Citigroup Raises South Africa Stocks on Earnings Growth

Citigroup Inc. (C) raised South African equities to overweight, the equivalent of buy, on expected “strong” earnings growth and companies’ expansion into Africa’s fast-growing frontier markets, the bank said.

Citigroup added Shoprite Holdings Ltd. (SHP), Africa’s largest food retailer, to its top picks “as a play on domestic demand,” with the bank forecasting economic growth of 3 to 4 percent next year, it said in a report yesterday. Other preferred stocks include AngloGold Ashanti Ltd. (ANG), Bidvest Group Ltd. (BVT), Life Healthcare Group Holdings Ltd. (LHC), MTN Group Ltd. (MTN), Naspers Ltd. (NPN), Sasol Ltd. (SOL) and Standard Bank Group Ltd.

South Africa’s FTSE/JSE Africa All Share Index (JALSH) trades at 11.2 times estimated 2012 earnings, compared with 10.6 times for the MSCI Emerging Markets Index. Citigroup forecasts South African companies will grow earnings about 20 percent this year, one of the highest rates among emerging markets, it said.

“Access to Frontier Africa through the South African equity markets remains a theme of interest to investors looking for exposure to that region, highlighted by Shoprite’s upcoming capital raise, a large part of which will go towards expansion in Africa,” Citigroup analyst Andrew Howell wrote in the note.

Shoprite announced plans last month to raise about 8 billion rand ($1 billion) in a sale of shares and convertible bonds to bolster its balance sheet, expand its domestic operations and invest in its expansion into Africa outside South Africa.

Nationalization

The “resource nationalization debate” may be dying down as the ruling African National Congress “continues to rein in the most vocal supporters of nationalization in the mining sector”, Citigroup said.

The ANC expelled Julius Malema, the leader of its youth wing, on March 1 for undermining party unity and for calling for the ousting of the government in neighboring Botswana.

The ANC Youth League is pushing for President Jacob Zuma to be replaced as party leader by his deputy Kgalema Motlanthe at the ANC’s elective conference in December. The league, which is calling for the nationalization of mines, banks and land, played a key role in helping Zuma oust Thabo Mbeki as ANC leader in 2007.

“This remains an area to keep an eye on given the upcoming ANC elective conference,” Howell said in the report.

The FTSE/JSE Africa All Share Index (JALSH) declined 1.2 percent by 11:09 a.m. in Johannesburg. The MSCI Emerging Markets Index fell 1.1 percent.

Citigroup raised Egypt and Chile to neutral from underweight and retained overweight ratings on South Korea, its top country pick, Brazil and China.

To contact the reporter on this story: Stephen Gunnion in Johannesburg at sgunnion@bloomberg.net

To contact the editor responsible for this story: Ana Monteiro at amonteiro4@bloomberg.net

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