No SABMiller shares for us, too expensive – RECM’s Hertzog

South African-born SABMiller released a trading statement this morning ahead of finalising full year results to end March. Volumes continue to grow in low single digits and the strength of the US dollar, its reporting currency, is set to hit the bottom line. Deep value investors Re:CM won’t be paying much attention. In our CNBC Africa Power Lunch interview today, the firm’s Wilhelm Hertzog explained in some detail why SABMiller shares are overpriced. Re:CM is also steering away from another of today’s reporters, Pick n Pay, but remains excited about resources stocks – the sector which RECM founder colleague Piet Viljoen last week said offers a “once in a generation opportunity.” – AH

ALEC HOGG:  In company news, SABMiller posted a three percent rise in full-year group net producer revenue, while Pick n Pay reported an eight percent rise in turnover for the 52 weeks to the end of March.  To get a more in-depth view of how the market is trading today, we’re joined by Wilhelm Hertzog from Regarding Capital Management.  Wilhelm, I know that for a while Pick n Pay did come onto the screen for value investors.  That set of results which came out today, was it likely to give you a better insight into the turnaround or the recovery we’re expecting there?

WILHELM HERTZOG:  Hi Alec.  Yes, I do think so, to some extent.  What particularly impressed me was the cost control.  They seem to be getting costs under proper control there.  The efficiencies from the distribution centres are coming through.  They’re looking at getting staff productivity up in the stores.  All of these are things that they lagged on for many years, things which needed attention, and which they held back on for too long.  They do seem to be making some progress on that front now, but at the top line level, things were fairly weak, specifically if you look at the like-for-like numbers and if you strip out the effect of inflation as we actually saw with Shoprite.

GUGULETHU MFUPHI:  You mentioned Shoprite, and Pick n Pay mentioning that it wants to be rather bullish on its African strategy.  Is it a bit too late for them, Wilhelm?

WILHELM HERTZOG:  That’s a difficult one.  I do think you have a substantial first mover advantage if you get into the markets first: get the distribution channels right, get the operating scale you need to offer, and the low prices you need to offer if you’re in the food retail game.  You definitely start on the back foot if you’re not first into the market, but many other people will tell you that you gain from the experience.  Maybe, waiting until the infrastructure is better developed, allows you a return on your capital in a shorter timeframe.  There’s probably something to be said for both the first mover and the fast follower approach.  However, it definitely takes you a long time to get to the level of experience and operating proficiency in Africa, which Shoprite has already achieved.

ALEC HOGG:  Wilhelm, just having a look at the news out from SABMiller here in South Africa – significant retrenchments, which the union says it wants to discuss with it.  I guess in a time when we are seeing jobs under a lot of pressure in South Africa that was always bound to cause a little bit of ructions, and with the Chairman, there just stepping down.

WILHELM HERTZOG:  Sure, I think ‘jobs’ is a very sensitive issue in South Africa, specifically.  Unfortunately, if the consumer environment is not strong – and it is currently quite weak in South Africa – an almost inevitable side effect is that companies start looking for efficiencies, ways to cut costs in order to stay profitable, and keep earning a decent return on capital.  Jobs unfortunately, form part of the equation, which needs to be looked at when it comes to efficiency and saving costs.  I’d say it’s a symptom of a fairly weak South African domestic economic environment.

GUGULETHU MFUPHI:  Is SAB still one to look at from an investor’s perspective?

WILHELM HERTZOG:  SAB is a fantastic business.  Brewery companies are starting to be phenomenal businesses and SAB probably stands out as one of the best ever, so we admire the business greatly from that point of view.  From an investment point of view, our clients haven’t owned SAB shares for many years.  The price has been very expensive in our view.  If you look at the current price with earning multiples in the mid-20’s that is high by anyone’s standards.  Sure, there’s maybe the option of an EOH coming along to buy SABMiller out, but speculating on a buyer coming along to pay a very high price for an asset, which is already priced highly is something we’re not inclined to do.

ALEC HOGG:  We had results today from two of the tech companies, BCX and Datacentrix.  We’re going to be talking to Benjamin Mophatlane of BCX in just a little while.  That has been an interesting business, and one that is now targeting Africa for its growth in the future.  Have you looked at this one?

WILHELM HERTZOG:  I’ve not looked at this one closely, I must admit, but yes, it’s an interesting strategy.  I think the local listed technology companies or IT companies, at least, haven’t had a major presence in Africa to date, so certainly, getting in there is an interesting strategy to follow and there’s probably something to be said for that.

GUGULETHU MFUPHI:  Do you have a particular pick Wilhelm, when it comes to the likes of BCX versus a Datacentrix, or even an EOH?

WILHELM HERTZOG:  Look, we don’t really have a strong view on any of those, so we’re not heavily in favour of or against any of those shares.  That’s probably as much as I can say.  Our clients aren’t heavily exposed to the information technology sector at this stage, we’re not finding compelling value there, but I wouldn’t say things are terribly expensive either.

ALEC HOGG:  When we had Piet Viljoen (your colleague) on the program last week, he said that the resources sector is a once in a generation opportunity.  When do you start getting a little bit concerned about the buying you guys have obviously been doing in this area?

WILHELM HERTZOG:  Look, the point at which one starts to get concerned, is when the fundamental economics on which you’ve based your business investment decision changes materially.  I don’t think that has happened in the resources sector.  Share prices have lagged and have been under pressure, but we see nothing to suggest to us that the fundamental economics of the businesses have changed permanently.  Yes, there is an extended cycle.  If you look at the platinum mines, profitability has been under pressure for a couple of years now, but we see no evidence to suggest that this is a permanent state of affairs.  We only see evidence that this is a cyclical state of affairs, and that this will change and this too, shall pass, in the future companies will earn decent returns, and share prices will reflect that then.

ALEC HOGG:  You’re pretty much an outlier there.  On CNBC Europe this morning, there was an analyst saying ‘go for platinum in the ETF’s by all means, but stay away from the stocks’.

WILHELM HERTZOG:  Sure, the two are tied quite closely together.  If you’re bullish on platinum then that feeds through into your view on platinum mines as well.  Obviously, the operational issue is the one variable, which comes into the equation when buying the mines as opposed to buying the metal itself.  As I say, we view the current situation in the SA platinum industry as cyclical.  It’s taking time.  It’s not a quick and easy process, but the guys are addressing the cost basis.  Their high cost mines are shut down.  All those things suggest a typical cycle in the mining industry, which is busy playing itself out – over a couple of years, fair enough – but it is taking place.

GUGULETHU MFUPHI:  Well, thank you so much to Wilhelm Hertzog.  He is from RECM.

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