Vunani told “be nice” or get frozen out as Curro tops Advtech 29 to 3.
Funny thing about the financial world. There are all kinds of rules about insider trading to stop companies passing on information to one party rather than another. The rules insist everyone gets treated equally so that we all have equal access before deciding whether to buy or sell. sadly, it's often just lip service. Many investment analysts play along because they believe the accuracy of their reports improves with confirmation from management. That can evolve vested interest into "be nice" of be frozen out. Scratch my back and I'll treat you to a titbit the others won't get. That approach by executives often expands into the way they engage with the media. I don't buy into it. Neither does Vunani, as we discovered in this CNBC Africa Power Lunch interview today with Gary Booysen. We asked his views about today's reporting company Advtech. Gary explained that because of criticism , the company's management had removed Vunani from the list of persona grata. When we tackled Advtech's CEO Frank Thompson on the matter, he confirmed it was so. As you'll read when you get to his interview. – AH
ALEC HOGG: Gary Booysen is with Vunani Private Clients. Gary, Advtech's interims…Sun International results: those are the two big announcements today, neither of which are enthralling the market…..
GARY BOOYSEN: No. Definitely not. We've covered Advtech for a long time – another lacklustre set of results when you compare it to a company as exciting as Curro. I think our analyst came out with the comment 'C+', as if it was a headmaster's report: 'C+, but they still have more work to do'.
ALEC HOGG: Did you ever get a C+ at school, Gary?
GARY BOOYSEN: I did, for Afrikaans. My Afrikaans wasn't too hot, despite the surname.
GUGULETHU MFUPHI: Are you from Durban or from KZN somewhere?
GARY BOOYSEN: No, I'm from Johannesburg.
GUGULETHU MFUPHI: I thought there was a connection here.
ALEC HOGG: Only two parts of the country can't speak Afrikaans, and that's Durban and Johannesburg. The rest…
GUGULETHU MFUPHI: Ek praat maar suiwer Afrikaans. Ek ken nie van julle nie.
ALEC HOGG: Ons kan die sien. It is an interesting company (Advtech) and now with the change, you would perhaps have thought through their thinking. Have you heard of this before, where the non-executive chairman takes over as CEO?
GARY BOOYSEN: Yes, I think you definitely flagged it as something a little bit strange. It was also brought to our attention immediately. Our research results were released on the 12th, saying this is strange because there's no operational experience here. As you say, he's a banker and not an educator (new CEO Leslie Maasdorp). It's going to be interesting to see how this one pans out. We've been fairly critical of Advtech all the way through, so it's very difficult for us to say because we haven't actually been allowed to speak to management for about a year-and-a-half. We've been highly critical.
ALEC HOGG: So when you're critical, they say 'we're not interested' in talking to you?
GARY BOOYSEN: It's more difficult to get meetings to chat to them. Anthony's a very vocal critic as well.
Looking at it over the last five years, they built three schools.
Curro's built 29 schools.So you've seen a huge expansion for Curro and their market cap tells the story. Curro sitting at a market cap above R8bn now and Advtech is sitting at about R3.5bn. The other comment Anthony was making was that Curro is now the centre of gravity in education in South Africa and Advtech is just something in a distant orbit. They are still the biggest – I think they currently have 37 schools but in another year Curro's going to be way past that. Their guidance to 2020 is around 80 schools, so you can see where the winner is and you can see where we're definitely putting our money education.
GUGULETHU MFUPHI: Despite the high valuations are there concerns around Curro?.
GARY BOOYSEN: There've definitely been high valuations with Curro. We were criticised for picking up Curro. I think Anthony's first recommendation was at R4, and we were criticised because there were no earning and 'these are all just prospects'. With the PSG backing that they have and the PSG continually following the rights, I don't think that it's particularly extended. As those schools come online and as those learners get in, the J-curve is very quick, compared (again) to Advtech who, when they build a new school it's more expensive. It takes longer for them to build a school. Curro has that cookie-cutter model that they can just go in and roll out new schools, and it's working very well for them. I hear what you're saying but if you look at earnings obviously, Curro's earnings are a little bit lower, but Advtech's earnings over the last six years have been very flat.
Advtech does pay a dividend, but even if you look at the dividend this time around, it's a five percent increase in their dividend, and that perhaps indicates that they're holding some money back – hoping to do some Capex and actually try to catch up. At this stage, we think Curro is just so far ahead. They've already selected their sites for their schools. They're already implementing and I think it's going to be difficult for Advtech to catch up.
ALEC HOGG: Very insightful comments there. What about Sun International?
GARY BOOYSEN: Sun International: I haven't looked too much at their results yet, but travel and tourism is obviously a sector that I think has been struggling a little bit recently, so it's one that we are steering clear of.
GUGULETHU MFUPHI: Tsogo Sun in comparison to that is…
GARY BOOYSEN: As I said, we don't cover that in a huge amount of details, so I'd rather not comment.
ALEC HOGG: It is interesting though, when you're just broadly talking about the hotel sector. We are going to be talking to Guy Stehlik – I presume that he's the son of Otto Stehlik, the Chairman of Protea before they sold to Marriott. He's in the business of rescuing hotels, so we'll talk to them later. Although Sun International puts a nice gloss on it, the hotel sector in South Africa's had a tough time.
GARY BOOYSEN: Definitely. Generally, hotels have had a tough time. There was that huge expansion, trying to build up rooms ahead of 2010, and now you're almost suffering (from what I can tell) from oversupply. I'm sure these room rates are not where the guys would like them to be. We obviously have our GDP print again tomorrow, and with an economy that's struggling, it's not easy to make money in the leisure sector.
GUGULETHU MFUPHI: You mentioned the technology space in some of the small cap players, and Anthony's been very vocal about some of them. Just looking at the share price movements today, Gijima down by eight percent. Pinnacle, on the other hand, following the update on their trading statement last week – again, up by more than eight percent today.
GARY BOOYSEN: Yes. Actually, Irnest Kaplan covers that one for us. Pinnacle has been a crazy story. We can't wait to sit down with management and get them to explain because obviously, after the first announcements they said 'this is not going to impact earnings. There might be a slight impact' and the obviously, that trading statement came out. The share price was knocked down almost 50 percent. It was down from R12.00, where it hovered after the initial news on the corporate governance issues and traded as low as R6.00. They came out and said 'no, wait a minute. This is a bad trading statement, but things are still okay'. It's very mysterious. We can't wait until those results come out so that we can actually go and have a look. We're holders of Pinnacle and we think it's a decent company with very solid earnings, but with very strange messages and very bad communication coming out of the company.
ALEC HOGG: R26.00 this time, last year. Now it's sitting at R10.00. The guys who called Abil correctly – 36ONE – they said that was their big short. This was their big long – this was their punt at R8.00, I think.
GARY BOOYSEN: It's always difficult because many guys are asking us 'what do you do with Pinnacle with these levels? Do you accumulate something?' For traders, it's very difficult. The margins have been hiked on it and you are going to have to wait until all the issues are worked out of the system, and we get some more clarity. That won't come until (at least) the results are in, and until the court cases are settled. As long-term punter, if you're looking for a nice small cap to put into a portfolio, we definitely don't think you're going to go wrong here. This business…the entire scope of their government operations is only about 30 percent of their earnings, so it's a company that has huge potential and I think it's currently just sitting under a dark cloud. We think it's a very different story from something like Abil.
ALEC HOGG: Have you done enough research into this? I guess Irnest Kaplan has…
GARY BOOYSEN: Yes, Irnest Kaplan has. He covers it in a huge amount of detail. He's one of the leading technology analysts. With him saying, 'this update is a complete shock to me. This is not what management has been telling me', is very difficult. We go on the back of what he's telling us.
ALEC HOGG: Has he changed his mind yet, on this?
GARY BOOYSEN: Not yet. He says that unless new information is coming to light at this level, this stock is definitely 'a buy'.
ALEC HOGG: If it smells fish, it often is fishy. If it came as a shock to Ernest, that would worry me more.
GARY BOOYSEN: Definitely. I hear what you're saying, but from our point of view, we have to go on the information that's available to us. We have to look at it and with management now coming out after that trading statement: yes, the numbers are saying one thing, but management is clearly painting a different picture for us here and they've said this not quite as bad as everyone's saying. We'll see. We'll see.
GUGULETHU MFUPHI: Maybe a lot more homework needs to be done there. Well, we'll find out in the days to come. Gary, thank you so much for joining us today. That was Gary Booysen from Vunani Private Clients.