Shapiro’s insights on today’s markets and the construction industry

David Shapiro has a keen sense of what is going in the world. His years of experience have provided him the benefit of a training ground that allows him to see through the noise, into the balanced reality of the situation. David’s insights into the markets locally and globally are always refreshing because of the clarity and anecdotal wisdom that he adds. In the spotlight today is undervalued Esor, and the goings-on in the construction sector. Special attention is paid to the potential of civil claims hitting the sector following Competition Commission fines. David also discusses the general state of global markets and the JSE. – LF


ALEC HOGG: Let’s get a more in-depth view of how the market is trading today. David Shapiro from Sasfin is with us in the studio. Let’s tell you the story about the prawns and the crabs. Here in our new premises at the JSE we have Millicent Radebe, who is our receptionist here for the whole media hub, and she maintains that the Radebe’s don’t eat prawns and crabs, so I had to ask Tshepiso whether that was true and, clearly she doesn’t. Apparently, when you are born as a Radebe, as a real Radebe, you throw the umbilical cord into the river. Maybe she was pulling my leg, but it sounds like a nice story anyway.

DAVID SHAPIRO: That’s very interesting. The reason that we don’t eat prawns or crabs is because it is not kosher.

ALEC HOGG: Oh, you don’t eat it either.

DAVID SHAPIRO: We don’t eat it either. It’s not kosher. The fish has to have scales and has to aerate. It has to be fins and scales.

ALEC HOGG: Maybe there’s a message in there for those who do eat these things.

DAVID SHAPIRO: I don’t eat them because, well, firstly, I must say I’m kosher, but the other thing is that they’re scavengers. They eat at the bottom of the ocean. I get very scared of those things.

ALEC HOGG: How have the scavengers been doing on the JSE? Have they managed to find anything? I see that little stock that I liked so much, Esor… Remember, it seemed to be hugely undervalued and we spoke to Bernie Krone, the CEO, and the share price went up and then it came down again. When does something like that actually realise its true value?

DAVID SHAPIRO: It is very difficult because I think if you picked up the Protech Khuthele story you’ve saw Aveng’s results were awful. I still think there are a lot of issues and it is still patchy…

ALEC HOGG: In the construction sector?

DAVID SHAPIRO: In the construction sector, it is still patchy and Government is not spending. There’s no evidence that they’re coming out with these huge schemes and spending money, so I just say, ‘stay cautionary. Just take a step back until the money is flowing easily and projects are on the go in summer’.

ALEC HOGG: I had an interesting chat to a bright young man, called Jason Lightfoot, from Futuregrowth, I spoke to him this morning. He said the Infrastructure Act, which was enacted on 1st of July, should kick-start this infrastructure program because remember – the PICC it’s called – the Presidential Infrastructure Coordinating Committee. Now it’s got teeth to get things going.

DAVID SHAPIRO: They might have teeth but they’ve got to have money and I think that’s a big problem.

ALEC HOGG: Is that the problem?

DAVID SHAPIRO: To me, it’s a problem of raising money and having the money to actually spend on it, as well as the people who can actually administer these projects. What I wanted to say is that there is one company that is doing pretty well, and it is one that you’ve always liked, and that’s Afrimat. They’re doing pretty well. Within their sector, you will always find one or two little gems that are managing to cope with the difficulties…

ALEC HOGG: But that’s the JSE as a whole, isn’t it?

DAVID SHAPIRO: Yes.

ALEC HOGG: You’ve just got to look for the…

DAVID SHAPIRO: Look for management…

ALEC HOGG: This management.

DAVID SHAPIRO: Management who can actually read what’s happening and then tailor their businesses accordingly and I think Afrimat is one of them. Wilson Bailey was up four-percent yesterday. I’m not quite sure what the message was there as well but it’s also, the company is still having troubled times but it has always been a wonderfully run business.

ALEC HOGG: Yes, that’s the blue chip of the sector. Afrimat is, of course, materials that are given to the building and construction sector. David, we had an interesting chat yesterday, with Steve Meintjes, from Imara S.P. Reid, who was talking about the potential threat of civil actions against the construction companies. Now, I know you know the sector really well.

DAVID SHAPIRO: Yes.

ALEC HOGG: Do you think that there’s a possibility of that, given that they had to pay the Competition Commission so much?

DAVID SHAPIRO: Well, I suppose they’ve got a case but to actually, get it to the Courts, and to go through with it, could take years and whether they’ll be successful in actually administering it, is another question. In America, believe me it would happen. Alec, I’ve got similar of issues as well with a number of other companies, against Tiger Brands, for example. How they can just mess up 900 million in two years, or even Exxaro who goes into the Republic of Congo, writes off R5.4bn in literally, two years. You know, one’s got questions. How are you running the company? What’s the due diligence process? I suppose there are a lot of actions we could take against listed companies. Whether we’ve got the, first of all, the pockets to do so and the energy to do so, is another issue.

ALEC HOGG: That’s an interesting point because the due diligence is not only done by the companies themselves, they get companies like PwC, etcetera.

DAVID SHAPIRO: I saw your interview with Protech Khuthele and I think it was last week you had the…

ALEC HOGG: Yes, R20m-odd that PWC got as a fee to do a due diligence, and it was all wrong.

DAVID SHAPIRO: And put a price of 90 cents on the share, when they were trading at 60. Less than a year later, they’re worthless, so what went wrong?

ALEC HOGG: But PwC seems to be having – and I know we’ve got Gerald Seegers from PwC coming in later – they seem to be going through a bad patch because they had to settle with Randgold as well. Remember they were involved with JCI, with Brett Kebble. They audited the accounts. Where are the shares? Well, we don’t know.

DAVID SHAPIRO: That’s true, yes. You know what happens is I think in business you need to have a certain amount of reasonableness. Is that the right word? In other words, don’t only tick the boxes. You’ve got to have a grasp of what is happening around there. I’m a big Buffett fan and I always trust in Buffett, as Graham and Phil Fisher did. Phil Fisher always said, ‘go outside. Go outside of the company. Speak to the customers. Speak to the competition. Learn more about what’s happening there’. I think this is something we don’t do in due diligence. We look at the numbers. We go in, we look at the papers, but we don’t do that investigative analysis, outside the realm of the company, and I think that’s where a lot of businesses go wrong.

ALEC HOGG: That’s a very good point. You’re a Chartered Accountant yourself, so you’re talking against your own profession, but CAs would sit there, if they are doing a due diligence, look at the numbers, believe the numbers are accurate, issue a report, and charge a fortune of money.

DAVID SHAPIRO: Dead right.

ALEC HOGG: Instead of doing the Phil Fisher, scuttlebutt as he called it, going out and finding out what really is happening at that company.

DAVID SHAPIRO: I think you’re absolutely right. In fact, even in auditing the first thing they used to teach us was when you go into a company, look at the person’s salary, and see how they’re living. If they are living beyond their means then start to delve because money is vanishing.

ALEC HOGG: But why do auditors not delve then, particularly in things like due diligence?

DAVID SHAPIRO: I don’t know why they don’t. I don’t know why and that’s why I’m very…

ALEC HOGG: Is the fee, maybe they’re receiving, too important?

DAVID SHAPIRO: It could be. It could be fees because it does influence the situation. I also think that they may be restricted by time, but I think you need to do things beyond what’s the obvious.

ALEC HOGG: Interesting. Dave, we always finish off with the markets, generally. It is in pretty stretched areas, in some peoples’ minds. Are you still convinced that we’re on our way, with more markets coming in?

DAVID SHAPIRO: Yes, I’m convinced. I think we ran too fast, much too fast, and we need to come back a little bit and we’re seeing a reasonable correction here. I’m not worried about the global economy. I think it’s growing and I still think there are better times ahead but it’s a matter of three-steps-forward, and one-back, type of thing and that. We’re seeing it in the United States as well. Don’t be worried about interest rates going up in the global economy, I think, I would like that to happen but even if they go up it is not going to be severe. It’s not going to knock us back.

ALEC HOGG: And from a South African perspective, with the strikes and industrial action that’s happening here?

DAVID SHAPIRO: That’s a worry. I think the longer it continues the more damage it is going to do. We are protected you know, Steinhoff is going offshore and you know why they’re going offshore. There is far better opportunity and he’s a good operator. I like Steinhoff. I like what they’re doing and I think that we’ve got so many of our companies that are expanded beyond our borders, that you can still do well on the Stock Exchange, simply by looking at where they are generating their income.

ALEC HOGG: Voting with bare feet. That was David Shapiro, who is with Sasfin. Well, we’re heading into a short break now.

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