It seems that South Africa’s long-suffering economy will finally be able to start moving out of the direct impact of the country’s longest platinum sector strike and into the proverbial after-shock zone. With the end in sight, investors who have been bullish on the affected stocks are expecting to see the fruits of their position as the industry slowly begins what can only be an arduous journey back to recovery. Wilhelm Hertzog of RECM discusses his position on the platinum sector, as well as companies in the spotlight, with a focus on Woolworths, and the hurdles it is facing in its David Jones takeover. Omnia is another company on our radar, on the back of its full year results, proving itself as a sound investment. – LF
GUGULETHU MFUPHI: We are speaking to Wilhelm Hertzog. He’s from RECM. Wilhelm, perhaps a good place for us to start today, would no doubt be the focus on the resources space – finally, the five-month end to that strike regarding AMCU in the platinum belt. Does this still maintain your stance, as well as the likes of Piet Viljoen with regard to a bullish outlook for resource stocks in South Africa?
WILHELM HERTZOG: Sure, but I do think that bullish outlook and the value we find is a qualified bullish outlook, specifically related to us finding great value in the platinum sector. The reality of investing is that prices only become cheap when the news is negative and the news has been horrible in the platinum sector over the past five months (as we’re all very well aware). This conclusion of the strike certainly is good news and definitely aids in restoring a fairer price for those shares over the long term, I would say.
ALEC HOGG: It was interesting in the news headlines, to hear that Woolworths is going to be doing a buyout of Country Road in Australia. I’m sure you’ve been following the whole Woolworths story with the acquisition (or proposed acquisition) of David Jones, and then Solomon Lew, the man who owns those share in Country Road coming in and almost putting a spanner in the works. It looks as though they’ve sat down and talked turkey.
WILHELM HERTZOG: Yes, sure. It looks like they’ve given him what he wanted, really. He’s been holding out for probably 15 years now, for the price that he wants, or even longer than that. If you look at the price he’s going to be paid for his Country Road stake, it was actually a very worthwhile wait. He’s going to be doing very well from that investment, despite having had to wait 15/17 years to get the price that he wants and to get him out of Woolworths’ life. I think it’s been a worthwhile exercise for him.
ALEC HOGG: It’s quite extraordinary actually, because if you look at the value he’s going to be extracting from them, they’re almost valuing Country Road at the same price as they’re valuing David Jones. That’s extraordinary, so ‘well done’ to Solomon Lew for playing hardball.
WILHELM HERTZOG: Absolutely. Sure, I think that’s obviously the value of small shareholding that has quite a lot of power attached to it in terms of being able to block deals and being almost obstructive. It’s not necessarily ideal from the point of view of getting economies flowing smoothly and allowing businesses to do what they want, but the reality is that is the value of such blocks of shareholding.
GUGULETHU MFUPHI: But then for investors, should they be concerned that perhaps Woolies’ balance sheet might be slightly under pressure, given the substantial amounts that it will have to pay to both Country Road and David Jones?
WILHELM HERTZOG: Absolutely. I think that’s a very valid concern. Look, we view the whole David Jones deal with a bit of trepidation. We’re not convinced that it is necessarily a fantastic deal, given the amount of money involved, given the cross-border risks etcetera, and having to fork out so much more to get an irritation out of your life really doesn’t tip the scales in your favour any more than it currently is already, so it’s certainly a concern.
ALEC HOGG: Wilhelm, if you have a look at the biggest movers on the JSE today, the one that’s down the most is a little business called Niveus. Now, I know you understand (or you know) this company quite well at RECM. Why do you think it’s suddenly gone out of favour with some shareholders?
WILHELM HERTZOG: It’s very difficult to tell. It obviously had a very strong run over the past year or more, so in that type of scenario a small pullback like this isn’t really that material, and I wouldn’t be able to say what suddenly swung sentiment. It is a very illiquid stock, so shares like that can often have dramatic moves on a very small number of shares being traded, so that’s potentially not really reflective of a solid market price for the share. We view the company very favourably. We think the underlying businesses are very solid, specifically the gaming assets, and we have the highest regard for management. They have proven to be excellent capital allocators over time at HEI, so we still have a very positive view of Niveus as a group’s future.
GUGULETHU MFUPHI: I’ll be sure to read up on that one, Alec. It’s the first time I come across it. Looking at Steinhoff, interesting with their announcement that they have plans to list on the Frankfurt Stock Exchange. What is your view on this new area of raising capital, Wilhelm?
WILHELM HERTZOG: I think it make perfect sense for them. The bulk of their revenues – I’m not sure of profits, but definitely the revenues – do emanate from Europe and the U.K. and certainly, they are the type of group who want to do deals and they like to use their scrip to do deals. If they can get a better rating for their scrip in an offshore market like Germany, it makes sense for them to move their listing to Germany. What I also found interesting is the announcement that went along with this news of the listing being moved, of them selling down some of their interests in Unitrans to make it almost a more focused retail group. Potentially, they want to be known as a more pure-play retail group/retail conglomerate and hopefully, they’ll attract a higher rating I guess, in the European market, which will allow them to continue to build the group as they have done by doing deals using scrip, as they’ve recently done with J.D. Group.
ALEC HOGG: And we saw the immediate reaction in the market as well: that cap-related transaction down by nearly seven percent. We’re going to be talking to the CEO’s of two companies that have done very well in the last year: Wescoal and Omnia, both with results out today. Your thoughts on both, or either of them, Wilhelm…
WILHELM HERTZOG: I haven’t had a chance to take a close look at Wescoal’s results, but I’ve had a look at Omnia’s results and they’re very strong, I must say. I think that if you look at underlying volume growth, both in the agricultural division and in the mining division – very strong, low double digit-type of volume growth, which is a fantastic result. Omnia’s a company, which we also hold in high regard. Our clients have been shareholders of Omnia for many years now – not always in the same size and currently the share’s not as attractively priced as we would like it to be – but it’s a company with a fantastic culture of looking at long-term returns. They’ve been very opportunistic in the downturn…in the recession of 2008/2009 – going out and spending CapEx and other people who were very scared of doing so, and that’s served them very well.
They’ve benefitted tremendously from the last CapEx expansions they entered into in 2009 and incidentally, they executed those very well. They came in on time and under budget, so a fantastic business, we’re very familiar with it, and these results are very strong, I must say. It’s quite surprising potentially, if you consider that on the mining side things are actually under pressure, but their exposure to Africa, and to open cast mining as opposed to underground mining in the platinum and gold sector, has definitely stood them in good stead over the past few years.
ALEC HOGG: I’m not surprised though, that you don’t like the pricing because it’s trebled in the last three years. That’s hardly a value investment.
WILHELM HERTZOG: Well look, its price versus value. Sure, in that type of scenario, you often find that the relationship between price and value becomes much less attractive from a value investor’s point of view than it was before such a trebling.
GUGULETHU MFUPHI: Well, thank you so much to Wilhelm Hertzog from RECM, joining us today and updating us on the markets.
