Paul Whitburn, a team member of deep value investment house Re:CM, shares the forthright approach of company founder and chairman Piet Viljoen. Whitburn, our market watcher on CNBC Africa’s Power Lunch today, dispensed with diplomacy in a conversation which ranged from BHP Billiton’s bearish view on South Africa through to a view on why companies from this country often get a bloody nose when venturing into Australia – Barloworld today becoming the latest to offload its assets after not being able to get traction. – AHÂ
GUGULETHU MFUPHI: SAB has lowered its expectations slightly for marginal growth while BHP Billiton says it will continue to seek opportunities to divest from its current operations to simplify its portfolio.  To help us unpack this as well as how the markets are trading today; I’m joined in Cape Town today by Paul Whitburn. He’s from RE:CM. Paul, perhaps if you can pick up on BHP Billiton…the share price responding positively to the company mentioning that they are looking to simplify their portfolio. The share price is currently up by two-and-a-half percent. Does this perhaps implicate what clarity as well as certainty, does in the market?
PAUL WHITBURN: Yes, I think there’s no such thing as certainty and clarity in the market, but it’s interesting what BHP Billiton are doing. They’re looking to unbundle some aluminium assets, potentially their smelters etcetera. As you know, their aluminium market is under immense pressure at the moment, very oversupplied globally, and the guys aren’t making good returns so you cut off the bad side of your business and the other part of it looks good. As value investors, we’re certainly, probably more interested in the bad part of the business, which they’re cutting off at the moment, as many investors may shun that because of the negative news around it. In fact, we own some aluminium assets in Australia and Europe, it’s certainly a sector we’re looking at, and so this will be a very interesting spinoff to us.
ALEC HOGG: Paul, it’s a fascinating story for South Africa, given the BHP Billiton operations in this country in the aluminium area.
PAUL WHITBURN: Yes, look I’d hazard to say that BHP Billiton’s not really bullish in South Africa. From their coal assets to their smelting assets, they don’t really want to be. I get a sense that they’re worried about the political risk and the mining risk etcetera. Then you have guys such as Glencore who are actively getting into South Africa and buying up these coal assets that are currently under-priced. There are always two parts to a market, but certainly, BHP want to run their mines in great jurisdictions and I think the sparkle is off South African mining at the moment, that’s for sure.
ALEC HOGG: Well, the difference is that BHP is run from Melbourne and the Chief Executive of Glencore is a South African himself, so I guess he might have more inside knowledge. Paul, Mike Salamon – I’m sure you know him…you know the name…we’re talking about mining. He’s the guy who was in the group, in BHP Billiton. He was with Samancor for many years, and he’s also helped to steer Central Rand Gold to a rights issue, but now that the rights issue has been concluded, he’s left the board. It just seems a little strange that he would have done something like that.
PAUL WHITBURN: Yes, we actually don’t follow that company too closely, so I can’t really comment on what’s going on there. It would be pure speculation from my part, so unfortunately, I don’t have any insight there.
ALEC HOGG:Â But business is all about people, and if you get people with big reputations who are supporting a company to raise money, surely they should stick around.
PAUL WHITBURN: Yes, sure, we’re always quite hesitant on raises as in IPO’s. Often, what happens in these IPO’s, is you have the original proprietors etcetera, trying to list the business. They know more about the business than you do, they’re selling out, and yet, the market’s happy to buy and generally, at an inflated price. With rights issues, sometimes it’s very different where we partake a lot more actively in rights issues and distressed assets that need refinancing at the bottom of the cycle, and those can be very lucrative opportunities for investors, so it depends on what they’re trying to do. Look, gold mining…we’re not that active within our portfolios in the gold sector. It’s a sector that we rather stayed away from over the last couple of years, nibbled at the likes of Goldfields, and we prefer the Anglo Gold and Goldfields. The real rats and mice at the bottom of the sector, we stay away from at this point.
GUGULETHU MFUPHI: Paul, looking at Barloworld, they’re letting go of one of their Australian assets for quite a hefty price.
PAUL WHITBURN: Yes, just about NAV, I wouldn’t say it’s a fantastic price. It looks more like a ‘desperation seller’. They’ve sold many businesses before at NAV. ROBOR comes to mind in South Africa. It was a pipe manufacturer back in the day…management buyout, and that management buyout did very, very well out of buying it at NAV. I think it was a small asset. It wasn’t really core for them…yet another gravestone of South African businesses trying to succeed in Australia, and that market’s just really competitive. Here, they’re selling off and back to their core assets again in S.A. and Russia.
ALEC HOGG: You’re so right about ‘another gravestone’. Imperial got a bloody nose. Pick & Pay…the list is long. What is it about Australia that the South Africans just can’t crack it there?
PAUL WHITBURN: It’s very competitive. I think that’s the key point. In South Africa, we have a number of concentrated industries, oligopolies here, where guys are making great returns. In Australia, it’s a different kettle of fish. We’ve had great businesses such as Ceramic, which is a business we really like, and Italtile, and they also got a bloody nose in Australia. It’s a really tough market to operate in and people just assume because it’s English and Australians are similar, that they can go there and make money, but I think it’s a lot more difficult than what guys think. Certainly, we prefer businesses that stick to their core regions, their core businesses, and don’t venture to diversify their business, or go to other geographies to manage their businesses. Different time zones, such as Australia, must be an absolute nightmare.
ALEC HOGG: The one that does seem to be getting it right is Outsurance – part of the First Rand Group – but I suppose we have to watch that one. Just to close off with, Naspers seems to be a place where you go on sabbatical. Now, we have the Chief Executive of the Pay TV division who says he’s taking a break. He’s been there for 18 years. It seems quite a healthy approach – that the top managers step away from the business after a period.
PAUL WHITBURN: Yes, Koos did it a number of years ago to understand, I guess, how the younger generations – in Asia, specifically – were consuming content etcetera, and I think you do come back with some fresh perspective. However, if you’re going on a sabbatical, you’re tired, and I think what Naspers needs to do is they need a fresh group of execs coming through the ranks to rethink the business, because they take the shotgun approach of investing in many, many different businesses and technologies, and then maybe one or two of them pay off. With regard to Pay TV, that business – globally – is under a lot of pressure from the likes of the Internet, and in South Africa, the story goes that we don’t have broadband and it will take a long time to become competitive here. However, I think it’s a matter of time before the consumer turns around and says ‘do I need to pay R750.00 per month for 500 channels that I don’t watch, where I can have Pay Per View on the Internet for probably a tenth of the price’, and I think that’s going to come to South Africa. They’re therefore going to have to think really long and hard about their business, which has been a fantastic business in South Africa, but I think there are some destructive forces at play, globally, at the moment.
