Monday means Sasha Naryshkine, Director at Vestact, joining us on CNBC Africa’s Power Lunch to chat about today’s market stories. Of particular interest is a complicated deal between BHP Billiton, Hulamin and a middle-man BEE consortium. Sasha also gives us his expert opinion on Pioneer Foods results under Phil Roux as well as why he’d rather own Mediclinic than Netcare. – CP
ALEC HOGG: Let’s get a more in-depth view of the market today and that insight into a rather complicated deal between BHP Billiton, Hulamin, and a BEE consortium. Sasha Naryshkine is a Director at Vestact. Let’s start off with that, Sasha. I don’t know if you’ve had a chance to read through the whole Hulamin announcement. It’s a big company – Hulamin – about R200bn market cap. It looks like there’s a BEE Company that’s been formed, that’s going to be taking an offtake from Bayside, and then selling it straight off to Hulamin, who’ve given them a guaranteed five-year purchase agreement and, being the man in the middle, making some money, I guess.
SASHA NARYSHKINE: Well, I guess it also gives the company certain BEE credentials, which I think they need. It’s a different way of going about it, I guess. Is the aluminium business a good one? I don’t think so. I think that in The Intelligent Investor, there is a segment (if I remember correctly) on old cans, specifically. The conclusion that Benjamin Graham comes to is that there’s very limited profitability over a period of time, like very lump earnings and then it’s losses because it’s way too cyclical. I guess that if you were looking at it from BHP Billiton’s perspective, you would say ‘well, that’s good. They’ve finally gotten rid of that asset’ although it was always going to be a new Co. anyhow – a company without the four pillars, on which BHP Billiton are now going to focus.
ALEC HOGG: It’s an interesting deal. I’ve never heard of the company, Isizinda Aluminium.
SASHA NARYSHKINE: What does it mean? It means ‘hub’ in Zulu, right.
GUGULETHU MFUPHI: Isizinda.
SASHA NARYSHKINE: I think that’s what they said. Does it mean hub?
GUGULETHU MFUPHI: I’d have to double-check that.
SASHA NARYSHKINE: Well, you’re our go-to person on isiZulu.
ALEC HOGG: Well, I would hope that Gugulethu… Isizinda: do you know those people? Do you know any of the people involved there?
GUGULETHU MFUPHI: No, it’s the first time I’ve heard about them but actually, that’s a good point to pick on, should investors interrogate the transactions, how they’re formed, and the parties involved. As Alec mentioned: little man…a company you’ve never heard of before…
SASHA NARYSHKINE: Of course, you should because it tells you everything about governance levels at a specific business. Interrogate, because it’s whom you lie down with, ultimately or depend on for the future of your business. If you set the right precedent early on, which many businesses do (and are probably not given enough credit for), it determines where the future is, ultimately – or the future for shareholders.
ALEC HOGG: It will be interesting to find out who the parties are behind Isizinda because it does appear as though you have BHP Billiton over there with the Bayside Smelter, and then Hulamin here, which is guaranteed to take R10bn worth of product off them in the next five years. Yet, you have somebody in between, which is basically, adding costs.
SASHA NARYSHKINE: Exactly.
ALEC HOGG: Well, that’s the way it goes. What about Pioneer Foods? Those numbers did look very strong.
SASHA NARYSHKINE: Yes, you’d have to say Phil Roux has done a fabulous job and so the snub at Tiger to some extent, has come as a positive for Pioneer. In the wake of Andre Hanekom having left Pioneer Food Groups, he’s done some great things there and continues to consolidate the business. I think that with Quantum now out of the way (and unbundled) there’ll just be two operations. You’ll have what they call ‘essentials’, which would be the staples such as pasta, bread, rice, and mielie meal. Then you’ll have the Ceres and Bokomo business separately. It still is, very much, an ‘essentials’ business but I think that the plan is obviously, to grow the branded business where the margins are a little bit better. Sometimes they have to take the commodity prices – both the rough and the smooth.
However, to own businesses such as these, you have to get them at the correct level. It looks a little bit stretched but maybe that’s as Alec pointed out; that they’re about to start firing on all cylinders.
GUGULETHU MFUPHI: What about Quantum?
SASHA NARYSHKINE: I don’t think… It’s either feast or famine (excuse the pun) and I don’t think chicken businesses are great businesses. Your input costs are always floating all around. Obviously, they’re going to get the benefit of lower input costs on the feed side, but that is a business of theirs, too. It’s too tricky to call the cycles when they’re so tight. Rather avoid.
ALEC HOGG: Definitely. The Phil Roux factor there has to be taken into account there with Quantum. If it was such a good business, why did he get rid of it?
SASHA NARYSHKINE: Exactly.
GUGULETHU MFUPHI: What do you make of Netcare? It’s an interesting company. Now they’ve changed management again in the U.K., to try to get things moving in the right direction there.
SASHA NARYSHKINE: If you do a direct comparison with the offshore element of MediClinic versus Netcare, obviously the United Kingdom is a lot harder to operate in than say, Switzerland or the UAE, where it’s a little bit more liberal. I would say that in terms of the international assets in – the medium term – MediClinic have the edge and in fact, is a preferred investment of ours over Netcare so obviously, I’m talking my own book. It’s been a difficult, long, hard road ahead. Now they’re paying rent to the business, which the essentially, used to own but they were forced to do it because of the creaking debt burden. You’d probably say that on a more normalised level, you’d have to watch and do a comparison three years hence, to see whether or not it was the right thing to do. I think it was ultimately, the right thing to do.
ALEC HOGG: It’s an interesting point that you make there because they moved in with their eyes open (Netcare), into this huge business in the U.K – the biggest General Hospital Group is the biggest private hospitals company there – but in a very regulated market. Whereas, if they could have their time again, maybe they would have followed the MediClinic route.
SASHA NARYSHKINE: Maybe, if they’d done it on a smaller basis… I think there was this rush in order. You could probably point fingers at Government to say, to de-South Africanise themselves, to protect their South African shareholders, and to look for acquisitions offshore. If we weren’t facing that in South Africa, they would probably have treaded a little bit slower.
ALEC HOGG: But the U.K. does have National Health Insurance and maybe that’s also a reflection… They’re private, and so they have to… If health insurance is good (and I was there recently), I had a cold, I’m a South African citizen, I walked into the hospital, the doctors saw me, and gave me a prescription. I asked ‘how much do I pay? I’m not a British citizen’ and they said ‘no charge. Off you go’.
SASHA NARYSHKINE: They looked at you surname and said…
ALEC HOGG: Must be a Scot…but that shows you what they’re up against.
SASHA NARYSHKINE: Well, I suppose, but in a world where people are becoming richer and you have the choice of elective surgery and world-class surgery, people are still choosing the one where your insurance will cover you. Out-of-pocket spender/richer people is growing. For instance, in Switzerland it’s over $2500.00 per person per annum. That shows you that rich people don’t want to go for the public health system because that’s creaking, relative to where it used to be, as well.
GUGULETHU MFUPHI: Are we seeing the likes of MediClinic and Aspen Pharmacare creeping into those markets that you’ve mentioned?
SASHA NARYSHKINE: Yes, I think that in MediClinic’s case, obviously having chosen the Switzerland (and there are growth prospects in the Middle East too, where there aren’t enough skills), they’re operating in a much friendlier environment from a regulatory point of view as well. I would say that the U.K. is combative towards the medical, but it’s a little bit more staid in comparison.
ALEC HOGG: So if you take a longer-term bet, your chips are on the table. You’re with MediClinic for strategic reasons.
SASHA NARYSHKINE: Correct.
ALEC HOGG: You’ve certainly backed the right horse in the last few years.
SASHA NARYSHKINE: Well, I guess that’s the benefit of hindsight. You have to ask yourself today ‘if I have the opportunity to buy MediClinic (zoning in on R100.00) or Netcare at R34.00, which one presents me with better medium to long-term prospects’, and we’d still say MediClinic.
GUGULETHU MFUPHI: Sasha, it’s always a pleasure having you with us. That’s where we leave it for our markets discussion. That was Sasha Naryshkine – Director at Vestact.
