Today’s market commentator is RECM’s Jan van Niekerk with a smorgasbord of very balanced views on topics as diverse as PPC, Japan, gold and the ins and outs of directors dealings – specifically the heavy selling by Bidvest directors. Always a pleasure to listen to these conversations as the events of the day unfold. – CPÂ
ALEC HOGG: Well, letâs get a more in-depth view of how the marketâs trading today. Jan van Niekerk, the Managing Director of RECM is with us in our Cape Town studio. Jan, PPCâŚI made quite a strong comment I guess, that the Board of PPC might be a little un-streetwise, cutting the dividend at a time when a very important vote is just around the corner.
JAN VAN NIEKERK: Hello, Alec. Yes, I heard you comment about that. I think youâre comparing the cut in the dividend to the headline earnings. If you strip out the adjustment for the BEE transaction and the base last year then actually, the underlying operation of the business was down by 22 percent as well. I think that the dividend was cut, very much in line with the operational performance of the company and you can only pay a dividend if you have the cash to do that. Alternatively, youâd have to do a script dividend, but I donât think that would have been a wise thing for them anyway, and so I donât really think they had a choice to that extent. This business, despite whatâs going on in the boardroom, is in an expansionary phase. They are going into Africa.
They are building out projects there that all need capital and itâs a business where part of whatâs going on in the boardroom have been the issues around accessing that funding that they need to grow into Africa. I donât think that they really had a lot of leeway in terms of declaring a much bigger dividend here.
ALEC HOGG: That puts it into a very good perspective. Thumi spoke a little bit about Japan. I had a look at that earlier this morning. It is an important economy: about one-eighth of the worldâs economic growth. Itâs interesting to see that the Japanese marketâs bouncing back after the bad news yesterday. Is it something we should be taking note of here?
JAN VAN NIEKERK: Apart from one-day moves Alec, I think the big thing one has to wonder about is that Mr. Abe, over the last 18 months or so, has been pursuing quite an aggressive strategy in saying âwe are going to use fiscal stimulus to kick-start this economyâ. He spoke about his three arrows, i.e. flexibility to be able to kick-start the economy. As these numbers keep coming up, investors look back and say âbut it seems as though this isnât working. Youâve put a lot of stimulus into the market and we donât see the real reaction on the ground, in the economyâ. What has happened is that the values in the Stock Market have increased significantly (1) because the currency is weakened and many of their companies are export-dependent, and can make much more money now that they are becoming more competitive on a global basis.
As you have weak economic numbers coming out, investors are becoming a big fatigued and saying âwell, is this another false startâ. You see comments like âthe triple-dip recessionâ etcetera, hitting the headlines, which probably speaks to the short-term nature of how investors look at the market when looking for instant gratification. Valuation-wise certainly, in Japan, there are many cheap assets around.
GUGULETHU MFUPHI: Jan, would that justify the local investors seeking exposure to the Japanese market?
JAN VAN NIEKERK: Absolutely, Gugu â not necessarily saying âa local investorâ. I think that many investors in the world today should be considering investing in some of the assets in Japan. If we look at valuations in many parts of the world, the Japanese market is one of the few places where you can still buy companies trading at values less than the cash on the balance sheet (or what we call typical Met-Nets). Remember that as South Africans, we generally donât speak or read Japanese that well so you need to make sure that you can do your homework, and understand the culture and actual economics of the business. Itâs certainly one of the parts of the world, which we think one should be scratching around in, and looking for opportunities.
ALEC HOGG: Nice to have gold shares, Jan.
JAN VAN NIEKERK: I see the gold shares are bouncing Alec, but theyâve been quite volatile in the last while. It doesnât take away from the general headwinds that South African gold companies face, which is rising costs and no control over their income. To be bullish on gold generally, I think you need to take quite a strong macro view and thatâs not really in our circle of competence.
ALEC HOGG: Itâs just interesting to see that PPC was down by four percent today, but a stock that jumped out at me when looking at the winners and losers on the JSE today, is Gijima. Now, I know itâs tiny, and not the kind of share that RECM would be investing a lot of time in but conceptually, itâs another warning flag that when insiders place their bets, you donât always have to believe them. Remember, on this one (itâs now 24 cents) they had that rights issue at 70 cents â three times the current price â and the Founder of Gijima put in R70m at that point in time.
JAN VAN NIEKERK: Yes Alec, I think youâre pointing in the right direction. You have to be sceptical when you assess investment opportunities. However, if you look at a number of companies over time, most of the time insiders, people in control of the business, or founders do have insights into the industry or the business, which guide them on how they do transactions. We do actually, put a lot of store and a lot of value into how management and owners of businesses transact in their own shares. Sometimes, it just gives you an indication of general market sentiment and sometimes it can give you an indication of whatâs going on in the business. You do get the opportunities, as in the Gijima case, where it seems as if thereâs misplaced optimism about the business. Gijima, as with many smaller South African stocks at the moment, is one of those where there seems to be a binary outcome.
You can get the capital and you can try to grow your business, but itâs highly dependent on getting that capital away, and it seems to be a feature of the market these days.
GUGULETHU MFUPHI: Looking at retailers, Mr Price had strong earnings yesterday but the share price is not moving in the same direction.
JAN VAN NIEKERK: I think the number is here today. The share price is up 46 percent and earnings over the last year is up 23, and so to some extent the market has been anticipating the good news out of Mr Price and rightly so. I think this is a business, which has continued to show that they get the South African consumer. They understand how to roll out their business in a very profitable way and it seems like, given whatâs happening on the ground in retail in South Africa, that certainly, a segment of South African consumers have changed their shopping habits and Mr Price has been a beneficiary of that. Iâm not surprised that the share price pulled back a bit after the results because it has been quite high, in anticipation.
ALEC HOGG: Jan, Iâm going to take you back to what we were talking about a moment ago and looking at recent directorsâ dealings. John Halamandris of the Famous Brands Group has been quite an active seller of that stock â so put that to the one side. Lyndsey Ralphs (whom I think youâre well aware of) is a Director of Bidvest, made a R22m sale of shares in that company last week and Valli Moosa, whoâs now on the Board of Imperial, made quite a substantial purchase of shares there. Letâs look at the three, in turn. Are we to read from Famous Brands and Bidvest that both shares are perhaps, peaking out at their current levels? On the other hand, is Imperial showing good value?
JAN VAN NIEKERK: Alec, I think youâre going in the right direction here. We know that Famous Brands is one of the companies, which have done fantastically well over time. People on the Board and owners of the businessâŚit makes sense to be selling some of that whereas on the Imperial side, you have a new CEO with a strong reputation coming in. Itâs generally in the South African industrial side of the economy where itâs unloved and the share price suggests that. Apart from Mr Moosa, other directors at Imperial have been buying so itâs not just him. You see it as a general trend in there and I think you should heed that as a piece of interest in concluding your investment decision.
ALEC HOGG: But what about Bidvest? If you go a little bit, further down there: Brian Joffe is a recent seller at R28m. David Cleasby, the Financial Director is a recent seller there of R7m. Larry Berson is a seller of R21m. Those are big offloads.
JAN VAN NIEKERK: Those are big numbers indeed, and again, I think youâre pointing in the right direction. One has to look. You can obviously ask the directors for specific reasons but as a general sense, I donât think itâs a bad idea to take that into account. Certainly, from our point of view, Bidvest is a fantastic company but the valuation says that the market is expecting very good thing from Bidvest in future and perhaps the executives realise that.
GUGULETHU MFUPHI: Well, thank you so much to Jan van Niekerk from RECM. Alec, just to pick your brain quicklyâŚHubert Brodie has recently been appointed as a Chief Executive for Group Strategy and Projects at Sanlam. Heâs a former Chief Executive of Imperial Holdings so itâs good to see that the talent is still being retained in South Africa. From logistics to a financial company, thoughâŚ
ALEC HOGG: I know him well. I know Hubert very well actually, and he movedâŚhe took a family decision. Just before he hit 50, at 49 years old he decided that for family reasons, he would like to move to Stellenbosch so he relocated to the Cape. You canât run Imperial if you are based in Stellenbosch. He also felt that heâd offered his time at Imperial. Sanlam approached him and said âcome and work with usâ and Sanlamâs an interesting company â interesting business. Itâs good for Sanlam to have acquired Hubert and good for Hubert to have gone over. Maybe heâs going to add a lot of value there, but itâs interesting to see that people take these lifestyle decisions in the interests of their family while theyâre still alive. Many people die with their boots on.
GUGULETHU MFUPHI: Thatâs so true. Thatâs a positive outcome, then.
