With results season underway, it’s interesting to note that overall, companies seem to be disappointing investors with this batch of numbers. Despite strong growth, Coronation and Reunert saw their share prices dip, and Adcock’s share price fell on weak numbers. Following on from disappointing guidance from African Bank, Esor and others, the overall picture that’s starting to emerge is a fairly gloomy one. After a strong run on the JSE, it seems that investors are feeling that earnings do not actually justify current stock valuations. If this continues, it may mean a flat first half for the Alsi overall. – FD
ALEC HOGG: However, we’re now joined by our market commentator in Cape Town, Paul Whitburn from RECM. Paul, thank you so much for joining us today. Let’s perhaps kick off on Adcock Ingram’s earnings expectations today. Brian Joffe: does this mean that he might have a little bit more work to do with the company after it announced that it does expect its headline earnings per share to drop quite substantially today?
PAUL WHITBURN: Yes, I think it takes a lot longer to turn around a business than six months. As we know, Adcock Ingram’s had substantial issues with capacity utilisation, some drugs coming off (basically not being allowed to sell those drugs anymore in the South African market), so there’s been a whole host of issues there. I think the core product range within Adcock Ingram and the OTC market is still strong, so I wouldn’t be overly concerned right now, but it will be interesting to see once Brian Joffe gets in there and gets the efficiencies through, to see what happens with that business.
ALEC HOGG: Paul, you’re not in the studio with us and, I tell you what, you look like we should take a photograph for you and send it on here. You’re like five times life-size.
GUGULETHU MFUPHI: He looks good though, Alec.
ALEC HOGG: Yes, but next time you need to wear a tie. You’re on television now and not radio any more. These numbers that we got today from PPC, Coronation, and Reunert all three of them, it is not often that we’ve seen companies disappoint to the degree that these three seem to have, as far as the market’s reaction is concerned. Is this just a short-term blip?
PAUL WHITBURN: You know what we’d say is that many of these things are priced. Coronation and many of these companies have had a great run in share price, specifically Coronation. A lot of those of earnings are based on performance numbers that they’ve put up over the last three and five years, so performance fees are a large component of that. You’d have to argue what is sustainable earnings of that underlying business and I don’t think what they are reporting now are sustainable, so clearly we believe that the share price is overpriced, pricing imperfect information, a great, rosy future, and I think things are tough out there. Once you are at five-hundred and fifty billion where does your South African asset base go to? Internationally, they are mainly in the emerging market sector of the global sphere, so that’s also a tough place, where assets aren’t exactly flocking towards those types of products. Once again, what does the growth look like in the next five years? I think that is possibly the greater concern for Coronation. For us, from PPC, there are bigger issues there with new competitors. Remember, we had a cement cartel here for the better part of a hundred years, and now, for the first time ever, we’re seeing new competitors enter the market in Sephaku, and then the other cement plant out in the Mpumalanga/Limpopo area, so that’s going to lead to price wars. I can’t imagine overcapacity in the market not leading to a price war, so that’s why he needs to divest via outside of South Africa but that comes with additional risks. It is not plain sailing out there, for PPC. Their core market is still South Africa, and people must not lose sight of that.
ALEC HOGG: Reunert, the third of them?
PAUL WHITBURN: Yes, so Reunert is steady as she goes. Many of those businesses, ex-growth, I would say, as you can see they sold their latest business back to the networks and I think are very well managed, focused on shareholder returns, return invested capital of those underlying businesses, so we think it is a nice little business. Unfortunately, there are no big growth notes for the existing business and I think that is something they’ve struggled with for the last five years, to be honest. They have the new CEO, Mr Wentzel come in to try to change that, and bought some stuff in the telecommunications environment, which I don’t think proved that successful, so their call portfolio of businesses is good. However, where do they go next? So that’s, I think, the biggest problem for Reunert, at the moment.
ALEC HOGG: They’re still talking about acquisitions. Paul, just to get back to Coronation because it is a ‘go-go’ stock, its worthR35bn now, and it’s an asset management company with a couple of hundred people who work there. It makes more than R2bn per year. Are you guys aiming towards that? Is this something that, when you start an asset management company that you say, ‘Well, we’re going to make a couple of billion rand a year with just a handful of people?’
PAUL WHITBURN: Yes, I think everyone has aspirations of becoming big. I think RECM itself doesn’t have the aspirations of becoming big, but generating good returns for our clients is the most important thing to us, not as an asset gatherer. What’s happened globally is that the industry is becoming more and more concentrated with large players in the asset management’s sphere. You think of Black Rock, for example. Now, when you become that large it becomes more difficult to move money around. If you had to look at Coronation, and what they could possibly invested in, in the SA market, it is probably about the top thirty shares they could really move money around to. All of a sudden, your universe shrinks substantially, so then you have to ask yourself the questions. ‘Well what does my performance look like going forward as an active manager versus the index?’ We would probably not want to become that size. It is certainly not our aspirations on the local front, because of the small SA market. However, globally you can become very large. That’s the one thing that Coronation could do, is to get larger in the global market of things. They have the Gems product at the moment, but certainly global funds and the like. They have a great track record, a great talent in the business, and it is certainly something that they probably will do in the future.
GUGULETHU MFUPHI: Paul, I’d like us to turn our attention now onto a new gem that’s recently listed on the Stock Exchange, and that’s Advanced Health Care. It’s been a sterling performer since the day of listing and up further by another nine percent. I know it is a small unit, but is it one that you are potentially looking at?
PAUL WHITBURN: We had a brief look at it and I think we looked at it more from the perspective of what’s happening there. Discovery is obviously trying to reduce the expense base in the healthcare sphere and this is one big way of doing it. Instead of booking a person in overnight to do an operation, it is sort of day care types of clinics, and I think this could work, long-term. As we know, healthcare costs and prices are exorbitant and you kind of look at the whole supply chain and you say, ‘why is it so expensive?’ Everyone points to each other saying, ‘it’s the hospitals or the pharmaceutical businesses etcetera’. I think they are all to blame, largely but in South Africa, I would say pharmaceuticals, in fact, are very expensive, if you look at some of the margins that Aspen etcetera are generating in SA. They are far in excess of the global norms, so I think Pharma is the place where you could really cut costs but clearly, Discovery are trying to cut costs and look at anything possible.
GUGULETHU MFUPHI: Indeed, well thank you so much to Paul Whitburn from RECM, looking nonetheless, tie or no tie. After the break, we take a look at Coronation’s first half results. That’s with Anton Pillay. Don’t go anywhere.
