Changes at Adcock, and the muted consumer environment
As always, David Shapiro offers plenty of insight into the South African market, including the resignation of Adcock CEO Jonathan Louw, the performance of Tiger Brands, and the right issue at Curro. For me, the most interesting piece is when Shapiro talks about clothing manufacturing in South Africa. Recently, Seardel sold its textile business to the textiles union, which is trying to save the industry after years of troubles. The main problem is that wages in South Africa are too high for textile manufacturers compared to other big textile producers like Bangladesh, Pakistan, or Thailand. In addition, issues around transport (to export textiles you need good ports and cheap transport) and rising costs like electricity have gutted the once-thriving industry. And, sadly, South Africa doesn't have a reputation for fine textiles that has kept the industry alive in places like Italy. The story of the textile industry is really the story of manufacturing in a middle-income country – too expensive for the low end, not sophisticated enough for the high end, and so subject to a slow death. – FD
ALEC HOGG: While Gugu was talking about Adcock Ingram, David Shapiro was having a little chuckle. He is with Sasfin and a close friend of the man who probably nudged Adcock Ingram's CEO out of the way.
GUGULETHU MFUPHI: Did you know something?
ALEC HOGG: Did you know something, Dave?
DAVID SHAPIRO: No, I didn't. I actually thought he'd lost, that he'd be given a chance. I don't know whether it was his decision, whether he was nudged out, or whether the kitchen just became so uncomfortable or so hot that he had to resign. I saw in Business Day this morning that he wouldn't give an interview because we don't say nice things about him. Alec, it's tough running a big company. If you don't perform…if you don't live up to the shareholders' expectations, then it's going to be very hard. No one's going to say nice things about you. When you're a Koos Bekker or a Brian Joffe, yes, people will say nice things about you.
ALEC HOGG: Sometimes, and sometimes not. I thought that Jonathan was a little ill advised to even mention that to somebody because a reporter's going to take that down and repeat it, and you can't win. The part I read was 'when you start writing positive things about me, then I'll talk to you'. Come on, Jonathan. You're better than that.
DAVID SHAPIRO: I agree. I agree. I think he's a decent enough man. I think he had a very tough job. He didn't live up to shareholders' expectations. I was hoping that he made it with Mr Joffe.
ALEC HOGG: Oh, he's Mr Joffe now, is he?
DAVID SHAPIRO: He's Mr Brian Joffe now.
ALEC HOGG: Not to Jonathan Louw.
DAVID SHAPIRO: Jonathan shares the same birthday as me.
ALEC HOGG: He probably has a different description for Brian Joffe, though – don't you think – than Mr Joffe….maybe Mr Chairman or my ex-Chairman.
GUGULETHU MFUPHI: But maybe that does highlight whom we could see taking up his position as the head of Adcock.
DAVID SHAPIRO: I have no idea or speculation. I think you need a chemist (1); you need someone who understands the manufacturing as well as pharmaceuticals, so I'm sure they'll be on the lookout for someone. I'm not sure whether there's anybody on the board that can fulfil that role. I think it's not going to be an easy road upwards. Locally, you're challenged by higher costs. The Rand is still in relatively weak territory and you don't have pricing power, Alec, on the ethical drugs or even on the generics. You don't have that much pricing. On the over-the-counter stuff, it's okay.
ALEC HOGG: You don't have that much… You don't have any. It tells you what to sell for. David, it was interesting to see – Gugu was pointing it out before we came on air – that Adcock was up a little and Aspen was down. Might it be a switch from Aspen, which has been so highly rated to Adcock, which is so poorly rated?
DAVID SHAPIRO: I don't think so. I think Aspen is just making its own headway. It had quite a good run. It's been in record territory. We've seen a little bit of selling of top shares such as British American Tobacco, breweries, and Aspen. I think the lead is coming from underneath. We've seen a big recovery in retailers. We've seen a huge turnaround in retailers despite the fact that you can't find any evidence of an improvement in retail sales or consumption, but there's money flowing into retailers and with construction companies, too. It's hard, Alec. It's very hard to reconcile the kind of movements we've seen on the market with the underlying fundamentals.
ALEC HOGG: Gugu, you need to ask him how to pronounce our guest who's going to tell us all about retail sales.
GUGULETHU MFUPHI: I'm sure he heard it – Sizwe Nxedlana.
DAVID SHAPIRO: Sizwe.
GUGULETHU MFUPHI: You'll stick to that but surely; you'll provide us with insights regarding the Consumer Confidence, which does seem to have remained fairly flat for the first quarter. Are we seeing that translate into the retail stocks?
DAVID SHAPIRO: We haven't seen any results coming out of retailers. Whenever results did come out in the outlook statements, without exception every CEO said 'tough, challenging times ahead', so they're either protecting themselves or…. However, there's been no one who's started to see a turnaround. The one area that is improving has been on the insurance side. We've seen insurance stocks run ahead – Old Mutual at all-time highs…I think Sanlam is very high as well. In that area, they seem to be doing better. They're still selling financial products to the medium and to the rich. Let's call the 'the rich' or the middle class, so maybe Woolworths and Mr Price will continue to do okay. It's probably at the bottom end of the market that most of the pain is still being suffered.
ALEC HOGG: What gives with Tiger Brands' big fall today? You know something.
DAVID SHAPIRO: I don't know anything.
ALEC HOGG: Look at him. You can see he knows, but he's been sworn to secrecy.
DAVID SHAPIRO: I think Africa is proving much more of a problem than they thought. I know they're under pressure in terms of margins. They can't pass on the higher cereal costs or the higher wheat costs onto the consumer, and I'm sure they're battling with profits. Many analysts are still positive on them. I just avoid any of the food companies. I just think the margins are going to be squeezed.
ALEC HOGG: In Nigeria in particular, for Tiger Brands. We did see John King. He's been a guest of ours in our studio a few times. He's been the Financial Director of EOH – buying the stock at R81.75.
DAVID SHAPIRO: He's a brave man. Look, it's a good company and I think that Asha Bohbot has done remarkably well. Not only has he done well, but his BEE policies of training people and then placing them, stands out for me, as one of the best policies in the country, of the listed shares. It's a wonderful contribution to the country and not only that…he's making good profits and he runs a very good business. If John's buying, then he knows something we don't. He does the books. He puts the debits in and he puts the credits in, so he knows what cash is coming in and he knows what cash is going out, so you can take that as a positive signal.
GUGULETHU MFUPHI: So you firmly believe that it has legs to run with.
DAVID SHAPIRO: I thought it looked a bit stretched and it had such a good run. I'm a little concerned that it can maintain those plus 20/25/30 percent growth, but if John's buying, it seems to confirm that he's happy with the share.
ALEC HOGG: David, you and I both know that when a company starts raising money through rights issues, it's the time to start becoming a little cautious, perhaps – to put it lightly. Curro: big rights issues they're involved with at the moment…
DAVID SHAPIRO: Alec, this is a lovely story and I can't take anything away from where the company's going, but you're buying at a 200… What is it? It will take you 200 years or something to get your profits back. Even if it doubles over four years, you're still at a 15 PE, so when they raise money, to me it's a concern because they're going to need to keep raising money in order to fund the purchases and development of schools.
ALEC HOGG: They're getting it.
DAVID SHAPIRO: PSG are behind it. They will not sell and they're very positive on the company.
ALEC HOGG: The shareholders are putting the money behind them.
DAVID SHAPIRO: It's mainly old Jannie Mouton or Jannie's son, so they're very firmly behind it and I'm sure that shareholders will follow.
ALEC HOGG: It's an interesting story there. Another interesting story is that the final rights have been given to Seardel clothing operations. Remember, they sold it off to the trade unions. You talk about a brave person in John King. I think the guys picking that up are even braver, or perhaps, do they know what they doing.
DAVID SHAPIRO: The sad story of South African manufacturing – Seardel. Do you remember Rex Trueform? They were superb companies. When I first joined the market (that's a long time ago – 40 years ago), they were dominant. We had the House of Monatic and manufacturing in South Africa – clothing manufacturing – was quite a vibrant industry. We used to supply suits to Harrods. The suits were made here under big brand names, and that industry has just completely gone. One doesn't know whether it's labour, whether it's just poor management, or whether it's the Chinese. It may be a combination, but it was really sad to see. We had the Flame Group. Do you remember the Flame Group? We had a number of companies listed on our market in that area.