain relatively too high to forecast growth rates when
compared to the BRIC countries. This provides the monetary policy
committee with ample “margin of safety” to reduce rates without
triggering undesirable inflationary effects. We estimate South
Africa’s potential output at 5.6%, compared to Bloomberg’s
consensus figure of 2.2%, resulting in a positive output gap.
Generally, lower rates tend to be inflationary if the output gap is
negative.
• higher deposit rates may also diminish consumer’s propensity to
consume, thus in turn hindering the rebalancing of the economy
towards consumption in the wake of a global recession.

Page 22 of 43
 On Interest rate/GDP growth rate, South Africa ranks badly against the BRIC

Interest Rate Growth Rate Inflation Rate Real Interest Rate Interest Rate/GDP Growth
2008 2009F 2008 2009F 2008 2009F 2008 2009F 2008 2009F
Brazil 13.8% 12.8% 5.2% 2.9% 6.2% 5.3% 7.6% 7.5% 2.6 4.4
Russia 13.0% 9.5% 7.2% 5.0% 14.0% 12.0% -1.0% -2.5% 1.8 1.9
China 2.8% 2.5% 9.9% 8.3% 6.4% 3.6% -3.7% -1.1% 0.3 0.3
India 6.0% 5.3% 7.9% 6.9% 7.9% 6.7% -1.9% -1.5% 0.8 0.8

South Africa 11.8% 9.8% 3.4% 2.2% 11.7% 7.1% 0.1% 2.7% 3.5 4.5

Source: Bloomberg, Legae Calculations

Comparing South Africa’s interest rate, and the Bloomberg forecasts, we

take note of the following:
• South Africa enjoyed low positive real interest rates in 2008, which
could have influenced the policy makers to continue to hike interest
rates. Brazil for instance has had a real interest rate of 7.6% in 2008,
relatively to South Africa’s 0.1%. However, compared to Russia, India
and China, our real interest rate seems mildly excessive given the
group’s negative real interest rates (-1.0%, -3.7% and -1.9%
respectively).
• South Africa’s real interest rate is expected to increase to 2.7% during
2009. Russia, India and China are still expected to enjoy negative real
interest rates, while Brazil’s real interest rate is expect to decline
slightly to 7.5%.
• Using a simplistic approach where a “neutral case” is achieved
when interest rates equal GDP growth rate, we note that SA is
probably conducting the tightest monetary policy when
compared to the BRIC group of countries. In 2008, the interest
rate/GDP growth rate ratio of 3.5x is the highest. The 2009 forecast of
4.5x remains the highest again when compared to the BRIC.
• The benefit of South Africa’s position is that it has room to
reduce interest rates before reaching the “neutral case”.

Page 23 of 43
3.3 Compelling Relative Valuations May Persist in 2009

3.3.1 Current Market Valuation: Is it a screaming BUY?

Current valuations do offer an unsurpassed opportunity for investors, but we
do caution investors against indiscriminate buying. We do not recommend:

• High beta companies (mainly Small Cap) which we believe will

continue to underperform the JSE ALSI as volatility
increases/continues.
• Non-optimally leveraged companies because we believe a
protracted global recession will put pressure on companies’ top line
growth. This will negatively affect the companies’ interest coverage
ratio, making access to working capital more expensive.
• Companies with weak cashflows. We expect liquidity to be
expensive in 2009, and companies with weak cashflows may find it
difficult to finance working capital. Strong cashflows will also be
important for companies that may seek to make acquisitions.

Our favoured shares

On a general view, we favour shares whose capitalisation is large (Top 60).
Again it is not random picking of the large caps, but we actually seek to pick
up large market caps that also offer growth. We favour shares that offer:
• exposure to credit expansion, and sensitive to interest rate
reduction in a positive impact to their top-line;
• exposure to public infrastructural build-out, as we expect some of
the R500bn government expenditure bill to be rolled out;
• defensive characteristics to the current weak local and international
demand conditions. In this category, we remain fans of food retailers,
tobacco, brewery and pharmaceuticals.
• cyclicality but only in late 2H of 2009. We expect cyclical stocks to
benefit from renewed global confidence and risk tolerance. We only
recommend exposure to Small Caps in the 2H09 also as they
would stand to benefit from our expectation of a recovery in the global
economy.
• exposure to large market cap companies with growth
opportunities. We do not believe that exposure to large market

Page 24 of 43
capitalised companies should be random. Rather investors should
look for large cap companies with growth opportunities. Our fan in
category is the mobile telecom sector.

Premium/Discount to 10-Year Av. P/E ratio

Premium/
Year Av. P/E Discount
1995 16.6 0.16
1996 17.3 0.20
1997 15.9 0.10
1998 14.7 0.02 While the Av. P/E ratio
1999 15.0 0.04 in 2008 shows only a
2000 14.6 0.01 discount of 9% (lower
2001 12.1 -0.16 than 16% in 2001 and
2002 12.1 -0.16 2002, and 27% in 2003),
2003 10.6 -0.27 the current P/E ratio is
2004 14.3 -0.01 at a discount of 49% to
2005 14.6 0.01 the 10-year average P/E
2006 16.4 0.14 ratio.
2007 15.6 0.08
2008 13.1 -0.09
Current 7.3 -0.49

Source: I-Net, Legae Calculations

Page 25 of 43
Premium/(Discount) to Average P/E Ratio of the Top 40
Premium/(Discount)
Company Sector P/E to Average P/E
Harmony Gold Mining Mining 54.4 492%
AngloGold Ashanti Mining 20.4 122%
Naspers Ltd Media 16.3 77%
Shoprite Holdings Retail 15.8 71%
MTN Group Mobile Telecommunication 15.7 71%
Exxaro Resources Coal Mining 12.3 34%
SABMiller plc Brewery 11.4 24%
African Bank Investments Banking 10.3 12%
Kumba Iron Ore Mining 10.3 12%
Bidvest Group Conglomerate 9.3 1%
Average 9.2 0%
PPC Ltd Cement 9.2 0%
Tiger Brands Retail 8.9 -4%
Anglo Platinum plc Mining 8.3 -10%
Murray & Roberts Construction 8.1 -12%
FirstRand Ltd Banking 7.8 -16%
RMB Holdings Banking 7.6 -17%
Sasol Ltd Chemicals 7.5 -18%
Sanlam Ltd Life Insurance 7.2 -21%
Reinet Investments SA Investments 7.2 -22%
Standard Bank Group Banking 6.8 -26%
Telkom SA Ltd Fixed Telecommunication 6.7 -27%
ABSA Group Banking 6.7 -27%
Nedbank Group Banking 6.3 -31%
BHP Billiton Mining 6.1 -34%
Impala Platinum Holdings Mining 6.1 -34%
Sapp Ltd Paper 6.0 -34%
Mondi Ltd Paper 5.5 -40%
Liberty Holdings Insurance 5.4 -41%
African Rainbow Minerals Ltd Mining 5.3 -42%
Arcelor Mittal SA Steel 4.9 -46%
Investec Led Investments 4.9 -47%
Aveng Ltd Construction 4.8 -48%
Investec Plc Banking 4.6 -50%
Steinhoff International Furniture Retail 4.5 -51%
Remgro Ltd Investments 4.4 -52%
Lonmin plc Mining 4.3 -53%
Anglo American plc Mining 3.7 -60%
Old Mutual Life Insurance 2.9 -69%

Source: Bloomberg, Legae Calculations, as at 14.01.09

Page 26 of 43
 Select Emerging Markets Closing P/E Ratios 2008

Romania 2.5

Russia 3.5

Hungary 4.6

Poland 6.9

Mauritius 7.2

South Africa 7.3

Egypt 7.5

Average 7.7

Average 8.3

Turkey 8.3

India 8.5

Brazil 8.8

Israel 13.1

China 14.2

0 2 4 6 8 10 12 14 16

Source: Bloomberg, Legae Calculations

• On relative valuation, South Africa is probably not a screaming buy,

like would seemingly be the case with Romania and Russia (P/E ratio
2.5X and 3.5X respectively). South Africa’s P/E ratio of 7.3X is
however still lower than the average P/E ratio of our select emerging
markets of 7.7X.
• China still commands the highest P/E ratio in our selected universe
(14.2X) while other members of the BRIC family close the 2008 year
at P/E ratio that are lower than 10X – Brazil = 8.8X, India = 8.5x and
Russia = 3.5x.
• Using the GDP growth rate to calculate the PEG ratio for the JSE
since 1995, we observe that 2008’s PEG ratio is below the average
PEG since 2000, while the forward PEG in 2009 will just be close to
the average.

Page 27 of 43
 Historical ALSI PEG Ratio (1995-2009)

25.000

20.000

15.000

10.000

5.000

0.000
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
Source: Bloomberg, Legae Calculations

P/Es (LHS) and PEGs (RHS)

17.00 4.00

15.00 3.53 3.50

P/E ratio
13.00 2.97 3.00
PEG

11.00 2.50

9.00 2.00
1.78
7.00 1.50
1.21
5.00 1.00
0.70
3.00 0.50

1.00 0.00
Brazil Russia India China South Africa

Source: Bloomberg, Legae Calculations

Page 28 of 43
• We use Bloomberg’s 2009 GDP growth forecast to calculate the
PE/Growth (PEG) ratios. We then compare South Africa to the BRIC
member countries.
• While South Africa has a relatively low P/E ratio when compared to the
BRIC, on a PEG basis, South Africa is the most expensive (PEG
=3.5x). This could indicate that on growth basis, South Africa’s
valuation may further de-rate since the current valuation is
weakly supported by growth (relative to the BRIC). Russia has the
least PEG ratio (0.7x).

• Comparing the current P/E ratio to the JSE’s historical, we note that
the years 1997,1998 and 2002 when the JSE recorded negative
returns, the monthly P/E ratio bottomed at 12.6X, 11.3X and 11X
respectively. In 2003 the P/E shrunk to 8.8X, but we believe this was
more a case of strong earnings growth than a case of falling share
prices.
• The average P/E ratio since 1995 is 14.1X which is a premium of
93.1% to the current market valuation.

JSE ALSI P/E Ratio (1995-2008)

21.0

19.0

17.0

15.0
14.4

13.0

11.0

9.0

7.0

5.0
1-Jun-95

1-Jun-96

1-Jun-97

1-Jun-98

1-Jun-99

1-Jun-00

1-Jun-01

1-Jun-02

1-Jun-03

1-Jun-04

1-Jun-05

1-Jun-06

1-Jun-07

1-Jun-08

Source: I-Net, Legae Calculations

Page 29 of 43
• We also bring attention to the fact that in general the market is
considered over-valued when the market’s earnings yield is less
than the long-term Treasury bond yield. We note that the current
R157 yield is well below earnings yield of the market, and the gap
widened towards the end of the year 2008.
• On a longer-term basis, the market was probably overvalued from
2002 to around 2005 (using the rationale of this model). It became
fairly valued up-to around mid-2007 before it became over-valued
again. A sharp convergence of the earnings yield and R157’s yield
around September 2008 signals the end of over-valuation. Thereafter,
the market’s earning yield become higher than the R157’s yield,
pointing to possible undervaluation. However, the undervaluation is
not as clear-cut yet.

Earning Yield vs. R157 Yield (2008)

17.00
E. Yield

15.00 R157 Yield

13.00

11.00

9.00

7.00

5.00
1/2/08

2/2/08

3/2/08

4/2/08

5/2/08

6/2/08

7/2/08

8/2/08

9/2/08

10/2/08

11/2/08

12/2/08

Source: Bloomberg, Legae Calculations

Page 30 of 43
 Earning Yield vs. R157 Yield 2002-2008

12

11

10

Earning Yield
6
R157 Yield
5

2
Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08
Dec-02

Jun-03

Sep-03

Dec-03

Jun-04

Sep-04

Dec-04

Jun-05

Sep-05

Dec-05

Jun-06

Sep-06

Dec-06

Jun-07

Sep-07

Dec-07

Jun-08

Sep-08
Source: Bloomberg, Legae Calculations

• On a dividend yield basis, the market is trading at the highest dividend

yield since 2002. We are however unsure of the forward dividend yield
as we expect companies to cut their dividends, especially
financial/banking companies, retail and those whose leverage would
require extra cushion.

Dividend Yield (%) 2002-2008

5.00
4.67
4.50
4.02
4.00

3.50 3.25
3.21
2.93 3.00
3.00 2.78
2.69 2.70

2.50

2.00

1.50

1.00
Average
2008 Jan
2002

2003

2004

2005

2006

2007

2008 Dec

Source: Bloomberg, Legae Calculations

Page 31 of 43
• While most metrics indicates undervaluation relative to historical
valuations (relatively low P/E ratio, and relatively high dividend yield),
we believe 2009 will be a year that will render relative valuation less
meaningful. Instead we prefer DCF-based valuations, or valuation
metrics (P/E, PBV ratios etc) based on fundamentals (growth and cost
of equity).
• Our implied fundamental P/E ratio of the JSE is 9.5X (refer to section
5.1). Our fair value of the JSE Index is 24233.91, just about 9% higher
than the current value.
• Because we expect fundamentals to be weak, and investors to use
valuation methods that incorporate risks (cost of equity) and
growth expectations, we expect valuations to remain weak and
appealing on a relative basis (relative to previous valuations).

Emerging Markets Sovereign Spread (bp)

1200

1000

800

600

400

200

0
22-Apr-01
22-Aug-01
22-Dec-01
22-Apr-02
22-Aug-02
22-Dec-02
22-Apr-03
22-Aug-03
22-Dec-03
22-Apr-04
22-Aug-04
22-Dec-04
22-Apr-05
22-Aug-05
22-Dec-05
22-Apr-06
22-Aug-06
22-Dec-06
22-Apr-07
22-Aug-07
22-Dec-07
22-Apr-08
22-Aug-08

Source: I-Net, Legae Calculations

• We note that emerging markets sovereign spread widened to break

1000bp in 2001 and 2002. The widening of spread is steeper when
compared to instances when they narrow, which indicates a gradual
process.

Page 32 of 43
• Current sovereign spread widened steeply again although it has not
yet broken the 1000bp. Given that we believe that the recession this
time around will be more protracted than the 2002, we anticipated the
spread to breach the 1000bp next year as investors fully digest and
realise the receding global economy.
• Widening EM spreads suggest an increase in risk premiums assigned
to EM countries. This negatively affects our DCF-based and other
fundamental based equity fair values, again supporting our
expectations of relatively weak valuations in 2009, especially
when compared to historical values.

Page 33 of 43
 3.3.2 How Does SA Compare to Other Resource-heavy
Markets?
We investigate how South Africa, whose market is resource heavy will fare
against other markets that are heavily, weighed to resources shares.

South Africa Over-perform developed resource markets.

6.5
RSA: P/E = 7.7
Australia: P/E = 10.2
5.5 Canada: P/E =10.7
Brazil: P/E = 8.6

4.5

3.5

2.5

1.5

0.5
May-02

May-03

May-04

May-05

May-06

May-07

May-08
Jan-02

Sep-02

Jan-03

Sep-03

Jan-04

Sep-04

Jan-05

Sep-05

Jan-06

Sep-06

Jan-07

Sep-07

Jan-08

Sep-08
Source: Bloomberg, Legae Calculations

• South Africa’s performance held very well with Australia and Canada
from 2002 to 2005, a point when both Canada and Australia started to
underperform South Africa. The performance gap is however
narrowing.
• South Africa has the least P/E ratio of our resource based markets that
we selected.
• Using the 2008 returns, the best performer is Australia in USD terms
while Russia takes the worst position. SA’s 2008 is close to the mean
of the select resource-based markets, (-45.8% vs. -49.9%) which
again should one believe in reversion to the mean, then SA’s upside
risk is limited.

Page 34 of 43
 USD returns for "Resource-heavy" Markets

250.0%

Y2008
200.0%
5 Yr Return

150.0%

100.0%

50.0%

0.0%
Russia Brazil South Africa Canada Australia

-50.0%

-100.0%

Source: Bloomberg, Legae Calculations

• Using the USD returns for the past 5 years, SA underperforms Russia
and Brazil (although the two markets underperform SA when 10-year
returns are used). However, both 5-year returns and 2008’s returns do
not seem to wander from the mean of the resource-based markets.

Page 35 of 43
 3.4 Volatility May Persist on Earnings Surprise
Fundamentally, the risk of investing in SA equities has increased as
measured by volatility. Volatility has increased from below 15% in 2005 to
over 30%.

90-day Historical Volatility of the JSE ALSI

35

30

25

20

15

10

5
1/30/98

7/30/98

1/30/99

7/30/99

1/30/00

7/30/00

1/30/01

7/30/01

1/30/02

7/30/02

1/30/03

7/30/03

1/30/04

7/30/04

1/30/05

7/30/05

1/30/06

7/30/06

1/30/07

7/30/07

1/30/08

7/30/08
Source: Bloomberg, Legae Calculations

• The volatility of the JSE ALSI increased markedly in 2008. It touched

30%, which historically was not achieved even in 1988 when EM
markets faced immense volatility.
• Our expectation of persistence in volatility next year is based on
our expectation of material earnings surprises – both upside and
downside. We however also note that historically, volatility would
rise during periods of bubbles and recessions, and stay relatively
high for a period of one year or two. In 1998, volatility remained
high up-to around 2000, and in 2002 shot up and remained relatively
high up-to the end of 2003.

Page 36 of 43
 4. Valuation
4.1 Market Valuation
We attempt to value the JSE All Share Index (JSE ALSI). We use the
Dividend Discount Model (DDM). We also introduce our Top picks of the
year 2009.

Our inputs for the DDM are as follows:

• the Dividend estimate (D1) of the JSE ALSI (I-Net)

• the Cost of equity (ke) which we calculate as a combination of the risk
free rate and the risk premium.
• Growth Rate (g) which we equate to our estimated nominal GDP
growth rate.

Our equity risk premium is the average of the sum of the difference between
the return of the market (JSE ALSI = Rm) and the risk free rate (R157 = Rf).
(i.e. Equity Risk Premium = ∑[(Rm – Rf)/n- 1]. We estimate the risk
premium from 1996.

We recognise that this observed excess return may be different from the
expected excess return by investors, especially in light of the global
recession. This expectation of higher returns has already been observed in
the widening of the EM sovereign risk premium. For the sake of reducing
subjective estimates, we do not adjust our observed ERP to reflect these
expectations.

Calculation of our Equity Risk Premium

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ERP
Market Return 7.1% -8.2% -8.6% 66.8% -2.6% 28.1% -11.3% 12.0% 21.9% 43.0% 37.7% 16.2%
SAGB 10 YR 16.2% 13.8% 16.0% 13.7% 12.7% 11.5% 10.6% 9.2% 8.2% 7.4% 7.8% 8.4%
SAGB 30 YR 16.3% 13.8% 15.9% 13.6% 12.6% 11.4% 10.1% 8.9% 7.2% 6.8% 7.2% 8.0%
ERP 10YR -9.1% -22.0% -24.6% 53.2% -15.4% 16.5% -21.8% 2.8% 13.7% 35.5% 29.9% 7.9% 5.5%
ERP 30YR -9.2% -22.0% -24.5% 53.3% -15.2% 16.7% -21.4% 3.1% 14.6% 36.2% 30.4% 8.3% 5.9%

Source: Bloomberg, Legae Calculations

Page 37 of 43
Below we value the JSE ALSI.

DDM Valuation

LT Bond Yield 7.49% R157 Yield

Equity Risk Premium 5.90% Legae Estimate
Equity Discount Rate 13.39%

JSE ALSI Dividend (2008) 918.34 Bloomberg

Dividend Growth Rate 9.25% Legae Estimate
Cost of Equity 13.39% Legae Estimate
JSE ALSI Value 24233.91

JSE ALSI EPS (2008) 2554 Bloomberg

Implied P/E Ratio 9.5 Legae Estimate
Current P/E Ratio 7.3

Source: Bloomberg, Legae Calculations

• Our fair valuation of the ALSI value is 24,233.91, providing no

fundamental value by a return of just 9.1%. This upside risk to the
current valuation would not provide real return.
• There are risks to our valuation. The major risk is our dividend growth
rate which we estimated at 9.25%. We bring investors’ attention to the
fact that when we calculated the index dividends using the dividend
yield of the ALSI since 1995, the average growth rate of the dividends
came up at a higher value of 16.7%.

Page 38 of 43
4.2 Our 2009 Top Picks
Below we present our top picks of the year 2009.

For 1h09, we sought shares that have large, sustainable balance sheets, a
reasonably defensive business model and transparent growth
characteristics. We are not of the opinion that markets will immediately re-
gain confidence in spite of the expected global economic recovery in H209.
To that end, we advise investors to be selective buyers of SA equities ahead
of 2H09.

Our 2009 Stock Picks

H1 2009 Picks
Bloomberg Market Cap Price 5-Yrs Av. Div.
Name Ticker Rmn cents P/E P/E PBV Yield Beta
MTN MTN SJ 187,925.94 10060 16.4 15.9 3.0 1.4% 1.0

Shoprite SHP SJ 29,891.37 5500 17.7 15.8 6.3 2.8% 0.4

BAT BTI SJ 527,092.92 26029 15.8 16.4 5.5 4.0% n/a

Tiger Brands TBS SJ 24,027.03 13885 9.1 11.6 n/a 5.6% 0.6

Bidvest BVT SJ 33,653.60 10117 9.5 11.4 3.6 4.85% n/a

Aspen APN SJ 15,271.89 3825 16.2 21.3 4.4 n/a 0.5

Spar SPP SJ 9,630.00 5600 13.8 n/a 6.4 5.0% 0.6

H02 2009 Picks

Murray & Roberts MUR SJ 15,600.00 4531 8.1 13.6 3.1 4.2% 0.8

Old Mutual OLM SJ 45,960.12 871 3.1 8.5 0.4 5.5% 0.9

Richemont CFR SJ 172,780.00 1625 5.4 n/a 1.1 5.4% 0.7

Truworths TRU SJ 16,110.00 3507 11.9 10.9 5.1 4.0% 0.6

Absa ASA SJ 74,930.00 10705 6.8 8.0 1.8 5.3% 0.6

Steinhoff SHF SJ 16,802.76 1227 4.6 9.8 0.7 5.1% 0.8

PPC PPC SJ 16,680.00 2717 8.9 14.8 7.6 7.2% 0.5

Source: Bloomberg, Legae Securities

Page 39 of 43
Our neutral case foresees a stable currency in 2009, weaker domestic
and global demand and lower interest rates. The combination of weaker
commodity prices and a stable currency is negative for mining stocks. Lower
interest rates should support domestic interest rate sensitive stocks, which
are also likely to anticipate a recovery in activity in 2H09. Our preferred
exposure to SA equities is for domestically-biased companies with a
mix of gearing to lower interest rates, relatively stable earnings growth
and reasonable valuations. In 1H09, we continue to favour Tiger Brands
which should enjoy good earnings growth in 2009. Despite some macro risk
in Nigeria we continue to favour MTN which offers exposure to growth in
mobile phone usage in Africa (ex-South Africa mobile penetration in MTN’s
coverage is approximately 30%). Our other preferred picks are:

• BAT: since 2000, compounded shareholder return has been 28.3%,

adjusted EPS growth is 10% p.a. BAT will likely achieve modest
outperformance over mid-term. BAT is on an 11.7x forward PE
(CY09) whereas its peers are on a slightly lower 11.5 times forward
PE. Gearing for BAT is low relative to Imperial Tobacco and while
corporate bond spreads remain wide, the higher rating that BAT
enjoys could be maintained.
• TBS: we like its defensive properties which are underpinned by strong
growth and a relatively cheap valuation. We expect growth within the
group to accelerate in FY09 as raw material prices decline while sales
prices remain relatively stable. This growth is further supported by
some of FY08’s underperforming divisions normalising in FY09, most
notably the beverages and bread divisions.
• APN: has grown to become the leading generics company in South
Africa. It has expanded into Australia and has gained market
leadership in AIDS drugs in the sub-Saharan region. Through
acquisitions, APN gained access to high growth, high margin LatAm &
generic oncology markets, but also broadened its reach via co-
operations. The full potential is not yet visible with Aspen shares
trading at a discount to its peers.
• SPP: We expect food inflation to remain above 14% until mid-1Q09
and then expect it to roll over, averaging double digits for the full year.
This combined with significantly lower petrol prices should bode well

Page 40 of 43
 for FY09. SPP has continued to gain market share on the back of
space growth and solid performance.
• BVT: has a strong cash generation track record, is relatively under
geared, has world-class management that runs some valuable
businesses, benefits from a weaker ZAR and capitalises on inflation
due to its trading nature. The business mix is diverse. Corporate
action remains a key driver of the share price given its successful
track record.

For cyclicality (in 2H09), we prefer ABSA (gearing to lower interest rates,
superior earnings versus the sector) and Murray and Roberts (strong
gearing to public sector infrastructure investment, best earnings in the
sector, following a sharp fall in the share price fears over a slowdown in
construction now fully priced in). Other members of our 2H09 preferred
shares are:
• SHF: Although all regions where Steinhoff operates are experiencing a
broader slowdown, the group continues to re-iterate that it is well
positioned to weather the economic downturn. Operations in the UK
are trading flat, while those across Germany and Eastern Europe are
trading up in local currency terms. Australia appears to be improving
on the back of recent interest rate cuts. The South African logistics
operations continue to perform well.
• TRU: Despite a tough trading environment, TRU’s sales are currently
14% higher than last year. Trading space year on year has increased
10%, while product inflation is hovering at 6%. Same store sales are
currently up 8%.
• RCH: Richemont is the world's second largest luxury goods group. It
owns one of the world's best-known luxury brands in the guise of
Cartier. It also owns some of the most recognisable luxury watch
names such as IWC, Vacheron Constantin, Panerai and Jaeger-
LeCoultre.
• PPC: Cement demand growth continues in SA, due to increased
infrastructure investment. PPC trades on a forward PE of 9.6x, an 8.6
percent discount to the industrials index, and has traded as high as a
50 percent premium to this index. It has dominant market share and
strong cash flow generation.

Page 41 of 43
• OML: Key positives are: huge scope for operating performance to
improve, scope for strategic refocusing, new management team might
solve structural problems. Key concerns are: South African country
risk increasing, confirmed by Rand weakness. Outlook tough given
commodities crash. Solvency surplus now below management target,
implies high risk of capital raising and dividend cut. Potential sale of
Nedbank could struggle to find buyers.

Page 42 of 43
Legae Securities (Pty) Ltd

Member of the JSE Limited

6-10 Riviera Road, Houghton, Johannesburg, South Africa

P.O Box 87277, Houghton 2041, Johannesburg, South Africa

Tel +27 11 715 3700, Fax +27 11 715 3701

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