Market watcher David Shapiro unpacks last week's frenzied sale of Abil shares by Coronation, something he hasn't seen since the Lehman panic in 2008. He unmasks the purchasers as private clients who were in for a punt, speculators who thought the shares were too cheap to miss – and the venerable Allan Gray. Also in today's Podcast, Dave offers his opinions on the bemusing downgrading of Naspers debt by rating agency Fitch. – AH.ALEC HOGG: There's quite a lot on the Biznews site today Dave, about the Abil collapse. We've had Coronation saying 'we're sorry', but the real story there is they dumped shares as though it was going out of fashion last week..DAVID SHAPIRO: Do you know who bought them? I see Allan Gray has just disclosed that it's built up a six percent stake, which was unknown to us. I suppose they had to say it. It came through this afternoon: they said that Allan Gray Proprietary has today, notified the company that it increased its holdings to six-point-eight-eight percent..ALEC HOGG: That's crazy..DAVID SHAPIRO: It's rather odd that people like Allan Gray, whom we regard so highly as been cautious investors, would have also bought in, particularly in the last week Alec, during which all the fury took place where the shares have fallen. I don't think it cost them much, but the fact that they actually took a punt on it also means that they've written off quite a bit. Its mea culpa from Coronation as well, so it didn't explain much and I think there was a lot of pressure for them to come out and try to justify how they bought the stake..ALEC HOGG: In other words, last Wednesday – because it's only in two days that Coronation sold 150-million shares – when the profit warning came out, Coronation clearly took a view that they wanted to get out at any cost. To move 150-million shares, Dave, in two days….DAVID SHAPIRO: Do you know what it is, Alec? It just shows you. Firstly, there must have been a lot of short covering. People who were short on covering also panicked. I'm sure that they wanted to cover, and then there was an enormous amount of speculation right around the country. Everybody was here, taking a punt that this was too cheap to miss, no one saw this falling, and no one saw it coming down as fast as it has, and everybody thought they were going to make a quick turnaround profit. It's caught many speculators, so I think there are many people who are not admitting that they were involved in it and went in. It's a rather tragic situation and I'm sure that not all of those were institutions, but many private clients caught, too..I know various clients without disclosing anything, even within our space here, and we don't advise. We didn't advise on it. People who run their own portfolios went…R250 000 to R500 000 in the turnaround. They never appeared. They've just written that off..ALEC HOGG: Someone must have been buying those shares because it's many shares to move. Dave, what happens in a case like that? Let's just say you're at Coronation, you read the profit warning, and you have your morning meetings, and say 'guys, we're in trouble. We own 20 percent of this company. Just get rid of the shares. Sell them at any price'. How did they then make it happen?.DAVID SHAPIRO: Well, they just fell into whatever buying was there. Alec, we were watching. That's what I say: it occupied everybody's minds last week. It was furious trading..I say we haven't seen this kind of flutter and activity since 2008 when Lehman Brothers collapsed..At that stage, we everyone was panicked. In this case, it was a different type of exhilaration. People wanted to get in. They wanted to buy. Everybody thought that Abil was going to survive. From that point of view, that gave the liquidity to the market. As I say, there was huge amounts of short positions that also wanted to cover in, just in case they were caught on the wrong side. I'm sure that 150-million from what it cost Coronation in terms of Rands – I don't think it made that much in terms of their cash flow. I wonder if it's going to cost them reputation. It's funny..What happens in a situation like this – and I talk about the psychology of the market, which is so interesting. If you're running portfolios for clients and you have 15 shares – 14 of which are all doing pretty well – and you just happen to have one that's not doing that well… It might not even be that much in terms of the overall activity, and you know we cannot always get winners: it's amazing how psychology turns to the loser, how that dictates your reputation, and how the conversation only turns to the loser and not to the winners. It's like a ten-to-one weighting and I think this is what everybody's going to ask Coronation..They're not going to say 'how well have you done'. The quick question is 'why did you buy Abil? What possessed you to buy Abil'? Poor Coronation..I feel for them because we can all fall for the trap, but I think that in this case they're really a company with a great reputation and a lot of very clever analysts. They just let their guard slip..ALEC HOGG: They bought the story. They bought the Leon Kirkinis optimism..DAVID SHAPIRO: Alec, doesn't it say a lot? To me, there's a lot. Firstly, in terms of reporting: so many professionals are involved in their company. We, as outsiders, can't get in. We can only deal with the published information – what's available to the public, and we have to make assessments from that. You wonder – and I don't want to cast aspersions on the auditors etcetera – where their market intelligence is. There should be ombudsman or watchdogs looking for these types of signs. I'm sure that even the Reserve Bank did a good job, going in and saying 'hold on a sec. This doesn't look good. Let's quickly go in and see what's there'..ALEC HOGG: Phil Fisher, with his scuttlebutt. You shouldn't just listen to the companies. Talk to their competitors. I remember going down to Cape Town to Capitec, sitting with them, and they were totally bemused at how the rest of the market had not (already, by that stage), uncovered what Abil was doing. Then yesterday, we had someone who was explaining/unpacking it for us, who was saying that when Capitec have a problem – this was Jean Pierre (as he prefers to be called) Verster, who made R100m for his company. It was published information and Capitec wrote off a loan if it was one month in arrears, other banks – 3 months, and Abil – 5 months. That screams at you, doesn't it?.DAVID SHAPIRO: The problem is that their provisions were not as secure as the other banks were. It's a warning. As soon as a person starts to… Yes, you can lose some accounts, but as soon as the person starts to miss payments, you have to be alerted to it, particularly at the bottom end of the market. It shows you that their cash flows are under strain and that they can't support it. I know JP Verster from 36ONE. He's been onto this for a long time. He was the only person… I wouldn't have gone short (I'm that courageous), but I just kept away from it, but he had the courage to actually short for the whole duration, even after people like Goldman Sachs had come in to underwrite it, and even though a few analysts were still out there who were coming in and saying 'all was well. All would be well'..ALEC HOGG: What is interesting there too is that they must have covered all of their big short positions and then they went short again at 31 cents on Friday, so they've really done well. It was a really interesting interview. Dave, just to close off with, there was another big story today. Naspers's debt was downgraded by Fitch. The more you look at that, the weirder this seems, because they have $1.5-billion in total in net debt. They have $55bn in assets through Tencent and Mail.Ru, and they're downgraded on that $1.5-billion. Why would Fitch do something as silly as this?.DAVID SHAPIRO: Do you know why? Firstly, the good news is that Naspers traded today at an all-time high again of R1 432 per share, so it just shows you that the market just dismissed it as a non-event. Why they downgraded it is because those are assets held for… It's not that they're bankrupt…far away from it. What happened is that they look at the cash flows being generated by earnings versus what the debt is. Of course, what happened is that because they've been ploughing more and more money back into the cash flows from investments, which has hurt their earnings, they reckon that it's reduced their ability to repay. I think it's a bit farfetched. I'm sure that they'll reverse it in no time, but I wouldn't take it too seriously. The only thing that might make it a little serious is if there are institutions that hold the stock, and are not allowed to hold junk. They'll then be forced to sell the debt.ALEC HOGG: Crazy..DAVID SHAPIRO: But it's a very technical issue. Fitch just forced into a position, simply because of analysing cash flows, and the ability to repay the debt. As those cash earnings reduce, they're forced to do it. As I say, look at the bright side. Naspers has a fresh new high..ALEC HOGG: And also, have a look at the story on Biznews. We got hold of Naspers' CFO Basil Sgourdos and he was in fact, in China where the Tencent results were released today. Basil was saying that they have no plans to borrow anyway, so it doesn't really matter..David Shapiro is with Sasfin. Thanks, Dave..* Note – The actual number of Abil shares which Coronation sold was 170m, not 150m as mentioned in this interview. In its announcement on SENS, Coronation said it reduced its stake of the 1 500m issued Abil shares from 19.62% (294m) to 8.28% (124m) – a total sale of 170m shares.
