David Shapiro: More evidence of SA business’s “Great Trek”; how to play Ellies now

It never ceases to amaze how prejudice prevents South African political leadership from tapping into the abundant private sector talent. Imagine, for instance, what the blinkered Trade & Industry Minister Rob Davies could learn about attracting foreign investment from spending an hour David Shapiro? South Africa’s favourite stockbroker was in top form in our CNBC Africa Power Lunch studio today, revisiting his research on what he calls the “Great Trek” of South African companies which are putting their investable capital anywhere except at home. He also offered suggestions on what those with Ellies shares should do now that HCI executive chairman Marcel Golding has been ousted – withdrawing the option of a deal with the BEE group which would have secured Ellies’ future. The uncertainty surrounding Ellies is now so great that canny shareholders are likely to be bailing. – AH       

ALEC HOGG: Well, Mr Shapiro, it’s interesting to see that Transnet regards a six-and-a-half percent increase in its revenues as a successful year. You would have thought that there’d be maybe more ambitious standards.

DAVID SHAPIRO: I think so. I like Brian (Molefe) and I think he’s done a very, very good job there. He’s really tried. He’s one of the few people who has put his shoulder to the wheel and is literally trying to make things happen there. Six-point-four percent: inflation over six really means in real terms that it’s virtually flat.

ALEC HOGG: Well, wage increases at Transnet will probably be well in excess of six-point-four percent, so it’s going backwards.

DAVID SHAPIRO: I haven’t seen the results, but I think that one would expect more.   Particularly with their initiatives taking place there, you would think that more people are moving towards railroads.

ALEC HOGG: That’s the point. If you’re investing heavily in infrastructure, which Transnet’s been doing for a long time now, you have to get the payback in higher volumes and higher revenues.

DAVID SHAPIRO: In the U.S., we know from Buffett’s Burlington, Northern Santa Fe, Canadian Pacific, and many other railways, there’s a big shift towards railroads there, which is making them very attractive investments. One would think that we would start to see a similar…

ALEC HOGG: Privatise.

DAVID SHAPIRO: I agree with you.

GUGULETHU MFUPHI: But isn’t that the key that we need to unlock the economic potential? We always hear infrastructure is linked with energy. Obviously economic growth in Africa…

DAVID SHAPIRO: I don’t find any need for Government control companies anymore. I think they’d be far better… Whether it was SAA – you see them having the spat now with Emirates.

ALEC HOGG: And the Post Offices…

DAVID SHAPIRO: The Post Office doesn’t exist anymore.

ALEC HOGG: The CEO and COO have gone/left – not surprised.

DAVID SHAPIRO: It doesn’t exist anymore. We do not have a post office.

ALEC HOGG: Do you know we’ve had a…? How long is the strike now – 11 weeks – in the post office?

DAVID SHAPIRO: I don’t know. I’m still waiting for my Amazon parcel to arrive, a very small one. I bought a disc (a CD). I could have gone there and fetched it myself. I think I would have gotten it quicker. It’s a worry. The Post Office…we still do rely on post, so I’m a great believer that Government should just do the basics.

GUGULETHU MFUPHI: Impala Platinum also out with their production update, might be returning into positive production there.

DAVID SHAPIRO: It’s ramping up a lot slower than we thought. I thought it would be quicker. I know that Amplats is ramping up quicker but it’s still an industry under a lot of pressure. I think the disappointment is that the platinum price is not performing. It’s under severe pressure, together with all other commodities and that just makes things tougher for them. Especially in Europe, where they will sell most of their platinum into the motor industry, things are picking up there but not at the pace that we want. I’m a bit concerned about overall commodity prices on the South African economy.

ALEC HOGG: David, you’ve been around a while. You’ve seen things come and go. We have an interesting development now at Ellies. Just to unpack that very briefly: Marcel Golding has a subsidiary with HCI that would have fitted really well with Ellies in his opinion, so he’s bought a lot of shares. Now the Board is using it as a stick to beat him with, but that’s all politics – political interference, etc. What isn’t politics is that Ellies have an overhang of stock that could sink the company.

DAVID SHAPIRO: I think it could.

ALEC HOGG: How are you reading all of this?

DAVID SHAPIRO: I know what Marcel wanted to do. I think he did it a bit prematurely. He bought the shares a little too high, but I feel for Wayne Sampson from Ellies. I think they were given guidance – and it’s typical of South Africa. They were given guidance that Digital Terrestrial would be introduced. They positioned themselves so that when it was introduced, they could supply their decoders, their aerials, and equipment etcetera and suddenly, it just never happened. That’s a South African story. We make promises that are just, never fulfilled. Whether he read it wrong or could have read it better, I think it just shows you how it could sink what I think is a very good business.

ALEC HOGG: How long has Ellie Salkow, the Chair (or the Founder) of the company been running it?

DAVID SHAPIRO: It’s been for a long time, I think. Thirty or 40 years – almost more. It could be.

ALEC HOGG: So he listened to what Government was saying and it could actually bankrupt the business.

DAVID SHAPIRO: It could. I think Wayne, as CEO of the company, listened to them. It’s not different from Altron. Altron got into the same kind of position where their TV tops…

ALEC HOGG: Top boxes. If you owned Ellies’ shares…

DAVID SHAPIRO: I’d be cautious. I think that once you start to renegotiate with the banks, you know that there’s pressure. The problem is ‘how do they get rid of all that stock’. What’s the outlook? Do you just write it off and then have to refinance it? Then, the fact that they come into the market for a rights issue shows you that they’re having difficulty raising bank capital and they literally have to start all over again.

GUGULETHU MFUPHI: I think you’re still being cautious. Alec just said it straightforward yesterday ‘get out’.

ALEC HOGG: Sell your shares and run. If you can, get R1.00 or R1.20 for that stock.

DAVID SHAPIRO: I feel so sorry for that team because I really like them.

GUGULETHU MFUPHI: But it goes back to the common theme that you were referring to about privatisation being something that’s necessary in South Africa overall, because here’s a Government contract that’s unfortunately, not coming to the fore and impacting on the local companies.

DAVID SHAPIRO: We have a very strong private sector, whichever company you look at. We have magnificent leaders here. Let Comair run SAA. They’re doing well. They never made a loss in… How many years have they been in existence – through the toughest times – higher petrol prices, etcetera?   If you look at our transport companies and our logistics companies, they know how to run this place.

ALEC HOGG: We had results coming out today in fact, just over half-an-hour ago from MediClinic International. That’s almost a reflection of what’s happening to these well-run companies based in South Africa.

DAVID SHAPIRO: Well, a few years ago, MediClinic was 100 percent South African. It’s a Remgro Group. It’s now probably 70 percent international. It’s expanded into Switzerland and it’s expanded into the United Arab Emirates. It’s now becoming an international company with very limited exposure here – or far less limited. They’re still dominant here. They still have a lot of beds here and big exposure, but you can see the focus is not here.

ALEC HOGG: Is that what you’re getting from the CEO’s you’re talking to?

DAVID SHAPIRO: Absolutely. I follow this all the time. I call it ‘the Great Trek’. It’s quite astonishing to see the companies that are going. Even in the fast foods, they’re looking for outlets overseas. Wherever you go, every company is looking for expansion outside of our borders.

ALEC HOGG: Why is the Government not taking notice? You know. I know. We speak about it on this program, every day.

DAVID SHAPIRO: I wonder if they watch and I wonder if they take seriously, what we’re talking about.

ALEC HOGG: But last week in Business Day, Zuma said ‘please come and bail us out. We’re open for business. Bail us out’.

DAVID SHAPIRO: Then you must put the welcome mat out and the ‘welcome mat out here’ is as we’ve discussed many times here, ‘what can we do to make you a success’. Not ‘what can we take from you’, but ‘what can we give you that will make your business a success’.

ALEC HOGG: I wrote a list of things that the President needs to do to get business to come back to South Africa, to start reinvesting in South Africa rather than what it’s doing.  It was quite a long list unfortunately, but a fellow (a commentator) wrote underneath it to say ‘well done, media. You’ve now chased all of the capital out of South Africa’.

DAVID SHAPIRO: No, not at all. The message needs to be given. What a wonderful country… This is an incredible country with so much opportunity in so many different areas. Really, we can attract investment but there’s another theme playing out, which is even more worrying and we’ve been seeing those developments in factory automation.   Robotics, artificial intelligence, and 3-D printing: all of these are threatening what we can give for a lower amount.

ALEC HOGG: Just scheme for a minute. We have inflexible labour. What we’re therefore saying is ‘if you’re in the labour market, you’re going to fight like crazy to keep your job. If you are the person who employs them, you can’t really shift people around’. Ergo, inflexible labour over here and the world is becoming increasingly flexible, saying ‘reskill because the robots are taking your jobs’. We’re heading for a very problematic thing.

DAVID SHAPIRO: To me, that’s a very powerful message, which we have to acknowledge and adjust to, so we can’t demand the kind of labour prices that we are demanding. It just scares people away.

ALEC HOGG: The road to hell is paved with good intentions.

GUGULETHU MFUPHI: On that note, David, thank you so much for your time today and for joining us. That was David Shapiro. He’s from Sasfin.

In a moment or two, we’ll hear from Transnet Group CEO, Brian Molefe about the role the private sector should be playing in infrastructure development.

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