Expert market analysis: Liberty, Abil and the impact of Ebola in West Africa

A tumultuous week for South African business news is coming to a close. Looking at the biggest stories is Brigid Taylor, Director at Dreadnought Capital. She lends her expert insights to the situation around Abil’s share price plummet after a dismal earning’s announcement expecting  full year losses to total $600 million. The share price has been trading at all-time lows which has raised the question that everyone is asking; is Abil too big to fail, and a steal at the price, or is it doomed? Brigid also discusses life insurance company Liberty Holdings’ interim results, which were released today. And has a very frank look at the impact of Ebola in West Africa from an investment perspective, based on her recent travels in the region. – LF 

GUGULETHU MFUPHI:  Alec did mention, at the top of the show that he’s looking forward to speaking to Brigid Taylor from Dreadnought Capital. She is the market commentator for today but Alec, what you didn’t notice was that this morning, on open exchange, I had Brigid all to myself.

ALEC HOGG: Oh, okay.

BRIGID TAYLOR: The girls were in the house, Alec.

ALEC HOGG: Yes, yes…I actually said, Gugulethu, if you’d listen next time that if the two of you were here it would be the beauties and the beast, but I’ve got the one beauty here anyway, so…

BRIGID TAYLOR: The thorn amongst the roses, Alec.

GUGULETHU MFUPHI:  Exactly.

ALEC HOGG: Thank you. Brigid Taylor, how are you? Isn’t it nice to have you in the studio? Let me just read the auto queue, where it says that Liberty Holdings reported this morning that it’s BEE normalised operating earnings are up 12-percent. To get a more, in depth view of how the markets are trading today I’m joined by Brigid Taylor. You see, if I don’t read the auto queue…from a Director of Dreadnought Capital, I get into trouble with Janine.

BRIGID TAYLOR: Oh, okay.

ALEC HOGG: And you know Janine?

BRIGID TAYLOR: Oh, okay, Janine, yes she’s hectic, so good luck, yes.

ALEC HOGG: She’s ‘woes’. Do you know that Janine and I have worked together for about ten years, we worked it out the other day, and she still says her grey hair, which…?

BRIGID TAYLOR: What, comes from you?

ALEC HOGG: She says it comes from me but, actually, she has no grey hair, as you can see.

BRIGID TAYLOR: Oh, my word.

ALEC HOGG: I think I’m the one who is getting the grey hairs here. Do we need to get grey hairs about Liberty?

BRIGID TAYLOR: I don’t think so. I think that there are better options out there. If we look at what happened with Old Mutual, Old Mutual great, really, solid results, so in terms of your opportunities. You can look at Discovery. Look at Old Mutual. Look at Liberty. I think Old Mutual still offers a better opportunity, in terms of that type of stock. However, yes, it’s okay. It is part of the Standard Bank Group. It is doing well, but it is not on the top of the pile.

ALEC HOGG: No lights been shot out there?

BRIGID TAYLOR: No.

ALEC HOGG: But I suppose, isn’t it Thabo’s first set of results, since he took over the Financials?

BRIGID TAYLOR:  It is and they are going to have to look at their business plan. One of the things that Old Mutual has done that’s been quite successful is how they’ve geared their business around, more on the retail side. How do they capture those retail clients that, have a little bit of money and that are more secure, in terms of the consumer spending that’s happening in the country. They’ve managed to maintain that sort of market share; obviously, Liberty is going to have to look at their business plan.

ALEC HOGG: Some years ago, in 2002, I was away in Australia opening an office for Money Web and my colleagues, back home, had an interview on the Thursday with Johann Myburg. They decided that they would write a story on the Friday. Johan Myburg was the CEO of Saambou. The headline was, “Buy Saambou now,” you know, quickly, get the shares, the next day it was put into curatorship. It was a great embarrassment.

BRIGID TAYLOR: I was going to say, Phase would love that because you can’t tell people what do to anymore.

ALEC HOGG: Well, I won’t tell you which of my colleagues actually stuck their necks out, on our behalf, but I’m sure that we are all very relieved, and nobody has jumped up and said, “Buy Abil now,” in the heading to this absolute disaster. Share price down 38 Cents again today, it was 50 Cents yesterday, back to 38 Cents today. Just the people who are trading in it now, who would be buying?

BRIGID TAYLOR: I think that the concern, really, is what is the deterioration on your asset portfolio if you buy Abil?

ALEC HOGG: But if you are buying, Brigid?

BRIGID TAYLOR:  Look, it’s a free option, Alec, so 38 Cents, where you were trading at what, R60.00 a little while ago. I mean, what is your down side, 38 Cents? So, the question is, ‘is this thing going to fail?’ If it’s going to fail, it’s a no brainer but then everybody is going to get out and then you’ve got a massive deficit that you need to sort out, in terms of the loan book. But on top of that, if we believe that there is an opportunity that somebody will come to the party, 38 Cents, listen…I’ve got to tell you, Warren Buffett would be all over it, if it was a U.S. stock right.

ALEC HOGG: Really?

BRIGID TAYLOR: Yes.

ALEC HOGG: Do you think that it is too big to fail or the Reserve Bank would step in?

BRIGID TAYLOR: Well, you know Alec, I remember when City Bank was trading at $1.00 and I remember that conversation. We still said, “Is this a free option?” Yes, it came off significantly, as we’re seeing with Abil. However, things did come on the table, protected that asset, and now, look at it again. It’s about whether or not you’ve got the view that it is going to fail or if we’re not going to see it fail.

ALEC HOGG: So rather than going to Turffontein on the weekend, take a R1.000.

BRIGID TAYLOR: Just put it in Abil. What have you got to lose?

ALEC HOGG: Yes, buy yourself some Abil shares but look at it that way.

BRIGID TAYLOR: Yes, if you’re happy to lose the money.

ALEC HOGG: Don’t think that you’re going to be buying into something that has a longer term. Well you don’t know, you could lose it.

BRIGID TAYLOR: You don’t know. I think it is really a play on, ‘do you think this thing is going to fail or don’t you think it’s going to fail’? If it’s going to fail then you stay out but if you don’t think it’s going to fail, seriously, this is the cheapest levels you’re going to get, right, so.

ALEC HOGG: Do you think that the PIC and Coronation, who are the two big shareholders. The one has got 15 percent and the other one has got 22 percent, according to SENS. When they bought recently, they had to disclose it. Do you think that they would be comfortable now to write everything off and move on, or do they have to come back to the party?

BRIGID TAYLOR: No, I would like to think that we would see the opportunity to support a company like that. One, yes, maybe their business acumen hasn’t been of the top standard. There’s been talk about this for the last six months to almost a year, so how do we change that? If we look at other companies, like Capitec, what are they are doing right and what did Abil do wrong. Is there still an opportunity to salvage it? They also made some bad decisions, in terms of going into debt, at the top of the market, very unfortunately in 2012, so decisions weren’t the best. However, can we come back from that? Is there still a market out there? Are there enough market shares? I’d like to think so, in the environment that we find ourselves, especially because there are so many low-income earners, in our country.

Those are the kind of questions; I think they’re going to be asking, looking at the business plan going forward. Is there sustainability? That’s the question that you need to ask yourself. Is it still a feasible business plan? Will people put money back on the table and see this as a long-term play? If so, at 38 cents it is a relatively cheap option.

ALEC HOGG: Business model though, has to be questionable. Years and years ago, I remember banks getting into trouble because they were borrowing from the wholesale market, not enough retail borrowing.

BRIGID TAYLOR: Well, there’re no deposits, right, and that’s the issue. You need the deposit on book.

ALEC HOGG: And when the wholesale market decides to take their money away, there is nowhere to hide. Whereas in the retail market you do tend to find that private, individuals take their money out a little slower, when there’s concerns.

BRIGID TAYLOR: Well, they will do and they’ve got that underlying short-term funding book, the Ellerines Book, which is another issue that they’re going to have to combat. It’s got to be about changing the business tact, in terms of taking more deposits, not utilising, and only lending and how to maximise on that. Is it sustainable, in terms of paying off the loans? If we look at the BEE books and the issuances that went through it at mighty high levels, so those are very…

ALEC HOGG: Let’s just say you take your 38 cents today, as a gamble, and it does go bankrupt. What are the implications for the banking system in South Africa, if any?

BRIGID TAYLOR: Well that’s the question and you’ve seen it on the financials. The big concern is how much unsecured lending is happening, and what is the big risk, in terms of that? You’ll see the pressure come on other unsecured lenders for sure. There is going to be a relook at how they are managing their business, especially if we see this happen.

ALEC HOGG: So, wait for Capitec share price to fall and if you know the business well enough that’s the time to buy.

BRIGID TAYLOR: Short CDS’s.

ALEC HOGG: Short CDS, okay.

BRIGID TAYLOR: Yes.

ALEC HOGG: Brigid, you’ve been travelling in Africa. You’re pretty, brave given what’s going on with Ebola or you actually didn’t know.

BRIGID TAYLOR: No, I didn’t, This morning we were on the show and the next thing there was an announcement side of the World Health Organisation, talking about it becoming an international pandemic, which is a concern, since I was in Ghana last week. So, I think that one of the things that they did say that was quite clear is, it is not airborne. I think it is bodily fluids. So you have to have been bled on, or have to have shared bodily fluids with somebody, for it to have been transmitted.

ALEC HOGG: So you didn’t kiss anybody.

BRIGID TAYLOR: I didn’t, well, you know, you kiss people on the cheeks. How infectious are your cheeks, is the question?

ALEC HOGG: Aren’t they because there’s a little bit of fluid in sweating, I guess.

BRIGID TAYLOR: There’s a little bit of fluid, I know, it’s a concern; and I think it’s the fear factor. I think what the World Health Organisation is trying to do is to just to allay the fears and say, “These are the facts.” How do we get people in there? How do we combat this? How do we contain it, and how do we take control? The concern is that it is 21 days that it is in incubation. So you’ve got the first week of where it doesn’t present and then you start to present. It’s about getting people help whilst that process is going on. Identifying who the potential candidates are, so that they can contain it, because once they’re in that kind of institution, one; they are not affecting other people but two; they are able to potentially, survive.

ALEC HOGG: My problem always is sitting next to someone on an aeroplane who sneezes and they’re not well, and you don’t know what’s in those bodily fluids and you don’t know where they’re going to hit you.

BRIGID TAYLOR: Snot flying monsters. No, I hear you but it’s the life and times of, they always say that Africa is not for ‘sissies’.

ALEC HOGG: It’s a reality, isn’t it?

BRIGID TAYLOR: So travelling around Africa is brave but, the unfortunate thing for me in this is the political risk. We’re always going to have those kind of underlying, emerging markets, and especially frontier, market type risks. This just puts another thing that weighs against that. So, in terms of, if we look at offshore investors and their concerns, do they really understand, and I think it is just allaying those fears of ‘it’s not as bad as it needs to be, however it has become that scenario, in the West of Africa but that is not the whole of Africa.’ Africa is a bigger Continent.

ALEC HOGG: Brigid Taylor is with Dreadnought Capital and we’re going to be finding out more after the break, talking to the World Health Organisation, about the declaration of Ebola as a global emergency. We’ll be covering that story in some detail. Stay with us.