Monday’s market commentary on our CNBC Africa Power Lunch show is always fun. Today’s discussion ranged from Gugu’s desire to invest in Jimmy Choos through to Sasha Naryshkine’s warning on cyclical stocks. Among the specific shares discussed was Abil whose big institutional backers poured in fresh capital at a significant premium to the current 690c share price. Reminds me of SuperGroup – for a while the professionals who supported its deeply discounted rights issue looked silly. Today they’re looking back on it as one of their best ever investments. Perhaps Abil will repeat the favour. But you’ll need to ignore emotion to take the plunge, even now. – AHÂ
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ALEC HOGG: We’re joined by Sasha Naryshkine, the Director at Vestact. Let’s pick up on Abil. It’s held its ground after that big move on Friday.
SASHA NARYSHKINE: Yes, but ten percent up and it’s still not yet above seven. I think that puts it into context. Even if it was to do another ten percent four days in a row, we’re looking above R10.00, and then it’s looking slightly better for a lot of institutional money that’s poured into the share price. The volatility is a lot about the discussion we had last week. There’s a lot of short interest and there’s a lot of institutional support that’s being built at a lower and lower level.
ALEC HOGG: What are they in at? What are Coronation and the PIC?
SASHA NARYSHKINE: I don’t know what their average price must be. Some of those – including the PIC – owned the shares for years and years, so I don’t know what their average price is.
ALEC HOGG: Do you remember the prices – the rights?
SASHA NARYSHKINE: Yes, they were issued at R8, so we’re not even there yet.
ALEC HOGG: Put fresh money in at a higher price than you can buy the shares at today.
SASHA NARYSHKINE: Correct.
GUGULETHU MFUPHI: It almost seems as though it doesn’t make sense. It’s like buying an expensive pair of shoes and…
SASHA NARYSHKINE: Shoes are not an investment…
GUGULETHU MFUPHI: Well, let’s touch on that blue. Aspen also has a familiar shade of blue with regard to that and green.
ALEC HOGG: Blue, red, and white like the French flag.
GUGULETHU MFUPHI: Nonetheless, Aspen’s share price has taken a bit of a knock but it does seem as though there’s some confusion about what’s actually happening with regard to future forecasts of the company. Today, they published a SENS statement trying to correct what was said in the media.
SASHA NARYSHKINE: This is a telephone conference pre their year-end, which is today. It was held on Friday afternoon, I think. I listened to the call. It’s all of half-an-hour with a little Q & A segment at the back end. Now, it’s difficult because they’ve done a lot of deals. Aspen have done many deals in many different parts of the world. It was difficult to interpret it. Gus and Steve – the CEO and Deputy CEO – have an enormous amount of energy, so they talk quickly on the conference call and it travels quite quickly, so I can see where the confusion does come in. Some of the commentary that went out onto the wires did misinterpret what they were trying to say, and that’s why a SENS release came this morning saying ‘no, we didn’t say that’ and ‘it was misinterpreted’ as such.
GUGULETHU MFUPHI:Â So would it be premature for investors to react today?
SASHA NARYSHKINE: It’s always a case of ‘pull the trigger first and ask questions much later’. That often happens in financial markets, one way or the other. The share price,  when I left the office, was up about two-and-a-half percent, so it hasn’t got back everything, but some of the stuff they said wasn’t new. It was specific to the South African market and antiretrovirals market, which I think – as they put out in the SENS this morning – constitutes only four percent of overall group revenue, and I think 14 percent of South African revenue. It’s a much smaller business and it’s not a very profitable business. We’re talking about government being on a standstill with regard to the ARV orders.
ALEC HOGG: It’s up three-point-two percent (R9.20) What about Adcock Ingram. What’s happening there, Sasha?
SASHA NARYSHKINE: I don’t know. How can the Competition Authority talk about job creation? You’re dead right. If you want to make a business a lot more profitable and, by function of its profitability employ more people down the line, you have to make some hard choices today. Is there regulatory overreach with regard to what your mandate is and isn’t?
ALEC HOGG: Anyway, we will hear more about that in a moment. Sephaku Cement – they were down here in the lobby at the JSE this morning and I see some people like it because the share price is up four percent today.
SASHA NARYSHKINE: Construction cycles are notoriously poor when they’re poor and very good when they’re good. You’ll remember in the last construction boom, admittedly it was tied to a big infrastructural rollout in South Africa and globally. People wanted to buy Murray & Roberts at an above 20 multiple, so they were trading (just to use Murray’s as an example), because that’s often the ‘go-to’ for construction companies. Even though this is a cement producer, it is linked to the same sort of cycle. If you have the ability to be able to hold the shares in perpetuity through the cycles, you’ll be well-rewarded. Many retail investors don’t have the stomach for that because they can’t handle three/four/five years of share price movement – and in this case, much longer. You will recall when Barlows unbundled PPC, which seems like forever ago, the share price was effectively R50.00. What’s PPC now – R31.00/R32.00?
I think you have to be careful in terms of the timing of these investments, strictly to say where we are right now, because a lot of people would say ‘well, there’s a lot of government infrastructural spend to come, but (a) it’s been delayed and (b) it’s been prolonged’. There’s the same amount of money that’s been allocated to an infrastructure project, but much longer…
ALEC HOGG: And (c), will they be able to afford it?
SASHA NARYSHKINE: Exactly. Where’s the money?
GUGULETHU MFUPHI:Â What about the African story with regard to that? When we spoke to Ketso Gordhan a while ago, he was very optimistic about developments on the rest of the continent.
SASHA NARYSHKINE: He’s a great operator. What a smart family that is. Isn’t his brother the ex-Finance Minister?
ALEC HOGG: I think it’s his cousin.
SASHA NARYSHKINE: Is it his cousin? What a fabulous family. It must have been an interesting December holidays there. I agree, but you’re not just going to waltz in across the rest of the continent with Greenfields expansionary plan and even purchases of other existing businesses, and think you’re going to unleash your smarts on the local population. No, that’s a tough old game – cement making. If you’re looking for quality, we have some great businesses down here that do it, so when the going is very good you’ll be rewarded with extra cash from the company.
ALEC HOGG: Back to Sephaku, that four percent improvement today. Well, they’ve got their presentation here at the JSE – the year-end presentation of the results. Is that a stock you would have a closer look at?
SASHA NARYSHKINE: I think so, but you have to be very conscious of the timing of these purchases and note that you can’t own these forever, which means that there’s an implied capital gain somewhere down the future, where we’ll all have to pay tax on that, obviously. It’s tricky to call the cycles. If you don’t want to be in the construction stocks altogether, maybe you can be in some of the suppliers like the longer-term story in an African context, specifically.
ALEC HOGG: Cyclicals are always a tough stock to own.
SASHA NARYSHKINE: Bill Miller, the legendary fund manager, he always ignored the cyclical ones, although he came unstuck in that Legg Mason Fund because he invested in financial companies. In the last disaster, he unfortunately came a little unhinged. He would typically ignore construction, housing, and more specifically, associated with our exchange – the commodity stocks.
ALEC HOGG: Sephaku is a stock that’s gone from R2 just over a year ago – November 2012 – to nearly R7.00 today.
GUGULETHU MFUPHI:Â So you like it. We can tell.
ALEC HOGG: What? I’m on the other side. It would be nice to have it, but if it’s a cyclical stock and it’s actually had an enormous run, you watch out because the cycle’s not in its favour yet.
SASHA NARYSHKINE: Yet…I think it’s coming.
ALEC HOGG: It’s like Pick n Pay. We’ll have that interview later. They’re sitting on a PE of 40 and Richard van Rensburg said… You must watch that interview. He’s almost saying ‘market, you’re asking us for a bit much here’ – a good story coming.
SASHA NARYSHKINE: I think they probably are. There are other retailers. I know your general view on retailers, but just to throw something else into that story, no major mall has been built in the U.S., indicating that people are stepping away from that sort of model since 2008/2007, I think.
ALEC HOGG: We have Takealot.com and Kalahari.com coming into the picture – well funded…big money. Sasha Naryshkine is a Director at Vestact.
