It’s been stormy seas the last two days for SA investors. So while us Antipodeans wished for a lower oil price, it doesn’t come without unintended consequences. Listen to Wilhelm Hertzog and Alec Hogg discuss the reach of such a commodity price drop as well as some views on who wins from the Steinhoff deal. – CPÂ
GUGULETHU MFUPHI: Weâre going to turn our attention to the markets, and we are joined by Wilhelm Hertzog. He joins us from our Cape Town studios now, to unpack the market performance. Wilhelm, maybe letâs pick up on the sentiment around the market. The markets never go up in a straight line, quite clearly. Up one day, down another but today we are certainly a strong amount of positivity.
WILHELM HERTZOG: Sure, yes. I guess, after yesterdayâs massacre, I guess a bit of a rebound is probably welcome. But, as you say, these markets never go up or down, in a straight line. It is always volatile and whatâs the sentiments around the commodity markets, obviously, those things tend to weigh quite heavily on S.A., with our heavy resources bias. Weâre seeing, I guess, the indirect fallout of that in Nigeria. The Naira weakening impacting on MTN, so our markets are certainly seeing its share of volatility, which can test the nerves but one must keep in mind that is just part of being invested, in the market.
ALEC HOGG: Wilhelm, surely the big story here that you guys have got to be running your numbers through, is the drop in the oil price. We see this morning that Christine Lagarde from the IMF has said it is going to stimulate the global economy. We know that Cees Bruggemans has done his numbers, he says, âGDP up two-and-a-half percent next year, as a consequence.â Obviously, Sasol has fallen out of bed but there must be big beneficiaries, on the stock market, from the oil price fall.
WILHELM HERTZOG: Sure, absolutely but I think it is difficult to pinpoint a specific beneficiary. Obviously, an oil price, fuel, and transportation is such a pervasive input cost into all industries really. That it benefits the entire economy but in a very subtle way, so it is difficult to say, âthis specific company or sector will benefit massively from the lower oil priceâ. It will be a stimulus to all and sundry, really but, yes, absolutely, we are looking very hard at the oil price, and what a fair oil price is.
In our global funds, we have a fair amount of oil and gas exposure, not so much locally but definitely, whatâs a normal, and a fair and a reasonable long-term oil price, is a key input into the valuation that we assign to many of the stocks in our global funds, specifically. We are taking a good, hard look at our stocks and whether theyâre still intact but, so far, nothing has really changed our conclusions, as to a long-term fair oil price, which we believe to be in the region of $80 to $90 a barrel. The current price, we believe, is too low. If you look at where production costs are, where normal long-term demand is, etcetera.
ALEC HOGG: Surely, one of the obvious beneficiaries would be the banks, in particularly the South African banks. Youâve got a situation that has changed dramatically, in the last six weeks. Everybody would have been doing their figures on maybe a mediocre GDP growth next year. It is going to be much better than that, no matter what happens. Wouldnât that be a reason to relook at the banks?
WILHELM HERTZOG: Sure, but again, itâs marginal, the benefit, and a GDP number, which is one percent higher or lower, the benefit of that or shall I say, the drawback of that, depending on which way it goes, is marginal. It is difficult to base oneâs investments, well, not only difficult but I think it is probably dangerous to base onesâ investment decision making on such short term impacts, and one yearâs outlook, this way or that.
I think it is much more important to get a solid understanding of the long-term fundamental economics of a business and what that implies for the value of the assets, so one percent better GDP. Yes, maybe that does help to contain non-performing loans and bring credit costs down somewhat and, obviously, on the inflation side, lower oil price helps to contain inflation, which means that interest rates tend to be lower and all those kinds of things do stimulate the economy. It does flow through, to benefit the banks but I donât think it is something that one wants to really, bet a great deal of money on.  I think there are more, important long-term aspects to any company, and to a bank, to get oneâs mind around, then just next yearâs GDP growth number.
GUGULETHU MFUPHI: Would the same stem true for the retail sector Wilhelm?
WILHELM HERTZOG: Sure, again, I think the benefit is there but the benefit is spread across all and sundry, and it is not dramatic boosts. I think, again, there are probably cycles, which are more important to get oneâs head around, and a massive expansion of retail space in South Africa, over the past decade, and that entrants from abroad and the impact on the competition. I think those things are definitely more important, in terms of what are the assets in the sector worth. What are the long-term economics of the business is, than an oil price, which has dipped dramatically low in a fairly short space of time.
ALEC HOGG: It sounds to me like you think this oil price is just temporary, Wilhelm. You are going against the rest of the world, who are unpacking it and saying, particularly if you read the stories, this morning, from the U.S., where the frackers say, âWeâll take you on, OPEC,â and OPEC says, âWell, weâll put you out, frackers.â This could be a long, extended struggle. You donât think so?
WILHELM HERTZOG: Well, it could be an extended struggle, one to two years that could be the case but, certainly, I think weâre already seeing the impact of the low oil price, flowing through into applications for new drilling licenses in the shale assets in the U.S., which have already started to decline. The impact is already there and I think if you look at oil demand. Yes, it is off and the global economy hasnât been, particularly robust, but oil demand is actually a very stable number. Hovering in the 90 million barrels per day region. I guess, in the recession going down to the mid 80âs, maybe but that is one of the most stable demand numbers that one sees across a commodity spectrum.
It is not like something, say iron ore, where one sees a dramatic boom over the past decade, where usage sort of doubles and triples, in the space of ten years. Oil is not like that. The demand for oil is fairly stable. Yes, at the margin, there are declines in the OECD countries but it is not such a dramatically variable number.
On the supply side, weâre already seeing that, at these prices, global supply is starting to be impacted. Sure, not by OPEC, not by the low cost producers, but definitely at these prices, Canadian Tar Sands, and those kinds of high cost projects are not viable, and they wonât proceed and that will impact supply, eventually. Not tomorrow but in a year or twoâs time, or threeâs time, and that will result in the oil price recovering to levels, where we think global demand and supply is in better balance, which, as I said, is about $80 to $90 a barrel now, in our view.
GUGULETHU MFUPHI: Wilhelm, a lot has been said about Steinhoff in the last few days. Your analysis of the news, as well as the investment outlook of the company.
WILHELM HERTZOG: As far as our analysis of the news goes, I think it is a very interesting transaction, which has taken place. This news flow about directors dealing in the securities and having had to put out a cautionary announcement. I think that is a bit of a âstorm in a teacupâ. I donât think thereâs been massive gain, either way, from directors, potentially discussing such a deal. I do think that is part of the discussions that happens during the normal course of business, between businessmen like Markus Jooste and Christo Wiese, so I think thereâs much to do about nothing, on that front.
As far as the transaction goes, I think itâs a fantastic transaction for Brait shareholders. I think the price they fetched for Pepkor, in selling it to Steinhoff, is a fantastic price. Yes, people argue about the multiples should be higher because Mr Price trades on 20 times EBITDA, and Pep is being sold for 15 times EBITDA. I think 15 times EBITDA is a phenomenal price, which anyone in the retail sector would have given their front teeth for, five years ago, so I think great value has been created for bright shareholders.
On the Steinhoff side, Iâm less convinced. I do think that they have given up more than what theyâre getting in buying Pep. Weâll see how it plays out, in the long run, but their plans for Pep. Sure, there are merits in putting Pep stores into their locations theyâve got across Europe. Europe is not an uncompetitive market. Thereâs plenty of competition already. Itâs not a case of just plugging in stores and taking over the world.
It will be very interesting to see how that plays out for Steinhoff but, at this stage, I definitely think the value creation in the deal, has been more on the Brait side of the equation, than on the Steinhoff side of the equation.
