It is not everyday that an announcement on the Stock Exchange News Service (SENS) creates a frenzy. Today however, Abil’s SENS announcement titled, ‘Quarterly operational update for quarter ended 30 June 2014, changes to the board, trading statement and cautionary announcement‘ did exactly that. Abil’s share price plummeted and unfortunately it seems that an air of panic has settled around the stock. Alec Hogg was joined by market commentator and investment veteran, David Shapiro from Sasfin to shed some light on the subject. David add years of insights to a situation that is at best, worthy of some jitters. – LF
GUGULETHU MFUPHI:Â For many, many years, the situation with African Bank, you saw that graph on the board just a moment ago, down by more than 60 percent in one day. Is this something that youâve seen before?
DAVID SHAPIRO: And how, and I think thereâs something that Warren Buffett always says, âThere is never only one cockroach in the cupboard and they normally hang out, not in pairs but they hang out in groups.â I think here we got the warning about a year ago, in fact just over a year ago, in April 2013, when they came out with a warning statement, which took everybody by surprise and I think that was the warning sign to run. There the shares settled down round about R20.00. We had a rights issue at eight-Rand, which was backed by Goldman Sachs, obviously thereâs a lot more in the cupboard or thereâs a lot less in the cupboard, than they disclosed. Itâs a terrible story and I think, Gugu, thereâs more to the story as well. It just shows you how difficult it is to lend in an environment like this, particularly to people of those low levels. Unsecured lending is a very difficult game.
ALEC HOGG: Well, letâs just pick up on that because if you havenât heard the news yet, Leon Kirkinis, the CEO of unsecured lender, Abil, has announced his resignation. He was the Chief Executive of the company for the last 23 years. Amid this announcement, the troubled bank reported a headline loss of just over R6bn. Shares in the company dropped to a low – an all-time low – I donât know if even the old baobab days 30 years ago, if it was at these prices. Itâs got to a share price today of R2.50 â itâs lowest in more than ten years. (Actually lowest since March 1997)
Well letâs get a more in-depth view of how the market is trading today. You heard from him, a moment ago, David Shapiro of Sasfin is with us in the studio: You know Leon Kirkinis well. Weâve had him in the studio on radio Dave, and heâs always been a kind of larger than life character but he really has under-shone in this instance.
DAVID SHAPIRO: You know, Alec that was the whole story. We all had faith in his abilities and he always gave us the impression that everything was under control and when I spoke to Gugu now, when we crossed, and I said that it was in April last year, when suddenly they came out with a trading statement, which was completely against what the market was expecting. The irony is that even after that, there was a conference at Sun City, which Merrill Lynch or Bank of America – Merrill Lynch always had – and investors came out of that even feeling more optimistic, and went out and bought the shares.
ALEC HOGG: Did he not just know what was going on – Leon?
DAVID SHAPIRO: Well, it obviously appears that thatâs whatâs happened. He didnât know what was happening in his bankâs books and I think itâs the same story that we learnt with the Sub-Prime crisis that many bankers werenât sure of what was happening underneath the quality of the people that they had lent money to. Itâs a shocking story, but it also gives you a warning of what may be out there.  I still remain very sceptical about the strength of the economy, as we are seeing with a lot of results coming out, and also some of the bankâs results. I know theyâre in charge. We had very good results yesterday from Nedbank downsizing the bank. They are very nervous of what theyâre lending but what we have to project is what this economy is going to look like in five/six monthsâ or in a yearâs time, having absorbed the aftermath of those strikes.
@alechogg John Storey at ML warned about this for some time…if you bank profits on weak risk management don't cry when poo hits proverbial
— Michael Avery (@MichaelJAvery) August 6, 2014
ALEC HOGG: Itâs quite interesting though, talking to the guys from Capitec. You remember I went down to see them in December last year. Off the record then, – but now it is pretty much in the open – they said that they could not understand what Abil was doing, why they were approaching business in the way that they had, and they were flagging that there was a disaster waiting to happen. Yet, Merrill Lynch goes in there, underwrites a rights issue.
DAVID SHAPIRO: Goldman Sachs
ALEC HOGG: Sorry, Goldman Sachs, Merrill Lynch, there were many. Coronation put billions of Rands into it.
DAVID SHAPIRO: How does Coronation…what homework do they do? I look at it from a market point of view, and Iâve said it many times. In fact, with Lindsay on Monday night, we were talking about it and I said âkeep clearâ. We were arguing. He said thereâd be a put, in other words someone would come and rescue her. I said âyes, but at what priceâ. For someone who is not involved, Iâm not a bank analyst, just looking at it from a market point of view, looking at it from the outside, I wanted to run clear. Maybe thatâs experience. How do people like Coronation, for whom we have such great respect, what homework do they do? Who do they rely on? How do they come to their conclusions? Yes, it means nothing in their life. They are such a big player.
ALEC HOGG: Yes, but they listened to the information they were given but if the information you are given is not accurate, because the CEO himself doesnât know, what chance have you got?
DAVID SHAPIRO: Well, sometimes youâve got to question that, I think even poor old Brian Joffe relied on published accounts to make his bid for Adcock Ingram and when you actually went into the company, you found a completely different company. Youâve got to use, probably, a little bit of instinct as well.
ALEC HOGG: Really, was it that different?
DAVID SHAPIRO: Well, Iâm sure. Itâs coming through in the results. They came out yesterday with a trading statement also saying âlisten, weâre going to make a lossâ. Now, thereâs a big difference between showing lower profits and making a loss, and the strange thing about African Bank is that the shares only capitalise at the moment at a little over three-billion. Theyâre going to make R7.5bn losses so this company is, I think, close to bankruptcy and that is why they need a rights issue.
ALEC HOGG: Well, if itâs capitalised at R3bn, then theyâre going to make R7bn losses at the market cap.
DAVID SHAPIRO: Yes, well maybe their share or market cap is not reflecting the balance sheet.
ALEC HOGG: Well, I guess shareholders just have to keep pumping money in, donât they? Itâs another good message in two respects. Not only for investors, âlet the buyer bewareâ, but also for the policy makers. Government sits there quite happily, thinking that people in businessâŚbusiness is a one-way ticket. It is not a one-way street. Many companies do go bankrupt. You have tears, as is happening in this case.
DAVID SHAPIRO: Yes.
ALEC HOGG: But David, on the 10th of June I was involved with MET-CI, with their Boutique Asset Managers, and I asked them, at that conference. What is your favourite buy and whatâs your favourite short? Now, remember in June, there was already a lot of the nonsense. A lot of the cockroaches had come out of the Abil cupboard and yet a bunch of them said that Abil was their best short, including Cy Jacobs.
DAVID SHAPIRO: Oh, yes.
ALEC HOGG: At that stage⌠They must be patting themselves on the back and thanking their investors today.
DAVID SHAPIRO: Thank goodness, because I think I wouldnât have gone short of it. I would just have avoided it because we werenât quite sure what was there. You knew that this wasnât the end of the troubles and it is just where…
ALEC HOGG: But not everybody did, and money was thrown in after it…
DAVID SHAPIRO: They canât sell Ellerines. I donât know who is ever going to take it off their… There again, they went in there blindfolded and didnât know what they were taking when they bought the company. I think thatâs been one of the biggest drags.
ALEC HOGG: So what happens now, class action suit against the Directors? Class action suit by the people whoâve lost money.
DAVID SHAPIRO: Well, you can but are you going to get anything there?
ALEC HOGG: Iâm asking.
DAVID SHAPIRO: Are you going to get there. Youâre going to ask or Iâm going to ask all the institutions that bought it.
ALEC HOGG: What about the auditors?
DAVID SHAPIRO: The same thing. Exactly. Where were they? How good were their risk management tools? How well did they assess it? I mean, itâs not that itâs a new story. This has happened, progressively, over a year.
@alechogg potential D&O claim and / or Class Action arising out of Abil's latest financial mess? Somebody has to be responsible!
— Warwick Goldie (@WarwDGoldie) August 6, 2014
ALEC HOGG: But there are big names here, big names that charge top Dollar. From Goldman Sachs to Coronation, so itâs not only their fees that have been pulled out of this business, in the fundraising issues. Itâs been those putting money in.
DAVID SHAPIRO: Sure.
ALEC HOGG: The whole thing sounds…
DAVID SHAPIRO: How does Goldman – and I like the company very much – what did they do, because they raised that eight-billion. Where are they now, and whatâs the next step there?
ALEC HOGG: Well, would you believe them next time?
DAVID SHAPIRO: Well, have a look at Protech, same story.
ALEC HOGG: Protech.
DAVID SHAPIRO: Remember PwC valued the company a lot higher than⌠What was it? TWP wanted to make a bid for it. No, Iâm sorry. It was Eqstra, my apologies.
ALEC HOGG: David, whatâs the knock-on effect from this? Clearly, someone is going to get sued somewhere. One of the audit firms, whoever the auditors are for Abil – I havenât had a chance to look – they must know that they are in for…somebody is going to hit them. If they were an institution whoâs going to ask them âhang on, these numbers that you said were auditedâ, Leon Kirkinis, in a personal capacity, has got to be in trouble, surely.
DAVID SHAPIRO: Sure.
ALEC HOGG: There will be consequences from what happened here.
DAVID SHAPIRO: Yes.
ALEC HOGG: What happens thereafter though, once everyoneâs extracted their revenge?
DAVID SHAPIRO: You see, the problem is that our courts move so slowly that these cases never come to court, and also weâre the kind of people who will just brush it aside. I want to ask; if I was, a Trustee and I had Coronation as a Fund Manager, yes, it might be absolutely nothing in the grand scheme of things. However, what thought process did you apply when you used my money? Yes, you can say âoh, itâs only point-three percent or point-two percentâ. You have got to ask a lot of questions about the people who actually went out and supported the business.
ALEC HOGG: They were lied to, David. What can they do? If somebody blatantly lies to you, a Chief Executive of a company, or even if the Chief Executive didnât even knowâŚ.
DAVID SHAPIRO: Do you know what? You didnât have to follow it. You could have walked away.
ALEC HOGG: He didnât have to put money in at the end, so it was a bit of grief there.
DAVID SHAPIRO: They saw a low price where things were going to turn around, and they were suckered-in. You have to ask âwhat kind of judgement or what kind of information did you give to your clientâ. I worry about these because to me, it was a red light that could have been avoided.
ALEC HOGG: David Shapiro is with Sasfin and there you have the voice of experience. Heâs seen this happen enough times in the past. Those people who jumped in, trying to catch the falling knife are today, bleeding quite heavily. Well after the break, weâll continue to discuss the biggest business news of the day, Abilâs results, as well as the resignation of its long serving Chief Executive Officer. These are two experts on it.
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