Mohammed Nalla talks OPEC, Steinhoff, SAB & Johann Rupert

Don’t be lulled by Thanksgiving. There is still a lot going on in our own market. Mohammed Nalla, Head of strategy research of global markets at Nedbank Capital talks to Alec and Gugu on CNBC’s Powerlunch about a plethora of subjects ranging from OPEC’s oil price/supply dilemma to musings on what the Pepkor acquisition could do for Steinhoff. From Johan Rupert’s diatribe at Tuesday’s Remgro meeting to the collaboration between SAB and Coke. That’s enough. Watch here. – CPĀ 

GUGULETHU MFUPHI: To give us a more in depth view now, on how the markets are trading today, weā€™re joined at the desk by Mohammed Nalla, who is the Head of Strategic Research for Global Markets, at Nedbank Capital. Good to have you with us, as always, Mohammed.

MOHAMMED NALLA: Thanks for having me.

GUGULETHU MFUPHI: Maybe we shouldnā€™t expect too much action on the markets today, given the fact that it is a Thanksgiving Holiday in the U.S.

MOHAMMED NALLA: Yes, so I think certainly volumes will be constrained by the U.S. going out. Turkey sales are very brisk but, other than, that yes, activity has been a little bit low. I think also, on the sidelines, a lot of people are waiting to see what the outcome of this OPEC meeting is going to actually be because thatā€™s a big story, if youā€™ve ever seen one. Right now, I think, and certainly our hypothesis with OPEC. Why should they cut production right now? Thereā€™s this whole game theory going in the background. I guess the good news for us is that lower oil prices, lower petrol price, relief for the consumers.

ALEC HOGG: In the short term it is the obvious play because if you allow too many shale gas producers, in the United States, and elsewhere in the world, whatā€™s going to happen to your grip on the energy market?

MOHAMMED NALLA: Itā€™s more than that though, Alec. I donā€™t want to digress too much but the break evens on some, and I have read some reports on this. The break evens on your U.S. shale oil are below $50.00, so even if they push it down to those levels, specifically on the volume players, those guys are still in business.

ALEC HOGG: Canada is $60.00, with all of their shale oil, from the little bit North of the border, so if you take the Canadians out…

MOHAMMED NALLA: But if you throw back in, for example, you throw in Eagle Ford, some of the larger fields in the U.S., at sub $50.00, and they only get more efficient, as time goes by. I think it is more than just a play between OPEC and the U.S., remember, OPEC only takes on around, roughly, now 35 to 36 percent worth of global oil supply, so it is not the player it used to be. If they cut production, theyā€™ll just lose market share to those U.S. players.

ALEC HOGG: Yes, thatā€™s a good point. Well, weā€™ll be talking to Christopher Johnson, from Thomson Reuters, it is his focus area, and heā€™s the oil watcher, so weā€™ll get a little bit more insights there, but a very good point you make.

Two big stories this week, the first was the deal of the year, the deal of the decade, perhaps, and certainly the biggest corporate transaction in South Africa, the acquisition by Steinhoff of Pepkor. It does make a bigger unit, to attack the global markets.

MOHAMMED NALLA: Yes, first of all, I quite like it. We havenā€™t seen Pepkor, in a kind of a listed sense, for the last decade. They delisted around the mid 2000ā€™s, if memory serves. Now, I guess, the most recent look through you had in terms of that was probably [Bret? 02:32], in 2011 or thereabouts. This is a sizeable transaction. Obviously, a lot of people out there are saying that Christo Wiese is smiling all the way to the bank, but heā€™s keeping skin in the game.

Effectively, as you mentioned, it creates a much bigger player and, if you have a look at their footprint, I think it makes a lot of sense for Steinhoff as well because Pepkor has got an exposure of around, what, 16-odd jurisdictions, outside of South Africa. Maybe that retail distribution network is what theyā€™re looking for, in terms of leveraging a business that they run very well, very successfully. Marcus is in the team, they are a strong management team, and really now setting their sights on being a global company and it is fantastic to see, effectively, a South African company going in and deciding to punch on that weight.

Weā€™ve got a couple of very good examples of that, but Africa is really the flavour of the month and, I think, the guys are saying, ā€œThereā€™s a low base there. Thereā€™s a strong market we can go and tackle, but it is not just about Africa. Itā€™s global.ā€

ALEC HOGG: Maybe its Europe. I spoke to Marcus on Tuesday and what is interesting, (there was a lot interest in that conversation), but a very interesting part was this combined group will be in the top ten, clothing retailers in Europe.

MOHAMMED NALLA: Clothing retailers?

ALEC HOGG: In Europe.

MOHAMMED NALLA: Interesting.

ALEC HOGG: That was where he was focussing his attention, so clearly they are now number two, as a furniture retailer in Europe. Top ten in clothing, integration…

MOHAMMED NALLA: So a cross-sale kind of…

ALEC HOGG: I said to him, ā€œDoes it mean watch out Mr Price, here in South Africa?ā€

GUGULETHU MFUPHI: Exactly.

ALEC HOGG: And he said, ā€œWell, yes, okay South Africa, but Europe is where they want to play.ā€

MOHAMMED NALLA: Okay.

ALEC HOGG: But he used Christo Wieseā€™s investment here, I think it is something like R50.bn that heā€™s got tied up in Steinhoff now. Remember, heā€™s still a controlling shareholder through his prefsĀ of Shoprite, which is itself, another R100.bn market cap company, so itā€™s a big bet even for him but it certainly isnā€™t his entire bet.

MOHAMMED NALLA: Yes, well look, also I heard Christo on one of the radio shows fairly recently, and his kind of mantra around Pepkor Group, but I guess also Shoprite, to a large degree, is that provide an affordable product to the end consumer. With Pepkor, specifically, the ideology was, you should be able to dress reasonably for a good price, thatā€™s value.

ALEC HOGG: Gugu wouldnā€™t relate to value.

GUGULETHU MFUPHI: No, Alec.

MOHAMMED NALLA: Not turning left in the play, definitely not.

GUGULETHU MFUPHI: On that note though, SAB and Coca-Cola coming together for a bottling collaboration.

MOHAMMED NALLA: Yes, thatā€™s interesting for me and Iā€™ll tell you why itā€™s interesting, is again, a lot of these things have existed in the fringes, in the unlisted universe. There was the ABI thing, that SAB had that exposure to them; there was Coca-Cola canners that sat separately, and thereā€™s the bottling company. A whole bunch of private enterprises that I guess had had their hands in the various licensing agreements, and they all, kind of had their jurisdictions carved out and so forth. This makes sense for me, in terms of just getting all of those interests aligned, under a single, kind of Umbrella Corporation and, yes, itā€™s interesting.

SA, I havenā€™t looked at it in a terrible amount of detail, but SAB is, obviously contributing a fair amount of the infrastructure into this. By the same token, they will then also allow licensing agreements for some of their beverages, Appletiser, specifically through too, to Coca-Cola, internationally. I certainly think a strong management team, there again, have crunched the numbers, thereā€™s going to be a bit of ā€˜give and takeā€™, but the more dedicated focus for me makes more sense.

ALEC HOGG: Remember when Phil Roux was in the studio?

GUGULETHU MFUPHI: PepsiCo, yes, the license agreement has been presently terminated there.

ALEC HOGG: Yes, they gave up their license. He said that they just couldnā€™t compete with Coke but he did tell us that Pepsi has signed up a new partner, which will be interesting, if this is a pre-emptive step by Coca-Cola and SAB, to take them on.

MOHAMMED NALLA: Yes, look certainly I think a conglomerated model may give them some economy as scale efficiency, operational efficiency and so forth. Pepsi/Coke ā€“ thatā€™s been this global battle that weā€™ve seen. I mean Coca-Cola is well entrenched here. I guess Pepsi is trying to make some head wins, in terms of some of the product placements, with other providers. When you think of the likes of Burger King for example, you can only get Pepsi at a Burger King. That becomes very important because thatā€™s your kind of foot in the door and from that you kind of start eating into consumer preferences and then, all of a sudden, the guys are buying a bottle of Pepsi instead of a bottle of Coke. A heck of a lot of work to do, specifically, because, I mean, Coke has been the dominant player here for generations.

ALEC HOGG: Before we let you go. Johan Rupertā€™s outburst at the Tuesday Remgro AGM in Somerset West, what do you make of that?

MOHAMMED NALLA: Some people are calling it an outburst. Some people are calling it a downbeat diatribe. Regardless, Johan Rupert is the kind of person out there; he comes with certain gravity. Just in terms of the fact that he can make the kind of comments, he makes and I think it comes from a good space. Mr Rupert undoubtedly has a significant investment in this country, like most of us, and heā€™s kind of raising the flag and heā€™s saying, ā€œNotice the stuff that weā€™re getting wrong.ā€ The phrase that sticks out for me, is the whole thing about, I think it may have been Hemmingway, if Iā€™m not mistake, when he said, ā€œMan goes bankrupt slowly and then suddenly.ā€

ALEC HOGG: Youā€™ve had that a few times before, havenā€™t you?

GUGULETHU MFUPHI: Alec.

MOHAMMED NALLA: Effectively thatā€™s it. The trajectory on a lot of things, are negative and we canā€™t afford to be complacent on those.Ā Ā  It is fully within the capabilities of everyone watching this show and ourselves to steady the ship here and turn us onto the right kind of path. It is not that much of a ā€˜tall orderā€™ but the longer you leave it, that watershed moment runs away from you, and then it becomes a ā€˜tall askā€™, so I think…

ALEC HOGG: Hemmingway wrote about that in one of his books. It was a description of one of the characters he was talking to, another character, and it was mentioned in Davos. Remember, when I came back from Davos, and was also repeating it. Clearly, Rupert reads the right books, Johan Rupert that is.

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