Why I Would Buy SABMiller plc And Supergroup PLC But Sell Afren Plc

Royston Wild examines the investment cases for SABMiller plc, (LON: SAB), Supergroup PLC (LON: SGP) and Afren Plc (LON: AFR).

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Today I am running the rule over three London-listed headline grabbers.

SABMiller

I am convinced that the bottom line should swell at SABMiller (LSE: SAB) in the coming years in line with racing alcohol demand in developing markets. The company currently sources around three-quarters of total earnings from these territories, and noted last month that sales across its core African markets, as well as in Asia-Pacific and Latin America, have all picked in recent months.

SABMiller’s proud record of earnings growth is anticipated to have hit the buffers for the year ending March 2015, however, and a 3% slide is currently pencilled in due to cyclical problems and currency headwinds during the past year. But the business is expected to start accelerating again from this year onwards, and expansion of 6% and 8% is expected in 2016 and 2017 respectively.

At face value the brewing giant may not be the most attractive value pick in town, registering P/E multiples of 22.6 times for this year and 21 times for 2017, some way above the watermark of 15 times that represents attractive value. On top of this, yields of 2.1% and 2.3% for these years fall short of the market average. Still, I believe that the exceptional brand power of SABMiller’s key labels, which includes the like of Peroni and Grolsch, should continue to strike a chord with customers in hot growth regions.

Supergroup

I reckon that fashion house Supergroup (LSE: SGP) is on course to enjoy surging revenues growth as its European expansion plan, combined with improving retail conditions in its critical UK markets, boosts demand for its highly-popular Superdry togs. Indeed, these factors drove like-for-like sales 11.3% higher during November-April, a brilliant turnaround from the 0.3% slip in the corresponding 2014 period.

And in my opinion Supergroup offers very attractive bang for one’s buck. The business is anticipated to follow up a modest earnings improvement for the year ending April 2015 with a meaty 10% advance in 2016, creating a P/E ratio of 16.6 times. And this slips to 14.1 times for 2017 as earnings are expected to pop 16% higher.

On top of this, Supergroup’s improving profits picture is expected to reap rewards for dividend hunters. The retailer is expected to shell out a payment of 19.2p per share in 2016, creating a handy-if-unspectacular yield of 1.8%. But an estimated 22.2p reward the following year nudges this to 2.1%, and I expect dividends to keep heading higher in lockstep with improving till activity.

Afren

Unlike the other stocks I have discussed, I believe that oil play Afren (LSE: AFR) is likely to suffer enduring earnings woes as the oil market struggles. Crude prices have enjoyed a strong bounceback in recent months as the number of US rigs in operation has dipped, and the Brent benchmark struck its most expensive point since December — around $68 per barrel — just last week.

But with production from North America’s most lucrative fields still edging gradually higher, and other producers — most notably those from OPEC — vowing to continue pumping with a vengeance, I believe that this recent price uptick is likely to prove a shortlived phenomenon. Indeed, Morgan Stanley said today that “we expect elevated volatility and greater cyclicality to be features of the oil market going forward,” adding that “sustained low prices and greater capex cuts will likely be required to produce a more satisfying recovery.”

The state of Afren’s balance sheet remains another huge cause for concern, despite the firm having secured $255m of funding from bondholders in April. Just today the company missed yet another interest payment, this time to the tune of $12.8m, while wider restructuring of its huge debt pile is yet to be agreed with its lenders. With Afren previously advising that output is likely to fall to between 23,000 and 32,000 barrels per day in 2015, and the oil price outlook remaining muddy at best, I believe that the risks far outweigh any potential returns at the embattled firm.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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