Expert market analysis – mining results, Sun Intl, Standard Bank and Abil

Market commentator Gary Booysen from Vunani Private Clients unpacked today’s markets on CNBC Africa’s Power Lunch with Alec Hogg, focusing on mining results from Harmony Gold and Village Main Reef. He also analysed Sun International’s trading update noting a decrease in earnings expected, and Standard Bank’s results which were marred by a R1bn loss on its Chinese aluminium deal. Alec and Gary ended off by delving into a debate around Coronation’s position on selling its Abil shares en-masse. And what the impact was on the companies who picked up the massive offload of shares. Was there an aspect of insider trading, did Coronation know that Abil’s trade would be suspended on the JSE? – LF

ALEC HOGG: Gary Booysen from Vunani Private Clients is with us in the studio. Gary, Gugu is off talking to Harmony, taking a camera along to go and find out what is going on there. How are you reading their results?

GARY BOOYSEN: Whenever a company comes down with headline earnings down 50-percent in Q4, it’s never a good thing. We’ve generally been staying clear of the miners because I think they are operating in a very difficult environment. A low gold price and costs creeping up, it is not an easy sector to operate in and that’s why we’ve been favouring things like the New Gold ETF. Even saying to our clients, with the normal equity account, you can buy Kruger Rands, rather than going and invest in these mines. It’s a big shift from how it was, probably ten years ago, where everyone was almost saying the opposite thing. “Why would you want that? Do you want a management team?” You know, you want someone that is actually digging gold out of the ground but for us…that is why we’re staying clear of, I mean you’ve seen a small uptake in production but until the gold price comes right for them, I think all of these miners are going to struggle.

ALEC HOGG: Yes, Tim Wood, a former colleague of mine, who now lives in the U.S., did us a graph where he deflated the gold price, in Rand terms, and then compared that with the gold price in the U.S. Dollar terms, and that’s all he had to do in fact. All he had to do, exactly what you were saying, buy New Gold but of course, if you bought the shares you’d be looking sick.

GARY BOOYSEN: Absolutely, you don’t even need to deflate them, you don’t need normalise it. Just overlay New Gold in Rand against what you would have performed in Rand in any of our gold miners, so yes, it is definitely a sector that…

ALEC HOGG: The Village has done well. These numbers, I know you didn’t really have a chance to unpack them but Gary, eight-point-seven cents, headline earnings in a quarter, and the share price was at 40-cents, so work that out…35-cents in a year.

GARY BOOYSEN: Yes, Village is a personal one for me because I also was an investor in Village for a long time, and there I started at, I think R1.40, and averaged all the way down, so I think, for me Village is just another one of those stories. Yes, on paper Village is very good. The story behind Village is also very captivating for investors and, if you look at it, you sort of thing that this is perhaps one that you could take a punt on but the share price tells a story on its own. Yes, perhaps you are going to get a turnaround. Perhaps it’s worth sticking it in your bottom drawer and it might come right for you but for me, I’ve burnt my fingers on Village before, so for me I don’t even want to look at it.

ALEC HOGG: A stale bull, hey.

GARY BOOYSEN: Stay away from it but these days, Alec, with transaction costs being so low in the market, I don’t think that investors really need to go and look for these turnaround stories to invest. You can invest in the high PE stocks and go with the momentum, as soon as it turns. The transaction costs are so low that you can switch out of them. You don’t need to be going, looking for this deep value.

ALEC HOGG: I’m with you, excepting on Village. I think you are going to be wrong in that way. Sun International, tell us about that one, they are finally lifting up their head as far as the gambling profits are concerned but the numbers, the overall numbers are not good.

GARY BOOYSEN: Yes, the overall numbers are still not looking great. If you look at the EBITDA it is not quite as bad as the headline earnings, between five and ten percent down, but definitely recovering. A better second half, I think, than first half and a lot of it is, obviously they’ve been criticised a lot for their cap expending, building a hotel and casino in Pretoria, and spending about three-billion there. They have been criticised about that but generally, I think the revenues are improving there, so perhaps a turnaround story. They also mention, obviously, their Monticello Casino in Chile also doing fairly well. I think that revenue was also up about ten-percent, so I don’t think a terrible set of numbers and I think they’re market pricing it a lot of it already.

ALEC HOGG: The big story of the day though is Standard Bank. What posses’ people to go and take the kind of punts that they’ve taken on aluminium and you lose a billion Rand, as a consequence?

GARY BOOYSEN: I was looking at that. If you look at, obviously everyone knows the story, aluminium in bonded warehouses. Sort of fraud, was it there or wasn’t it there?

ALEC HOGG: In China, just to add into it.

GARY BOOYSEN: In China, they were collateralising this in the form of repo agreements to finance commodity trades. It’s part of business, I suppose but at the same time, like you say huge punts. I looked at the actual volume of aluminium that was supposedly there, I think it is equal to the yearly production of aluminium in Turkey, or the yearly production in aluminium in the U.K. as well. We’re talking about huge quantities here. Absolutely massive but, obviously in the results today they’ve now, sort of taken a right out of about 80-million Dollars but they’ve said their total exposure to that problem is 167-million Dollars, so it’s significant. Like you said, a billion Rand there, their earnings for this half year, is nine-billion.

ALEC HOGG: Yes.

GARY BOOYSEN: Now, in context that’s a big knock for Standard Bank.

ALEC HOGG: That would have done okay; they have ten to 12 percent improvement, if they didn’t have this one off but the problem with Standard Bank is they always seem to find an issue somewhere, to knock them back.

GARY BOOYSEN: Yes, but I suppose that’s also fine. They’re a hugely complex operation. They’ve got a lot of fingers in a lot pies. They’re expanding aggressively into Africa. They’ve got a very good relationship with China, through the 20 percent stake that ICBC has in them. The fact that they’re working in China it is no surprise but I think, for a bank like Standard Bank, they’re going to struggle locally, I think with lackluster GDP in South Africa. The fundamentals in South Africa not looking fantastic and I think they are really trying to push earnings offshore. They’re trying to move into Africa. To be taking punts in China that’s, unfortunately what they do.

ALEC HOGG: And that’s what the American Government wants to stop the American Banks from doing, and I think our Government would be quite happy, or our Reserve Bank would be quite happy to do that, to also, de-risk the banks a little more in the future. There was a little known, or rather a little mention on SENS about Abil. The fact that the bond holders are now not going to be paid any interest, so although they’ve taken a ten-percent haircut and they felt that was a bargain, those bonds aren’t going to be serviced until the curatorship is over, which in a case like this could be some time. You guys wouldn’t have invested in bonds being largely private clients but did they jump in, boots and all, into Abil last week, some of your clients?

GARY BOOYSEN: What, our private clients? Yes, we were very fortunate. We had close to no Abil on our book at all but, of course you get the guys that look at it opportunistically, almost like The Village saying, “Look, but it’s fallen so much there must be value there,” and you sort of start just on the simple lines, assets plus liabilities equals equity. What is this company actually worth? So, yes, a lot of guys were tempted to go in but we were advising not to. We didn’t actually pick up much Abil for the speculators.

ALEC HOGG: What I can’t understand, and I had a lovely chat with David Shapiro last night because he knows a lot of people who did go long of Abil, Wednesday/Thursday/Friday of last week. What I don’t understand is that those people who are holding their shares think they’ve got something of value. In fact, the value is nil. Just write it off.

GARY BOOYSEN: It’s going to be nothing, and that’s what we were saying to the guys as well. You’re buying at 80-cents, and this is not worth anything. It was a bit of a farce over the last week. Obviously, Abil it didn’t get classed as a ZO4 stock, so that thing spent most of the day in auction anyway because they didn’t take the circuit breakers off the trading, so even when we were trading it, it was impossible to trade.

ALEC HOGG: Really, because the JSE says that about 711-million shares exchanged hands.

GARY BOOYSEN: No, I’m not saying that but obviously, the shares would still change hands in auction but there was hardly any continuous trading over the period because once it drops into the ZO4 category the circuit breakers get…

ALEC HOGG: Explain that.

GARY BOOYSEN: Basically, on the small caps, so if you are trading something like Village, obviously a ten-cent movement in Village is going to be a massive percentage unit, so generally the JSE has a five or ten percent circuit breakers, on either side. So if in one trade, a stock moves more than ten percent, it will throw it into an auction, so that they can try and get proper price discovery. Now, normally what would have happened, I suppose, is Abil, would have been, suspended but obviously, with the CEO stepping down, I mean we had the JSE coming out and saying, “We’re not going to suspend the share because there’s no Application for it.” Yes, for three days the stock spent most of its time in auction but a stock like Village, has those circuit breakers taken off, so even though it is moving around more than ten-percent, it doesn’t get thrown into auction.

ALEC HOGG: But Gary that’s an interesting point because, surely, with what has happened thereafter, if you look back in hindsight, they should have suspended the share on Wednesday, with the CEO leaving, and then you’d have Coronation sitting with a 180-million more shares, worth nil than, in fact they’ve got now.

GARY BOOYSEN: Yes, potentially…

ALEC HOGG: Because Coronation had an inside track, they must have had an inside track, if they were the biggest shareholders and the funders.

GARY BOOYSEN: I don’t want to comment on that but if you look at it obviously, the share, it was one way selling all the way down, on that first day but then you had Peter Redman, with the JSE coming out and saying, “We are not going to suspend the share.” Immediately you saw the appetite come back in. That’s when it went from, I think the low was about 31 cents, and it finally bounced back to about 90 cents. Also just, think of the percentage movements that you’re talking about there. Speculators buying at 31 cents, being able to now drop off at 90-cents. That’s a massive movement.

ALEC HOGG: But wait a minute, you have Coronation sitting with 300-million shares. They sold a 180-million in three days. That is one-way traffic, buying all of it, particularly with the circuit breakers that you’re talking about.

GARY BOOYSEN: Yes, 100 percent.

ALEC HOGG: If the share had been, suspended and that would be my argument.

GARY BOOYSEN: Yes, if they wouldn’t have had the opportunity, yes, no control about that.

ALEC HOGG: And those, you have to believe that Coronation had better insight into what was going on at Abil, being the biggest shareholder, having had the discussions with the CEO and been given support from the CEO over all the time, all it took was one phone call. “Leon, what’s happening? Why have you gone?” Kirkinis said ‘sorry guy, it’s over’.

GARY BOOYSEN: Yes, no a 100 percent.

ALEC HOGG: One question.

GARY BOOYSEN: But to be fair, the guys that were buying that stock, you know it’s taken the other side of, let’s assume it was Coronation, on the other side.

ALEC HOGG: It was, well, we had the announcement yesterday.

GARY BOOYSEN: Okay, but the guys buying that, I don’t think…are you claiming that they were necessarily informed.

ALEC HOGG: Coronation has come out with a statement to say that their shareholding has dropped from 20 percent last Tuesday, to eight percent yesterday, 180-million shares.

GARY BOOYSEN: But what I’m saying is the guys that they were selling to, I don’t think that you could make a very strong argument and say, “They were necessary uninformed.” I think savvy investors should be able to look at it and the writing should have been on the wall. We were advising our clients all the way through that, this is not something that you want to take a speculative punt on, at 50-cents, because it does look like it is going to be suspended, and that is not with any inside track information.

ALEC HOGG: So, it’s their own fault for being greedy.

GARY BOOYSEN: To make the argument that Coronation had inside information… I think that that perhaps is a little bit unfair.

 

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