South Africa’s much beloved market commentator, David Shapiro from Sasfin joined Alec Hogg on CNBC Africa’s Power Lunch, to discuss the markets. David shared his insights on Abil, its curatorship, and staying open for business. He also lends his years of experience to Merafe‘s pleasing half year results, on the back of its success in the ferrochrome sector. Other companies in the spotlight for the day are Sasol after its trading statement expecting substantial increases in earnings and Telkom‘s share price being up on the day. – LF
GUGULETHU MFUPHI: To help us get a more in-depth view of how the markets are trading today, we’re joined by Mr Favourite. It’s David Shapiro from Sasfin Securities.
ALEC HOGG: South Africa’s favourite.
GUGULETHU MFUPHI:Â Yes he is, Alec.
ALEC HOGG: You’re joking with us. There can be only one.
GUGULETHU MFUPHI: Yes, there can be only one, but you know how ‘way back’ we go with David. When he used to steal my news scripts….
DAVID SHAPIRO:Â No matter what you say about Gugu, you could never fluster her and we tried on many occasions.
GUGULETHU MFUPHI:Â You did.
ALEC HOGG: When Gugu first started…there’s a dreadful story that we’ll have to let out of the closet one day.Â
GUGULETHU MFUPHI: Dreadful story…
ALEC HOGG: No, but you weren’t flustered, so well done. A big story, Dave. I see Capitec’s share price is down; is this a little bit of a contagion issue.
DAVID SHAPIRO: I would imagine there are worries about what’s happening at the bottom end of the market. We bounce back very strongly, but the more you think about it the more you have to worry about the South African consumer and about people who are indebted. The economy is not booming. If anything, it’s getting worse and that’s why I keep asking ‘so how good is the good bank’. We know that the bad bank is bad but how good is the good bank? In fact, in our last week’s discussion my big concern is ‘what about banks’. They’re all tightening up on credit etcetera, so I think we’re in for a tough six months on repayments and I’ve no doubt that it will hurt banks like Capitec, even though I have the utmost respect for them. What was that famous thing? It’s the economy.
ALEC HOGG: You were going to say ‘stupid’ at the end of it.
DAVID SHAPIRO:Â I think something like that.
ALEC HOGG: ‘It’s the economy, stupid’.
DAVID SHAPIRO: It’s the economy, stupid. Yes.
ALEC HOGG: I thought you’d look at me and say ‘stupid’, and then Gugu would’ve flown into you. Wouldn’t you, Gugu?
GUGULETHU MFUPHI:Â Yes, definitely.
DAVID SHAPIRO: Which president was it? I can’t remember.
ALEC HOGG: Well, it was probably the stupid president. Who was that? Bush.
GUGULETHU MFUPHI: Keeping with company results David, I want to draw your attention to Merafe Resources (and we’ll be speaking to the CEO in a moment or two), a company that’s done fairly well and here, today, the share price is up by more than 90 percent.
DAVID SHAPIRO: A big turnaround story and probably… If you’re looking for a small cap or a small mining cap, look at Merafe. They seem to have been focusing now on… They’re not diversifying anymore. They’re focusing on ferrochrome. Sales are up. Costs are down and they paid a dividend for the first time. That’s a long time, so it looks like… If you have the appetite for ferrochrome or for something in that area, I think you can look at this one quite carefully.
ALEC HOGG: Isn’t there much of an influence there from Glencore taking over the Xstrata…?
DAVID SHAPIRO: I would imagine. I don’t think Glasenberg is an easy customer and his minions are well trained. I like Glencore. I like Ivan very much. He’s a non-nonsense manager.
ALEC HOGG: Because Merafe gets a share…20 percent of that joint venture.
DAVID SHAPIRO: Yes, they’re a junior partner.
ALEC HOGG: What we’re betting on there, is Glencore sweating the assets that used to be owned by Xstrata.
DAVID SHAPIRO: That’s exactly right.
ALEC HOGG: Why didn’t you tell us about this, Dave? If you think about it, it’s a no-brainer now, isn’t it
DAVID SHAPIRO: What worried us was the ferrochrome market. That’s what we didn’t know about and I think those prices are stabilising. That’s using stainless steel. It seems to be stabilising and picking up and that impressed us.
ALEC HOGG:Â Does Merafe have more upside?
DAVID SHAPIRO: I would say so. I get a nice feeling about resources at the moment. They’re levelling out. It’s not going to run away. We’re not going to see prices that we’ve seen in the past, but on the other hand, I don’t think we’re going to see a collapse in process. Even the iron ore price is more or less around these levels. Alec, the answer is you have to mine efficiently. That’s where the profits are going to be made and that’s the message that has to come through to all our miners. You can’t just rely on higher prices to get you through this time. You have to start running things a lot more efficiently.
GUGULETHU MFUPHI: It almost sounds like you’ve been speaking to Piet Viljoen. He mentioned that it’s a once in a generation opportunity Alec, to get into resources. Another resource company to watch is Sasol. They had a trading update yesterday – looking very impressive, too and expecting HEPS to increase by 13 or 17 percent.
DAVID SHAPIRO: I think so, too. They’re cleaning up head office.
GUGULETHU MFUPHI:Â Is the U.S. a different story?
DAVID SHAPIRO: Yes, look at the U.S. What we don’t realise is (1) that’s a booming area and (2) the cost to capital. You can borrow for next to nothing there, so you can finance these projects at a much lower level. Therefore, your yields don’t have to be that high to make big profits and I think we’re going to see low interest rates for a lot longer. Sasol going there: they ring-fence this operation, and are able to find as much finance as they can at very low levels – probably at half the cost that they could here – in a booming market.Â
ALEC HOGG: And they get tax benefits because they’re in a State that needs investment.
DAVID SHAPIRO: Louisiana. The difference in investment in Louisiana is there, they say to Sasol ‘what can we do to make this successful’, which is an attitude we could adopt here.
ALEC HOGG:Â How can we help you make money?
DAVID SHAPIRO:Â Exactly.
GUGULETHU MFUPHI:Â Is S.A. unfortunately not saying that at the moment?
ALEC HOGG:Â How can we take the money away from you?
DAVID SHAPIRO: That’s exactly right.
ALEC HOGG: You’re tipping Telkom. I’m sorry. You’re on your hobbyhorse, aren’t you?
DAVID SHAPIRO: No, it is right because they go in there and they create employment. Louisiana doesn’t say ‘we want 25 percent of this’. They don’t care who owns it. What they say is ‘you’re creating employment and you’re creating ongoing economic activity as well, because you buy all your useable goods there’.Â
ALEC HOGG: It’s all about education and knowing the impact of a Sasol. That means I get a job. That means I’ll keep voting for whoever’s in power and if they keep bringing jobs, I’ll keep voting for them.
DAVID SHAPIRO:Â Exactly right.
ALEC HOGG: However, we have other reasons why we vote in our country. Telkom: up three percent.  Schindehutte gone – hardly a budge.
DAVID SHAPIRO: I think they’ve run as much as they can. I think we’ve seen the turnaround. Now is the next phase of the restructure. What worried me Alec, is that if you looked at the top line there when the results came out, there wasn’t much growth. They weren’t making much penetration. I think they have a lot ahead of them now, to take it from here.
ALEC HOGG: R28bn: that’s the value of the company. It’s a fraction of MTN and Vodacom.
DAVID SHAPIRO: I think so, but where are they going to make their next money? I know they have a lot of plans. At the moment, those are PowerPoint plans – PowerPoint presentations etcetera. They’re going to have a lot of problems when they start to cut down on staff, which they have to do.
ALEC HOGG: Talking about PowerPoint, we had a Chairman in the studio yesterday who’s been appointed CEO. He’s a non-executive Chairman. You know whom I’m talking about – Leslie Maasdorp from AdvTech. I’ve known Leslie for a long time, so I’m being the devil’s advocate in this respect. He’s a banker. He’s never been operational and now he’s operational. Would you be buying the shares? I see today the shares are down three-and-a-half percent.
DAVID SHAPIRO: That’s a worry. I don’t know him and therefore, I can’t comment. I have a checklist of things that we look at when we buy investments and the one thing is to know where the man’s come from. If he’s a banker, is he a dealmaker? That’s generally, what happens. When you come from the bottom up, you’re much more productive. You know the production. You know how the company works. I always worry about that. I always avoid investment bankers coming in to run a business, because all they want to do is investment banking. I prefer it to come from within, as we’ve always seen from companies like SABMiller who build the managers there.
ALEC HOGG:Â That is so interesting.
DAVID SHAPIRO: Yes. I don’t know him.
ALEC HOGG: CURRO…remember Dr van der Merwe has come through – he’s an educationist.
DAVID SHAPIRO:Â Exactly.
ALEC HOGG: Maybe the AdvTech board are saying ‘hang on. We need a dealmaker to catch up on CURRO’. I did the numbers yesterday, Dave. CURRO’s R8.5bn market cap, AdvTech is just over R3bn, and AdvTech must be three times older.
DAVID SHAPIRO: AdvTech is at the top end of the market. It’s outside of high schools. It has schools. It has Crawford. It has quite a few other colleges, but most of its focus has been vastly college etcetera, and they have to resurrect. They have to get that going again. It seems to have been lost as well as their placement. I think it’s a company that needs to take a look at itself. It was really running very strongly and then just seemed to fall away or fade away in a market, which was growing and where people are prepared to pay money for education.
GUGULETHU MFUPHI: Is it too late for them to catch up? Yesterday, he did mention that they want to enter into the lower entry-level market. Alec asked him about margins, which he didn’t say too much about.
DAVID SHAPIRO:Â Look, they can copy the model.
GUGULETHU MFUPHI:Â Is it that simple?
DAVID SHAPIRO: Of course, they can. They can copy that model.
ALEC HOGG: David, it’s one thing to do it yourself. It’s another thing trying to replicate it.
DAVID SHAPIRO:Â Well, they can buy already existing schools and start to do it.
ALEC HOGG:Â So do a CURRO.
DAVID SHAPIRO: Do a CURRO. That’s what I mean. They can start to do what they’re doing. There is so much room for growth here.
ALEC HOGG: If he gets it right – because he has a strong balance sheet. He has everything in his favour (good cash flows) – you could see AdvTech taking off. Maybe it needs an investment banker.Â
DAVID SHAPIRO: Well, AdvTech is at about…maybe a 10PE. CURRO is at 140PE.
GUGULETHU MFUPHI:Â Exactly, so you would be investing in AdvTech maybe.
DAVID SHAPIRO: Well, if he starts to do something like that, sure. I like education, especially in this country.
ALEC HOGG: Well, he didn’t have his supporters today because the share price is down three-and-a-half percent. Maybe David will be buying the shares tomorrow and once word spreads, ‘it’s Mr Shapiro, South Africa’s favourite market commentator…  You’re the modern Greg Blank. When Greg Blank used to buy a share, there would be a legion of followers.
DAVID SHAPIRO:Â No, please.
GUGULETHU MFUPHI:Â Did you buy Abil?
DAVID SHAPIRO: No. If anything, I was running away. I can never understand why people love to go and jump in fires. They see a fire and they just want to… I run away from fires.
ALEC HOGG: Don’t try to catch a falling knife.
GUGULETHU MFUPHI:Â Not part of the herd mentality, clearly.
DAVID SHAPIRO: There are quite a few shares on the market. Where there’s trouble, run away.
GUGULETHU MFUPHI: Indeed. Well, on that note from South Africa’s favourite market commentator – that’s David Shapiro from Sasfin Securities.
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