In-depth market analysis of Naspers’ downgrading, Group Five and Glencore

Naspers was a hot topic today after Fitch downgraded its debt to junk, noting that Naspers’ intensive investments would hinder its profitability. The market was unphased, and Naspers’ share price actually rose despite the news. Group Five was another company that impressed investors with its full year results reporting a 26% increase in normalised headline earnings per share. Glencore also came out with a half year production update today citing a 13% increase in copper production, the market however was displeased – Glencore’s share price is down on the day. Having a look at these companies as well as the progressing story of Abil  is Tshepo Modiba, Head of Equities at Seriti Asset Management. – LF 

ALEC HOGG:  Let’s get a more in-depth view of how the market’s trading today.  We’re joined by Tshepo Modiba who’s Head of Equities at Seriti Asset Management.  Naspers’ share price up by two-and-a-half percent today despite that downgrade, as Gugu and I were both giving a ‘thumbs down’ to Fitch.  Would you agree?

TSHEPO MODIBA:  Look, it actually just doesn’t make sense.  As you touched on the amount of debt on their balance sheet, it’s almost insignificant.  The fact that they’ve written it down to a point where it’s not investable just doesn’t make sense.  I can’t wrap my head around how Naspers is junk in terms of their debt, but we’ll see whether the equity markets or the rating agencies are correct.  The equity markets seem to disregard that completely and think that this is a phenomenal business.

GUGULETHU MFUPHI:  Just on Naspers – despite the downgrade, which clearly did nothing for the share price – the investment case of that company…

TSHEPO MODIBA:  Well, having said that, the positivity around the Group is there for everyone to see.  Tencent had another set of really good numbers.  I’m probably the wrong person to ask on this – I’ve been saying it’s been expensive for a while now – but it seems to gain fairly decent traction in terms of the underlying operations.  One of the areas that they highlight for downgrade is that short-term results are going to be impacted investments to prop up the business.  When you’re looking at a business like this, the truth is that most of the value doesn’t come from what they’re doing now, but from what they’re going to do so you’re probably focusing your eye a little bit more on some sort of idea of what growth is going to look like.  Not now, but five years down the road: that’s really the case.

ALEC HOGG:  We don’t get the exponentiality.  The numbers this morning: quarterly growth up 59 percent. 

GUGULETHU MFUPHI:  Quarterly?

ALEC HOGG:  Quarterly growth.  These are extraordinary numbers that we’re seeing coming out of China and coming out of Tencent.  We’ve often said (on this program) that exponentiality is something to which the human condition just isn’t attuned.

TSHEPO MODIBA:  I can’t argue with that.  A phenomenal performance out of Tencent again.  It keeps beating my expectations; that’s for sure.

ALEC HOGG:  But Fitch must be embarrassed.  Come on.  You come out with a downgrade to junk status, the share price goes up, and their biggest subsidiary (where their investment is worth more than their market cap), actually shoots the lights out.  Anyway, that’s ‘goodbye, Fitch’.  Well, you can’t really say ‘goodbye, Fitch’, but you know where I’m going.  What about Group Five’s numbers?  They’ve been through rocky patches and it does look like it’s becoming better.

TSHEPO MODIBA:  A really pleasing set…  The last two years have been really back to good momentum for the business after what was a difficult environment not just for the business, but also for the sector as a whole.  Interestingly enough, they’ve run ahead of some of their peers in terms of returning to profitability and seeing good growth.  A large part of that has been the difficult decisions that the business took, and probably more so than the rest of the construction sector, probably starting to get the Africa story more ‘spot on’ than everybody else.

GUGULETHU MFUPHI:  Just moving onto Glencore, also out with a production update – seeing a nice increase there.  Is this one resource stock that you might be bullish on?

TSHEPO MODIBA:  I thought it was a nice increase.  The market seems to disagree.  It sold down quite aggressively today.  I actually though the production numbers were quite reasonable.  Clearly, the expectations were a little bit higher.  In terms of valuations, where this sits relative to the other diversified miners, it probably is a little bit more on the expensive side.  If I were looking for opportunities, I’m currently looking a little bit elsewhere, probably more at a Billiton.

GUGULETHU MFUPHI:  Billiton only…Sasol…? They had an impressive trading statement early on this week.

TSHEPO MODIBA:  Sure, Sasol’s looking fairly interesting.  There’s a big overlap in terms of the energy theme between Sasol and Billiton, so if you’re constructing a portfolio it doesn’t make sense to hold both, given the drivers of returns for both businesses but certainly, Sasol looks like a good investment case now as well.

ALEC HOGG:  That whole Louisiana story: I don’t know if we’ve quite absorbed it here in South Africa – how big that is – when you make the front page of the Wall Street Journal from a South African company making an investment in America, you must know this is something special.

TSHEPO MODIBA:  Sure.  The true is that corporate South Africa punches pretty high up in global terms.  If you walk around New York and you talk MTN, people know what you’re talking about so it’s impressive, but we have some pretty impressive giants in the market.

ALEC HOGG:  But remember, we have football starting this weekend in England and there’s a corporate South African company that’s involved – Bidvest.  Guess what they paid to have their name on the Sunderland shirt.  Don’t look at me like that.

GUGULETHU MFUPHI:  Yes, sure Alec – Sunderland.

ALEC HOGG:  Sunderland is a football club.  Bidvest sponsors them.  They play in the Premier League in England.  R90m per year, just to put their name there, and they’re one of the small teams.

GUGULETHU MFUPHI:  Uncle Brian has deep pockets.

ALEC HOGG:  Bidvest has deep pockets, but at least they aren’t trying to sponsor Manchester United because that would probably take out all of their income, certainly, for a few months anyway.  What about this story with Coronation dropping its shares, coming out with an announcement today to say ‘we don’t actually own 19.6 percent of Abil.  We only own eight percent because we’ve sold some shares somewhere along the line’.  It looks a little bit like sleight of hand.

TSHEPO MODIBA:  The truth is you can’t be overly critical of these investment decisions in terms of business that you thought would do well and ultimately, come out and hurt a little bit.  I think they had to post last week’s announcements and reduce their holding in the company.  The truth is, as a function of their overall assets under management or portfolio size, it’s probably (even at 19 percent) a fairly small portion of their portfolios, but they had to reduce their stake.  It will be interesting to see whether they can recoup any money back from those investments.

ALEC HOGG:  Who would have bought?  That’s a lot of shares.  That’s nearly 200-million shares that they would have moved toward the end of last week at 30/31/38 cents.  Somebody went in big and somebody’s lost a lot of money.

TSHEPO MODIBA:  Sure.  It’s probably the reason that we saw the share price drop as aggressively as it did towards the end of last week – that they had to offload this massive position – and people just sat fairly alone.  Good luck to whomever bought.  As you say, I have no idea whether they’ll get anything back.

GUGULETHU MFUPHI:  Maybe it was too little, too late.

ALEC HOGG:  I agree.  Tshepo, thank you for getting us up to date on those issues.  That was Tshepo Modiba, who’s Head of Equities at Seriti Asset Management.

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