Stock Picks – Old Mutual

Featured

Illumina Inc (ILMN US)

Recommendation

BUY

Summary Headline
(left hand section with turquoise background) 22 Words.

We initiate a LONG position. Our upside target is set at $410. We recommend a stop-loss at $315.

Analysts

Peet Serfontein, Sithembile Bopela

Summary Copy
(Right Hand summary copy)

149 Words.

Illumina manufactures and markets integrated systems for the large-scale analysis of genetic and biological functions. The group provides a comprehensive line of products and services pharmaceutical companies, academic institutions and biotechnology companies.

Technically, a stable price makes the stock attractive as an investment option. Notice how the price remains between major support and resistance (see the black converging trendlines).

The expectation is that the price might progress upwards from the current price.

The price remains just above its 200-day simple moving average; continued trading above this price will set the long-term trend as bullish.

Relative Strength Index (RSI) forward calculations suggest that the share will be in overbought territory at around $430, which classifies our target price of $410 as realistic.

Fundamentally, the group has a solid foundation in its respective markets and is expected to gain market share in sequencing given its increasing use in the clinical landscape.

Share Information

Share Code

ILMN

Industry

Pharmaceuticals, Biotechnology

Market Capital (USD)

50.04 billion

One Year Total Return

4.94%

Return Year-to-date

3.31%

Current Price (USD)

342.72

52 Week High (USD)

404.20

52 Week Low (USD)

196.78

Financial Year End

December

Consensus Expectations (Bloomberg)

FY19

FY20E

FY21E

FY22E

Headline Earnings per Share (USD)

6.57

4.44

6.34

6.32

Growth (%)

-32.37

42.58

-0.25

Dividend Per Share (USD)

Growth (%)

Forward PE (times)

77.14

54.10

54.24

Forward Dividend Yield (%)

Buy/Sell Rationale: 302 words.

 

 

Technical Analysis:

  • Recently, a change in trend to bullish occurred as the MACD (amber line) crossed above the MACD signal line (black line). The previous instances of such a bullish trend change resulted in some upward price action.

  • The sideways trajectory of the on-balance volume (OBV) – which uses volume flow to predict stock price changes – indicates that money is flowing into the stock.

  • Our upside target is set at $410 (~19.6% upside from current levels), which is at some major resistance. The price will be in overbought territory around $430 and profits can be harvested close to these levels.

  • Time to exit is around mid-February 2021 (taking a medium-term stance) with the option of extending for a longer or shorter period depending on the behaviour of the share price.

  • Price action below $315 (~8% downside potential from current levels) remains a major concern for downside potential and is recommended as a stop-loss.

Long-term fundamental view:

  • Illumina, which is one of the global leaders in DNA sequencing and array-based technologies, has benefited from growing demand in gene sequencing. Lower costs and faster results have spread sequencing to uses in many sectors including research, clinical and consumer settings.

  • The group recently announced its intention to acquire Grail, a previously spun-off genetic sequencing subsidiary of ILMN that is currently developing a blood test for early stage cancer detection.

  • The management believes Grail is uniquely positioned due to its first-to-market potential, the largest completed or in-process clinical studies, as well as potential for value-creation in the long-term particularly in the rapidly growing market for early cancer screening.

  • In terms of downside risks, other than further unexpected pandemic-related headwinds, the group remains exposed to competition from potential disruptive technologies, slow demand for new products (weak penetration rates) as well as regulatory risk and delays due to the complex nature of the products.

Featured

Anglo American Platinum (AMS)

Recommendation

BUY

Summary Headline
(left hand section with turquoise background)
22 Words.

We initiate a long position in AMS. Our upside target is set at R1 586. We recommend a stop-loss at R1 114.

Analysts

Peet Serfontein, Thabiso Mamathuba

Summary Copy
(Right Hand summary copy)

150 Words.

Anglo American Platinum (Amplats) operates platinum mines. In addition to platinum, the group mines and produces platinum group metals such as palladium, rhodium, iridium, ruthenium, osmium, nickel, copper and cobalt.

Technically, the price movement is in a broadening top/megaphone pattern which makes Amplats attractive. The expectation is that the price movement will advance to “number 5” on the chart to complete this pattern.

The price recently crossed above its 200-day simple moving average, indicative of a bullish trend. 

According to the Relative Strength Index (RSI), the price is overbought at ~R1 650.00 which leaves some upside potential from current levels.

Fundamentally, we are of the view that Amplats is a better-quality counter among the South African PGM counters given its balance sheet strength. As of the end of 1H20, the company was in a net cash position of R11.3 billion. We view this as insurance during periods of market volatility.

 

Share Information

Share Code

AMS

Industry

Platinum & Precious Metals

Market Capital (ZAR)

332.14 billion

One Year Total Return

4.23%

Return Year-to-date

0.15%

Current Price (ZAR)

1 251.99

52 Week High (ZAR)

1 529.52

52 Week Low (ZAR)

419.10

Financial Year End

December

 

Consensus Expectations (Bloomberg)

FY19

FY20E

FY21E

FY22E

Headline Earnings per Share (ZAR)

70.87

98.75

191.87

169.85

Growth (%)

 

39.34

94.30

-11.48

Dividend Per Share (ZAR)

27.60

37.01

100.71

105.73

Growth (%)

 

34.08

172.14

4.99

Forward PE (times)

 

12.68

6.53

7.37

Forward Dividend Yield (%)

 

2.96

8.04

8.45

Buy/Sell Rationale: 369 words.

Technical Analysis:

  • The recent upwards trajectory of the on-balance volume (OBV) indicator confirms that money is flowing into the share. The OBV is a form of technical analysis that enables traders and investors to make predictions about future price movements based on the share’s previous trading volume.

  • Our entry range is between R1 114.00 and R1 249.00. Our upside target is set at R1 586.00 (+27% upside potential). An extension to R1 650.00 seems likely (RSI overbought territory).

  • Time to exit is mid-February 2021 (taking a medium-term stance). Keep the option open to extend the time exit should the price action unfold sideways or reach our profit target in a shorter time.

  • A price action below R1 114.00 (-11% from current levels) remains a major concern and is recommended as a stop-loss.

 

Fundamental Analysis

  • Despite falling car production and sales globally, we believe PGM demand will remain robust on the back of Chinese and European emission regulations that require PGM loadings to increase on autocatalysts to curb the amount of pollution that cars produce.

  • Amplats is well positioned to benefit from these developments given its relatively low production costs, well-capitalised assets, long life and easy to mine operations.

  • Although production was lower during the first half, this was expected. Revenue was well supported by higher average prices for palladium (+53% y/y), rhodium (+216% y/y) and minor metals (+12% y/y).

  • Amplats has managed to grow dividends from R3.49 per share in 2017 to R52.60 in 2019. We forecast that the company will continue paying attractive dividends throughout our forecast period given its strong cash generation, cost-cutting initiatives, low capex commitments and balance sheet strength.

  • Risks to our fundamental view include regulatory risk in mining, particularly in SA. In addition, labour disruptions can have a substantial impact on production when wages are being negotiated.

  • In addition to the above-mentioned risks, the adoption of electric vehicles (EVs) threatens to displace demand for several commodities, particularly oil and platinum group metals (PGMs). There is, however, a misconception that EVs do not contain PGMs. This is only true of battery EVs. Other EV models, such as fuel cell EVs, contain over 30 grams of PGMs, while hybrids comprise similar amounts of PGM to an equivalent internal combustion engine.

Featured

Electronic Arts (EA US)

Recommendation

BUY

Summary Headline
(left hand section with turquoise background) 22 Words.

We initiate a LONG position. Our upside target is set at $152. We recommend a stop-loss at $118.

Analysts

Peet Serfontein, Tlamelo Ntabeni

 

Summary Copy
(Right Hand summary copy)

133 Words.

Electronic Arts develops, publishes, and distributes branded interactive entertainment software worldwide for video game consoles, personal computers, handheld game players, and cellular handsets.

Its leading titles are Madden NFL, FIFA, and Star Wars, all of which it licenses from other companies, and its own Battlefield, Mass Effect, and The Sims. While Electronic Arts generates increasing sales for games on mobile devices, it still makes most of its revenue from games played on consoles from Sony and Microsoft and on personal computers.

Technically, price action that presents as “muscle memory” makes Electronic Arts attractive as an investment option.

Fundamentally, Electronic Arts has perennial money-makers; FIFA – its soccer series, Madden – its NFL game, and The Sims. The company’s strategy is to create amazing games and content, powered by services, delivered to a large, global audience.

 

Share Information

Share Code

EA

Industry

Media & Entertainment

Market Capital (USD)

37.33 billion

One Year Total Return

24.83%

Return Year-to-Date

19.86%

Current Price (USD)

1.29

52 Week High (USD)

1.47

52 Week Low (USD)

0.86

Financial Year End

March

 

Consensus Expectations (Bloomberg)

FY20

FY21E

FY22E

FY23E

Headline Earnings per Share (USD)

4.83

5.31

5.94

6.57

Growth (%)

9.93

11.89

10.66

Dividend Per Share (USD)

0.00

0.06

0.09

0.00

Growth (%)

N/A

32.81

N/A

Forward PE (times)

24.25

21.68

19.59

Forward Dividend Yield (%)

0.05

0.07

0.00

Buy/Sell Rationale: 385 words.

 

Technical Analysis:

  • The sideways trajectory of the on-balance volume (OBV) – which uses volume flow to predict stock price changes – indicates that money is flowing into the stock.

  • The price remains above the 200-day simple moving average, confirming a bullish trend.

  • The lower panel shows the Moving Average Convergence Divergence (MACD) of the stock. The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price.

  • Our entry range is set at $118 to $127 or as close as possible to the current reference price of $127.24. A fall below the suggested entry range suggests a structural change in the trend has occurred and provides reason to negate the trade idea.

  • Our upside target is set at $152 (just over +19.5% upside potential from current levels). The profit target is based on the width of the previous movement (see the green arrows). Harvest profits close to these levels.

  • Relative Strength Index (RSI) forward calculations suggest the share will be in overbought territory at around $160, which classifies our target price of $152 as realistic.

  • Time to exit is mid-April 2021, taking a medium-term stance, with the option to extend for a longer period.

  • A price below $118 (5% downside potential from current levels) remains a major concern for downside potential and is recommended as a stop-loss.

Long-term fundamental view:

  • Electronic Arts is well positioned for long-term sales, earnings and cash flow gains, aided by continued expansion of its key live-services titles.

  • Electronic Arts is anticipated to have its strongest quarter ahead in 3Q21 with the launch of FIFA 21 and new partnerships with Microsoft between EA Play and Xbox Game Pass, which management expects could double its subscribers to 6.5 million over the next 12 months.

  • The company’s challenge is to develop new franchises that open with a bang and deliver recurring revenue. Its recent release, Apex Legends, a free-to-play game, was the fastest-growing new game Electronic Arts has released, hitting 50 million players in a short time.

  • In terms of downside risks, Electronic Arts faces a number of headwinds including an inability to drive further growth at non-sports franchises if the anticipated acceleration in industry-wide software sales does not materialise in the coming years, or it sees cannibalisation of existing games. Growing competition and uncertainty in new game releases are further risk factors.