As the share price of Abil was plunging to a third of yesterday’s value (down from 688c to 250c), head of equities at Sanlam, Patrice Rassou, offered a large shareholder’s perspective of the fall and fall of Abil, once a darling of the South African investment community. This morning’s news that with further uncovering of huge losses, Abil’s CEO of the last 23 years, Leon Kirkinis, is leaving “with immediate effect” is, Rassou says, a sad outcome. In this special podcast, he adds his concerns to the level of share prices on the JSE, flagged by the R35bn in new equity which a handful of businesses have raised in the past couple week – CEOs of companies rarely sell equity when it’s cheap. – AH Â Â
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ALEC HOGG: This special podcast is brought to you by Sanlam Investments. Patrice Rassou, Head of Equities at Sanlam Investment Management is with us. Big news out this morning before we start talking about the equities or the outlook for equities, which is also an interesting topic, Patrice… The resignation with immediate effect of Leon Kirkinis at Abil: this is a story that doesn’t seem to have any end.
PATRICE RASSOU: Yes Alec, I think it is the end of an era because Leon’s been in the business for over 20 years and he really represented…he was the face of African Bank. Him exiting, the business posting very heavy losses, and talking about another rights issue is quite a sad exit. When you see Chief Executives, they always say you want to leave at the top or close to the top, but it’s unfortunate that it’s happened this way. It really looks as if the issues within Abil are too big for even Leon to handle – after the previous rights issue.
ALEC HOGG: Twenty-three years. Now there are those who say that Chief Executives have a sell-by date. There are others who say that Chief Executives should serve indefinitely. The camp that says ‘the sell-by date’ would probably get a little bit of support from this development.
PATRICE RASSOU: Yes, it’s quite unfortunate. I guess the group has really evolved over time from being fairly niched in a very murky part of the market, to becoming really mainstream. We all know when they purchased the book from Saambou, which had gone into liquidation; it really put them on a different plane in terms of size and market share. Post the financial crisis, there was this really ‘go-go’ era of unsecured lending when the banks turned off the taps on all forms of lending. Now unfortunately, it looks as though the whole boom in unsecured lending post 2008 was overdone and now it’s payback time. This is really the end of an era and Abil looks like a business that will have to start from scratch.Â
We’ve seen it in many cases– and it’s quite common overseas – where you end up with a good and bad bank, and try to stabilise the book that’s in trouble, and restart with a very different mindset – a different lending criteria, different credit scoring, and a much more cautious outlook. I think that’s the type of direction that African Bank will have to take under its new CEO.
ALEC HOGG: It’s been quite widely publicised that Coronation’s been a big supporter of Abil recently, pumping a lot of money in. Goldman Sachs managed that rights issue. Were you guys caught up in this, in throwing good money after bad?
PATRICE RASSOU: As value investors Alec, we were cautious in looking at the opportunity. Yes, we have invested some money in African Bank at the lower levels, especially post the rights issue, so any disaster story like this is not good news. However, we didn’t put too much of our clients’ money at risk there. It was always one where we realised that it was a very difficult risk return creation. There were many unknowns, for example, the funding and the quality of the book, but as value investors unfortunately, it was one of those frogs that we decided to kiss.
ALEC HOGG: Patrice, but you kiss lots of frogs. They don’t always (as in this case) turn into prices, but many of them do. When you look at the third quarter, and particularly looking at equities now, there is a lot of head scratching going on. The market’s had a fantastic run. There are some who believe it’s only just started and that we haven’t really seen the crazy bull market yet. Usually, one needs that before you get a rebalancing. How are you viewing things?
PATRICE RASSOU: This is the context of the story. The All Share over the past year has delivered a total return of 25 percent plus. Within that, you’ve had interesting enough, financials run very hard – over 30 percent. One can’t help but think the market is on the pricey side – maybe not in sky-high bubble territory – but the market is expensive, which is why (coming back to the previous question), you tend to look some of the stories, which are maybe models where the company might look cheap versus the rest. At this point in time, it’s very difficult to expect the same type of returns we’ve had in the past. We don’t think it’s going to be an ‘all fall down’, but we would be very cautious from this point onwards.
ALEC HOGG: So what if you were managing money for your parents, for example. You’ve had a wonderful run, as we know, out of equities in the past few years. Would you now be increasing the amount of liquidity?
PATRICE RASSOU: I think it would be quite a safe bet. We always say it’s quite wise to diversify your holdings, look at other instruments, and look at the more balanced fund type of approach. Obviously, if you have a very long-term perspective, you want to have a decent equity allocation. Having said that Alec, if you look at the month of July it’s very interesting – locally – to see the appetite for paper that we’ve seen in the market. As much as we talk about the market being overpriced: in aggregate, we’ve had three or four transactions where about R35bn were raised in the space of a few days, and oversubscribed. I’m talking about the Forbes listing, the placing of the Tsogo Sun shares by SAB, the Steinhoff rights issue, which by itself, was R18bn, and Aveng raising convertible bonds.Â
While one would say ‘yes, we should be quite careful’, it looks like a lot of money sitting on the sidelines is looking for a place and doesn’t want to sit there simply in cash because interest rates are still very low, despite the Reserve Bank – the latest increase of 25 basis points. For me, at this point in time I would go for a more balanced approach/a more diversified approach because at the end of the day, if you’re just going to sit with cash you are making the call that the market’s going to crash and remain there forever. Timing the market is always very difficult, I believe.
ALEC HOGG: But it’s interesting as well: if you take a signal from Marcus Jooste, the guys at Forbes, and at Tsogo Sun, they aren’t going to raise money – certainly, not big chunks of money – and dilute the equity the way they have, if they did not believe that the equity they’re selling is very expensive.
PATRICE RASSOU: That’s a very good point. It is a market where usually, you do see supply of paper coming to the market when valuations are elevated – that’s very true. Some of it is quite obvious, if you look at the Forbes listing. In the case of Tsogo, at least you have the mitigating factor that the management team also have taken quite a big stake or personal exposure, to the stock by borrowing and buying shares, so at least you have that issue. Steinhoff is a slightly different story. They are listing offshore, so some of the rights issue is to facilitate that, but your point is valid. These are usually signs of rather toppish valuations, but I can tell you that compared to what we seeing offshore, what’s going on, on the JSE is fairly subdued. Offshore, the level of mergers and acquisitions is really hitting record levels, pre-financial crisis levels, and we’ve seen that recently.Â
If you look at one of the shares on the JSE: BAT subsidiary Rothman merging with the number three in the U.S. in a 27-billion transaction.   That’s Rothman, so that’s a big U.S. merger and you’re finding that with growth being subdued and the cost of equity being very low, it’s starting to make it attractive for companies to either acquire, to merge, or to look at ways of acquiring growth. That’s becoming a very, very common factor – these big mergers and acquisitions – some of it cross-border U.S. companies trying to buy European companies. This whole sloshing of liquidity in the system is also driving that type of behaviour. You can’t grow organically. It’s not as easy, but you’re deciding that maybe it pays you to just raise some funding in the debt markets to do a big acquisition.
ALEC HOGG: Patrice, what at the view that South Africa’s really tied now to the international markets – the international markets, although you’ve explained the activity that’s going on – they’re not really expensive – or not yet, anyway and as a consequence, the South African market can follow in their slipstream?
PATRICE RASSOU:  It’s an interesting point. As you know, last year emerging markets were shunned by investors. We’re still seeing big outflows (I’m talking on a global basis) out of emerging markets, going into developed markets. What’s interesting is that this year there’s been very strong rebound in many emerging markets. Emerging markets have largely led the way. You see that with Turkey and Indonesia close to 30 percent and India close to 23 percent. The JSE itself has done very well year-to-date. Some of it has been, interestingly enough, around politics. Many of the markets I just referred to…Indonesia’s had elections with Yudhoyono being elected. Narendra Modi came into power in India. Our own country has had elections this year. Turkey’s having elections next week.Â
It looks as though many of the investors who sat on the sidelines last year and ran away from emerging markets, are having a second a look and maybe giving some credit with new politicians being appointed – maybe believing that there’ll be some political reform or more market-friendly policies being put in place. I would say that the core between the two right now is a lot closer. The problem is that within the emerging market universe, South Africa looks expensive. We’re trading at quite a big premium to the rest of the emerging markets. Price-to-book, we’re on a two-point-five time’s book. The rest of the emerging world is on one-point-five. We’re basically trading at U.S. valuation, which many say is quite a stretch and that’s quite a worry within the universe. Â
Again, I don’t have to tell you that we do have a very heavy developed market component on the JSE with the dual-listed shares and global stocks. I think there’s quite a big discrepancy between the valuation of these stocks and the pure domestic counters. In a financial space, if you look at the banks for instance, don’t trade at very stretched valuations compared to the rest of the market.
ALEC HOGG: So we have a situation where it’s not going to be ‘all fall down’, but caution is required right now, particularly with some very smart people raising lots of fresh capital. Patrice Rassou is Head of Equities at Sanlam Investment Management and this special podcast was brought to you by Sanlam Investments.
This is how Abil announced its long-standing CEO’s departure on the Stock Exchange News Service this morning:
ABIL Board and Executive Committee appointments:
The Board regrets to announce that Leon Kirkinis, the Group Chief Executive Officer, managing director of
African Bank and one of the founders of ABIL has resigned with immediate effect after 23 years in the
business. The Board owes a huge debt of gratitude to Leon for his vision and leadership during the growth of
African Bank and wishes him every success for the future.
The Board has appointed Nithia Nalliah (the Group Chief Financial Officer) to the position of acting Chief
Executive of ABIL and managing director of African Bank with immediate effect. Nithia joined ABIL in 2006 as
the chief financial officer and the Board is confident that he has the experience and ability to steer ABIL
through these trying times pending the appointment of a permanent Chief Executive Officer and Managing
Director.
Nithia will continue to occupy the position of the Group Chief Financial Officer pending further appointments.
ABIL is currently in discussions to make further appointments of independent non-executive directors to the
ABIL and African Bank Boards. These appointments will add significant financial experience and materially
strengthen the Boards. An announcement will follow in due course.
The Company is also pleased to announce the appointment of Pieter (Piet) Swanepoel (52) as Chief Risk
Officer (“CRO”) and a member of the executive committee (“ExCo”) for the Group, effective upon the
retirement of acting CRO Pieter Marais on 1 July 2014. Piet brings extensive banking and management
experience gained in the banking industry. He was the Executive Director of MLS Bank for 8 years. Piet joined
Imperial Bank where he headed up the Property Finance and Professional Divisions. He assisted with the
integration of the Property Finance Division into Nedbank Corporate and the Professional Division into
Nedbank Business Bank where he ultimately became Head of Professional Nedbank Business Bank. Piet has
a B. Com. from the University of Pretoria and completed an Advanced Management Programme at Templeton
College, Oxford University.
