Mohammed Nalla: Why Sasol prefers the US; Shoprite and Ellies

Having an in-depth, unbiased look at today’s markets and the companies that are dominating the spotlight, Alec Hogg was joined on CNBC Africa’s Power Lunch by Mohammed Nalla, Head of Strategic Research and Global Markets at Nedbank Capital. Mohammed offers fascinating insights into Sasol after it confirmed that it would be investing $8.1bn on building an ethane cracker plant in Louisiana, he also expands on Shoprite after its impressive operational update yesterday, and lends his expert insights to troubling circumstances affecting Ellies’ share price at the moment. – LF

 

GUGULETHU MFUPHI:  To help us get a more in depth view of how the market is trading today, we’re joined at the desk by Mohammed Nalla, Head of the Strategic Research for Global Markets at Nedbank Capital. It’s good to have you with us, Mohammed.

MOHAMMED NALLA: Thanks for having me.

GUGULETHU MFUPHI: In very neutral or bright colours today, I should say.

ALEC HOGG: He’s got my old…

MOHAMMED NALLA: …It’s Aston Villa, right.

ALEC HOGG: No, it’s Westham United, that’s my team.

MOHAMMED NALLA: Westham? I was called a ‘villain’ this morning, Aston Villa.

ALEC HOGG: No, tell them you’re a hammer.

GUGULETHU MFUPHI: Okay, from villas to hammers, you can tell I lack football knowledge here, but let’s get back to the markets, something I know a little about. Sasol, interestingly enough, before we actually went on air you said that this is a company that you like but Alec, obviously mentioning that this investment is a significant one, going outside of South Africa’s borders.

MOHAMMED NALLA: Ironically, I guess that’s almost there’s the indictment. That’s the reason I like the stock. I like the investment story, so let’s rewind a little bit. Sasol is a quality company. It’s been a quality company for quite some time and, yes, it does run a bit ahead of itself. A lot of people seem to just think that Sasol is a proxy for the Rand/Oil price, but I think there is so much more behind this company. I guess this investment that you’re seeing in the U.S., for me, what’s positive about it…? You know, I’ve been preferring these ex South African players for quite some time, whether it’s in property, stocks, or whatever. This is in the energy sector. Put on top of that an overlay that we’ve seen energy prices come off substantially. We’ve seen Sasol come off substantially, off the recent highs as well.

I get the sense, we’ve got an Opec Meeting coming up in Vienna, in November that we may see some sort of support for oil prices around here, and perhaps a bit of an uptake if we actually start seeing some slightly better economic data, coming out of the larger economies, going into next year. For the longer term I think, yes, certainly. I like the stock. I like the company and if you want to apply a tactical overlay, if you’re bearish on oil prices, buy the stock and just hedge out the oil price risk, if you really want to do that.

ALEC HOGG: You’ve got to like what they’re what they’re doing. They’re going to the centre of fracking. They are going to the centre of cheap energy, which the Americans have perfected.

MOHAMMED NALLA: Undoubtedly and…

ALEC HOGG: And they’re going to turn that into chemicals…clever.

MOHAMMED NALLA: And that’s where Sasol has already had this competitive edge. The whole gas to liquid technology, the Fischer-Tropsch method effectively…

ALEC HOGG: The processing.

MOHAMMED NALLA: Was, basically developed in South African, and that’s Sasol technology.

ALEC HOGG: No, the Nazi’s developed it. The apartheid government brought it here.

MOHAMMED NALLA: Okay, so there’s the history knowledge coming in. Thanks for that Alec, but at the end of the day, that’s the competitive edge. They’re going now, as you mentioned, to the source and let’s not fool ourselves. That U.S. energy sector is becoming a very, material player. OPEC still is kind of the elephant in the room, if you want to call it that, but if OPEC thinks that they have the kind of power that they had a decade or two decades ago, they don’t and an interesting report. If you look at the flexibility of a lot of that U.S. production; first of all, your break-evens, on a production level, on some of those are as low as $20.00 to $30.00 a barrel. Then, over and above that, the ability to turn on and off that we find in capacity to meet changes in demand is actually remarkably easy and the one last thing is they say, the oilmen say ‘a good field just gets better’.

As you get you productivity gains coming through, so for me, I like that Sasol story (over the longer term), and again, if it hinges on your view on the oil price, buy the company and then hedge, tactically on your view on the oil price.

ALEC HOGG: I’m reading a really good book by a guy called Zuckerman called ‘The Frackers’. It is worth looking at. They worked hard at getting the innovation. It was over many years, before it finally clicked into gear over there and the Americans, with the shale gas, which of course is coming to South Africa. We had another announcement on that point yesterday. I’ve got to talk about Shoprite because yesterday, in conversation with Sasha, I said to him, “Yes, but maybe Whitey Basson’s salary has something to do with the fact that he is Christo Wiese’s, (the Chairman and controlling shareholder), brother-in-law.” Well, they then told me, “No, both are J Basson, but the one is Jaapie and the other one is Johan Basson, so Whitey’s father has got no relation to Christo Wiese’s wife’s father.” I apologise, they’re not family, there’s no nepotism there.

Whitey is in on merit, as, well it doesn’t mean that because you are family there has to be nepotism, but what did you think about those Shoprite numbers? The market seemed to like it.

MOHAMMED NALLA: Yes, they seem to like it a lot. When the stock is up six/seven percent, I don’t recall where it eventually ended up but that tells you that the market…I mean the market has been ‘downbeat’ on retailers for a while. We’ve had this retailer’s discussion some time ago. What I’ve liked about Shoprite for a while now, I wouldn’t necessarily put it at the top of my list, in terms of local retailers, but it is certainly there and I would still put that ahead of Pick ‘n Pay on a relative basis, and we may have a disagreement there but good, solid management. Yes, a lot of people grumpy around the size of Mr Basson’s pay package and you’re seeing news stories about that, time-and-time again, but they are starting to diversify them. They’ve got that Africa strategy coming through there. Growth-ex South Africa was around 16-percent, if memory serves.

Again, I hate to sound bearish on South Africa but that is where the growth is coming from. A lot of our markets are quite mature, so companies that have that exposure are generally, able to deliver that extra tick that investors are looking for.

ALEC HOGG: When he was here, when Whitey was here, he did say that for the first time this Financial Year, they are investing more outside of South African than in South Africa, which talks to what you were saying earlier.

GUGULETHU MFUPHI: Exactly, well that clearly was from an investor’s perspective because you are putting your money into these initiatives but, maybe if we could side step just to the economic conditions of South Africa and if that’s a concern?

MOHAMMED NALLA: You know, we say a lot of the right things and the concern for me, very frankly, and I’m not unique in this. Even our Finance Minister said it at the Medium Term Budget is, “We’ve drawn up the plans. We’ve got the plans. We’ve got the NDP. We’ve got all of these policy frameworks,” and we run out of acronyms on these things. It’s about the delivery, about the implementation and when you have all of these glaring holes, investors start to ask the tough questions, so yes, we like the framework. Okay, fine, ‘so what are we doing about it?’ As soon as you do that, as soon as you ask that question you start to get unstuck on a number of issues so, yes, I’m concerned. I’m specifically very concerned and it’s about delivery. These things take time. We don’t have the luxury of time.

If you look at Brazil, for example, the markets punish you, and they punish you very quickly, so if we’re going to ride the ship and steer it, into the next, we need to stop thinking about today and tomorrow. We need to start thinking about the next 10/20/30 years and we need to start putting in the hard decisions today. For me, the jury is still out on that, unfortunately.

ALEC HOGG: Mohammed, I want to get a bit more specific, in something that’s been in the news – Marcel Golding’s departure from HCI. Let’s not talk the politics, but let’s talk Ellies. He bought a big chunk of Ellies’ shares. He offered to take them over. Clearly, the board of HCI said he was wrong in buying them. They’re not letting him take over those shares but there’s an overhang for a company, an overhang of stock for a company that is desperate to do a rights issue. How are you reading that because I see today, Ellies’ share price took a little bit of a wobble again?

MOHAMMED NALLA: Yes, I don’t know where Ellies is trading right now…

ALEC HOGG: At R120.00.

MOHAMMED NALLA: We had this ramp up, just after that news; it went from around a Rand to around R1.40, so it’s off 20 cents and maybe there’s a bit of guys getting too excited around it.   For me there are a couple of issues here. The first issue is, can I see a strategic tie between, call it HCI and Ellies? Yes, I think there is some sort of merit in…

ALEC HOGG: No, you can’t.

MOHAMMED NALLA: Why not?

ALEC HOGG: Well, you could have when Marcel was there but it’s a matter of honour now. He did the wrong thing.

MOHAMMED NALLA: Agreed, so let’s maybe put a caveat out there. I can see the business imperative of tying of those two together.

ALEC HOGG: Yes.

MOHAMMED NALLA: Whether it happens or not is an entirely different question and what’s unfortunate for me here is that politics are starting to erode shareholder returns. We’re in the ‘capital market’ business here. That is what shareholders care about, so we need to be making the right business decisions and not the right political decisions. Whether those two are congruent again, there’s a question mark there, so for me…it doesn’t smell right.

ALEC HOGG: Careful…it doesn’t smell. If I was an Ellies shareholder today I would be very worried because at least with Marcel Golding, doing exactly what you are talking about and bringing in that strategic alliance, it made sense that someone would come to the party, to support it, but with him out of the way. HCI are saying that he did the wrong thing buying the shares. They’ve got to dump the shares and if they dump the shares…

MOHAMMED NALLA: The Company is in trouble, Alec.

ALEC HOGG: Yes.

MOHAMMED NALLA: Jeez, they need that rights issue to go through to show up their balance sheets. If they don’t, are we going to see another casualty, because of, effectively boardroom politics, (what I’m calling a boardroom soap opera) right now. We’ve got a couple of those.

GUGULETHU MFUPHI: Does that impact on investor’s decisions or should they ignore the noise then?

MOHAMMED NALLA: You can’t ignore the noise because yes, it does impact on investors.

ALEC HOGG: Run for your life if you own the shares. If I held that stock, I would be out this instant.

MOHAMMED NALLA: You’ve just got to feel sorry for the guys at Ellies because it’s been a comedy of errors and circumstance.

ALEC HOGG: The risks now are excessive.

MOHAMMED NALLA: Massive.

ALEC HOGG: You’ve got to read what’s going on there. Just to close off with, your company, Nedbank. We had a trading statement yesterday, capital add equity ratio and stuff today. It’s like things are going well for the ‘green’ bank.

MOHAMMED NALLA: Yes, look, it’s been a good time period. Things have been going well. Shareholders have been rewarded by nice gains. We’ve got the Ecobank tie up as well here, in terms of…hopefully our ex South Africa strategy that comes through there, so yes, obviously I come from Nedbank. I’ll talk my book.

ALEC HOGG: No, Mohammed. I can’t believe what Gugs has just shown me here.

GUGULETHU MFUPHI: Just before we go, if camera five can zoom in here…we were commenting about your tie just a moment ago.

ALEC HOGG: Jeez, you’re the best-dressed man of the year.

GUGULETHU MFUPHI: It seems as though, Mohammed you’ve won some awards, hey, and best dressed man.

MOHAMMED NALLA: As on the side, not market orientated, when I’m not talking about markets, I would like to claim that it’s got something to do with me but behind every well dressed man, there’s a woman telling him how he’s not dressed well enough and that’s my wife, so she’ll have to take credit for that one.

ALEC HOGG: Well, what we do know is that Westham, my little football club, beat the champions on the weekend, 2 – 1, so you are very well dressed today with your Westham top.

MOHAMMED NALLA: That’s the reason, surely Alec.

ALEC HOGG: Of course, and if I had a vote, who would I be voting for? Mr. Nalla, thank you team. That was Mohammed Nalla, a new Westham United supporter, and best dressed man of the year, Head of Strategic Research at Global Markets at Nedbank Capital. Well, Sasol $8.bil ethane cracker project has been given the green light. We’re going to talk to Sasol’s Acting Chief Financial Officer, Paul Victor next, right here on Power Lunch.