 Mohammed Nalla from Nedbank Capital joined Alec Hogg on the Power Lunch today for a look at the markets. In focus was the Argentinian default, where Mohammed offers seasoned words of calm for the jittery market and the potential knock-on affect that Argentina’s woes could have on South Africa. He also gives his expert insights into where exactly the bottom of Abil’s share price is, and adds his views on Grand Parade Investments buying a 10 percent stake of Spur Group at a substantial discount. – LF
ALEC HOGG: Mohammed Nalla from Nedbank Capital is with us in the studio. We have a lot to talk about. Let’s start off with Argentina. It has been a rocky road for decades now for the Argentinians. The big story that came out in part, from the default this week is that Carlos Tevez’ (the footballer) father was hijacked. Then they saw who he was, decided to blackmail Tevez, kidnapped him, eventually Tevez paid the kidnappers, and he walked free. It’s almost as though lawlessness has now come throughout the society there. If a country defaults on its debt, watch out. It’s a slippery slope.
MOHAMMED NALLA: This Argentina risk has been on the agenda for a little while. At Nedbank Capital, we’ve spoken about and we’ve spoken to our clients about it. The risk here, specifically for South Africa is if this becomes a much wider emerging market contagion effect. Let’s rewind. This Argentinian default’s nothing new. It’s effectively a replay of what happened in 2001. What happened in 2001 is they needed to restructure their debt and most of their creditors agreed to that, except a small group of what they call ‘hold out investors’ – literally, about three or four hedge funds – that said ‘hold on. We don’t agree to these terms’ and that’s really what’s come to the fore here. What’s interesting is that Argentina, barring these hold-out investors having gone to the U.S. courts, would have continued along/bumbling along. However, these guys managed to go to the U.S. court.
Argentina had placed its current interest payment at U.S. bank and then the judge said ‘hold on. You can’t pay that money to the existing guys unless you actually make these hold-out investors, hold’. That’s really been the give and take and the market’s really priced in the fact that they’re expecting a resolution. In fact, on the news of S&P now calling this a default, Argentinian bonds actually rallied and the reason for that is that this is not a full-blown default. I would call it a selective default. This gives them a couple of days to try to remedy this, so that’s the reason why everything hasn’t hit the wall – just yet.
ALEC HOGG: The Argentinian banks are talking as well. The commercial banks are talking about going in there and settling these debts. Can’t the Argentinian government do anything about it?
MOHAMMED NALLA: Well, the Argentinian government is in a very difficult space. There economy’s gone into a recession and this is really, where game theory I guess comes into play. You have to ask yourself at what point in time is it actually, just so painful that regardless of what they do, they actually say ‘hold on a second, hold-out, investors. We’re going to default on this. Let’s carry the consequences and then, let’s start rebuilding from the bottom up’. Bondholders need to realise that countries can default. We seem to have very short memories. Russia defaulted. Argentina defaulted. Markets tend to forget this. We’ve gone through a period where bailouts seem to be the flavour of the months and that’s really, where the guys are scrambling for a solution. If the banks try to rescue this, that’s just another bailout. It doesn’t force the country into making the hard, structural reforms that it needs to make.
Right now… Unfortunately, if it does move to a full-blown blowout, there is a possible risk of contagion to emerging markets and that seems to weigh on market sentiment as we speak.
ALEC HOGG: Specifics today: quite a few traders are trying to find the bottom on Abil. Have you been playing there as well?
MOHAMMED NALLA: I remember when Abil was at R18.00 – that’s fairly recently – and everyone back then was saying, ‘great value. Time to go in’ – myself included. Then it fell down. It was at R16.15 and the guys eventually just cut the thing all the way down. I think they’re struggling to find that bottom. The spreads on their bonds have ballooned to record highs over government. The market’s saying that the funding mix at Abil looks quite tenuous. They’re unlikely to get through this unscathed. They’re probably going to have to go with a rights issue of some sort.
ALEC HOGG: Again.
MOHAMMED NALLA: Again. They just had one. In that kind of context, the market may be cleverer…
ALEC HOGG: Let the cleverer people play. Is that what you’re saying to us? Let other people with a different risk factor try it.
MOHAMMED NALLA: I’m saying; don’t try to catch a falling piano.
ALEC HOGG: I’ve heard about a knife, but not a piano. It’s interesting to see the director’s dealings and today, I picked up Andries van Heerden – a stock that I liked (Afrimat) – it’s up 78 percent in the last year. He sold R16m worth of shares – ‘ding dong’.
MOHAMMED NALLA: I must be honest. I don’t follow it closely enough. Those red flags kick up whenever you see big transactions like that going through, and the directors will always say ‘I’m realigning my portfolio’.
ALEC HOGG: ‘Diversifying my portfolio’.
MOHAMMED NALLA: That’s it. That’s the standard response. In the absence of going to look at it in greater detail, I don’t know.
ALEC HOGG: Famous Brands – the Halamandris family (Theo and Panayiotis): they sold R25m each of the share in that company. That’s a big warning sign, surely.
MOHAMMED NALLA: Yes and no. If you look at the total size of their holdings, it’s gargantuan in many respects. One would argue that in their specific context, maybe not such a large amount, but one has to be concerned. Many of the stocks have run pretty hard, and perhaps the guys are just becoming a bit concerned, saying ‘let’s take some of the cash off the table’. We have this debate every single day when we look at this market. People with such sizeable holdings – it takes them a long time to manoeuvre and then it has to go through SENS. Yes, go and have a look. Famous Brands, as I say that is a sizeable amount of money, even if you look at it in the…
ALEC HOGG: Kevin Hedderwick’s also been selling, so I think there’s a story there, which is perhaps related to the other story today with Grand Parade Investments moving more aggressively, still, into the food sector. We know about Burger King that Hassen Adams has been into, and now buying ten percent of Spur at nice discount.
MOHAMMED NALLA: I like that story. We look at Grand Parade – a complete realignment. They’ve moved away from the gaming side. Burger King: that was a fantastic win for the company. They’re now showing almost a commitment to this new strategy (food) and I would guess it’s a defensive play on the consumer at the end of the day. South Africa in many respects is still a largely untapped market when it comes to many of these types of offerings such as Burger King. However, Spur – I like it. As you say, at a nice discount coming through there for Grand Parade. I like that stock and I think again, related to that Famous Brands story, there’s going to be more competition in that consumer space. That’s certainly good for the consumer, but companies that don’t bring their A-game are obviously going to be caught a little bit short.
ALEC HOGG: Mohammed Nalla is with Nedbank Securities. Just to reiterate on the Spur story, Spur’s share price has done nothing in the past year. It’s been bumping along for the past 18 months and if you consider that, and the fact that Grand Parade is buying in at a 13 percent discount to the current share price, then it does look like value.
ALEC HOGG: Nedbank Securities is with us in the studio. We have a lot to talk about. Let’s start off with Argentina. It has been a rocky road for decades now for the Argentinians. The big story that came out in part, from the default this week is that Carlos Tevez’ (the footballer) father was hijacked. Then they saw who he was, decided to blackmail Tevez, kidnapped him, eventually Tevez paid the kidnappers, and he walked free. It’s almost as though lawlessness has now come throughout the society there. If a country defaults on its debt, watch out. It’s a slippery slope.
MOHAMMED NALLA: This Argentina risk has been on the agenda for a little while. At Nedbank Capital, we’ve spoken about and we’ve spoken to our clients about it. The risk here, specifically for South Africa is if this becomes a much wider emerging market contagion effect. Let’s rewind. This Argentinian default’s nothing new. It’s effectively a replay of what happened in 2001. What happened in 2001 is they needed to restructure their debt and most of their creditors agreed to that, except a small group of what they call ‘hold out investors’ – literally, about three or four hedge funds – that said ‘hold on. We don’t agree to these terms’ and that’s really what’s come to the fore here. What’s interesting is that Argentina, barring these hold-out investors having gone to the U.S. courts, would have continued along/bumbling along. However, these guys managed to go to the U.S. court.
Argentina had placed its current interest payment at U.S. bank and then the judge said ‘hold on. You can’t pay that money to the existing guys unless you actually make these hold-out investors, hold’. That’s really been the give and take and the market’s really priced in the fact that they’re expecting a resolution. In fact, on the news of S&P now calling this a default, Argentinian bonds actually rallied and the reason for that is that this is not a full-blown default. I would call it a selective default. This gives them a couple of days to try to remedy this, so that’s the reason why everything hasn’t hit the wall – just yet.
ALEC HOGG: The Argentinian banks are talking as well. The commercial banks are talking about going in there and settling these debts. Can’t the Argentinian government do anything about it?
MOHAMMED NALLA: Well, the Argentinian government is in a very difficult space. There economy’s gone into a recession and this is really, where game theory I guess comes into play. You have to ask yourself at what point in time is it actually, just so painful that regardless of what they do, they actually say ‘hold on a second, hold-out, investors. We’re going to default on this. Let’s carry the consequences and then, let’s start rebuilding from the bottom up’. Bondholders need to realise that countries can default. We seem to have very short memories. Russia defaulted. Argentina defaulted. Markets tend to forget this. We’ve gone through a period where bailouts seem to be the flavour of the months and that’s really, where the guys are scrambling for a solution. If the banks try to rescue this, that’s just another bailout. It doesn’t force the country into making the hard, structural reforms that it needs to make.
Right now… Unfortunately, if it does move to a full-blown blowout, there is a possible risk of contagion to emerging markets and that seems to weigh on market sentiment as we speak.
ALEC HOGG: Specifics today: quite a few traders are trying to find the bottom on Abil. Have you been playing there as well?
MOHAMMED NALLA: I remember when Abil was at R18.00 – that’s fairly recently – and everyone back then was saying, ‘great value. Time to go in’ – myself included. Then it fell down. It was at R16.15 and the guys eventually just cut the thing all the way down. I think they’re struggling to find that bottom. The spreads on their bonds have ballooned to record highs over government. The market’s saying that the funding mix at Abil looks quite tenuous. They’re unlikely to get through this unscathed. They’re probably going to have to go with a rights issue of some sort.
ALEC HOGG: Again.
MOHAMMED NALLA: Again. They just had one. In that kind of context, the market may be cleverer…
ALEC HOGG: Let the cleverer people play. Is that what you’re saying to us? Let other people with a different risk factor try it.
MOHAMMED NALLA: I’m saying; don’t try to catch a falling piano.
ALEC HOGG: I’ve heard about a knife, but not a piano. It’s interesting to see the director’s dealings and today, I picked up Andries van Heerden – a stock that I liked (Afrimat) – it’s up 78 percent in the last year. He sold R16m worth of shares – ‘ding dong’.
MOHAMMED NALLA: I must be honest. I don’t follow it closely enough. Those red flags kick up whenever you see big transactions like that going through, and the directors will always say ‘I’m realigning my portfolio’.
ALEC HOGG: ‘Diversifying my portfolio’.
MOHAMMED NALLA: That’s it. That’s the standard response. In the absence of going to look at it in greater detail, I don’t know.
ALEC HOGG: Famous Brands – the Halamandris family (Theo and Panayiotis): they sold R25m each of the share in that company. That’s a big warning sign, surely.
MOHAMMED NALLA: Yes and no. If you look at the total size of their holdings, it’s gargantuan in many respects. One would argue that in their specific context, maybe not such a large amount, but one has to be concerned. Many of the stocks have run pretty hard, and perhaps the guys are just becoming a bit concerned, saying ‘let’s take some of the cash off the table’. We have this debate every single day when we look at this market. People with such sizeable holdings – it takes them a long time to manoeuvre and then it has to go through SENS. Yes, go and have a look. Famous Brands, as I say that is a sizeable amount of money, even if you look at it in the…
ALEC HOGG: Kevin Hedderwick’s also been selling, so I think there’s a story there, which is perhaps related to the other story today with Grand Parade Investments moving more aggressively, still, into the food sector. We know about Burger King that Hassen Adams has been into, and now buying ten percent of Spur at nice discount.
MOHAMMED NALLA: I like that story. We look at Grand Parade – a complete realignment. They’ve moved away from the gaming side. Burger King: that was a fantastic win for the company. They’re now showing almost a commitment to this new strategy (food) and I would guess it’s a defensive play on the consumer at the end of the day. South Africa in many respects is still a largely untapped market when it comes to many of these types of offerings such as Burger King. However, Spur – I like it. As you say, at a nice discount coming through there for Grand Parade. I like that stock and I think again, related to that Famous Brands story, there’s going to be more competition in that consumer space. That’s certainly good for the consumer, but companies that don’t bring their A-game are obviously going to be caught a little bit short.
ALEC HOGG: Mohammed Nalla is with Nedbank Securities. Just to reiterate on the Spur story, Spur’s share price has done nothing in the past year. It’s been bumping along for the past 18 months and if you consider that, and the fact that Grand Parade is buying in at a 13 percent discount to the current share price, then it does look like value.
