Sasha Naryshkine: On results from Shoprite, Imperial, BHP and Discovery

For an in-depth view of how the market traded today, not to mention the raft of financial results released from early this morning, Vestact’s Sasha Naryshkine was back in CNBC studio today for a chat with Alec. The pair looked into released updates by Shoprite, Imperial, BHP Billiton and Discovery in particular.

Thanks Sasha. On days like today, where people have been up at 04:00am to start analysing the results because if you had been up any later, there’s no way you would have got them.

You wouldn’t have got them until the SENS hit the screen.

You prepare overnight.  Don’t you do that?

You always know they’re coming and, in some cases because, well, remember, 15 years ago you had no disclosure in terms of director selling and you had no forecasts, in terms of companies.  If you think about it, Corporate Governance has improved to a level where at now you at least know the directors are selling, and you know, more or less, in a range where a company is going to be.  Companies are only obliged to tell you if it is going to be above 20 or below ten. Good common practice is that they give you a range, and in Discovery’s case, which I guess we are going to talk about, closer to the top end of the range. As you said, having to raise money. I think it is at R90.00 a share.

Yes, rights issues are never good for share prices and it came back a little bit. Let’s start with the big one. The big one is BHP Billiton, three-and-a-half percent, nearly four percent at BHP, so clearly it beat expectations. 

I also think on the cost saving, which is obviously, where they can beat their peers because of bulk, size and scale they are able to save. If you have a look at Western Australian iron ore operations, which is one of their big divisions, they’ve managed to reduce costs to somewhere just above $20.00 a ton for iron ore, which is nearly about five or six dollars a ton better, than when they presented back in September/October. An absolutely, fabulous job done by Andrew McKenzie. They’ve raised the dividend, even though you’ve seen earnings have been hit. It had been circulated widely that this is how they would keep a lot of their shareholders interested.  Obviously, South32, so these are the non-core assets.  There’s going to be a circular in about two to two-and-a-half weeks.

Non-core, meaning South African primarily…? 

No, I don’t think that is the case.

The South African assets are being hived off.

Correct, they are going to concentrate on metallurgical coal, iron ore, copper and, of course, their petroleum both onshore. That is also an interesting point worth making is that their onshore U.S. costs per barrel equivalent, so we’re talking about shale, oil, and gas, is just over $16.00 a barrel, which begs the question, ‘if they’re able to operate at that scale what are the other shale producers able to operate at’?

When they put it together, I remember talking to Brian Gilbertson who was the chief executive of BHP Billiton at the time. He was saying that they are going to go for low costs across the board in everything that they do. Isn’t that now coming to the advantage of BHP?  The share price is up today. Imperial, however, has gone the other way, which is interesting because you had a company that was highly entrepreneurial and one that has now got a new CEO, who is far more centralised. Mark Lamberti likes to know what’s going on with every little division, and we hear whispers coming out of Imperial that not all is well there. Their share price is down six percent today. 

In fact, you are talking about the entrepreneurial spirit of Bill Lynch and sadly, he’s sick. Then Hubert Brody, who is now a non-exec at Woolies?

He is now an executive at Sanlam. 

In between those two, and Mark Lamberti is a fabulous operator.  Look what he did for Massmart, but I think that, at the end of the day, it is their vehicles division, obviously with the weakening Rand, because the Rand is as they point out, I think in the Shoprite results, has weakened significantly to 13 to 14 percent.  The big impact from a weaker Rand, so perhaps one of your favourite Minsters needs this pointed out that it is not a win for consumers, a depreciating currency, because that means that the imports (of which we have many) suddenly get more expensive. Servicing a motor vehicle and purchasing a motor vehicle, in a tough consumer environment, because of inflation (depreciating Rand), that is not a great cocktail.

Shoprite is down two percent today. Imperial is down by six percent.  There’s a big different. There is something more going on at Imperial and, you go back, Lamberti is an entrepreneur but Massmart – highly centralised.  

They are now.

They were when he was running it.  Imperial is highly decentralised.  I’m just wondering how that culture is fit in there.

I think it is still early days for Mark Lamberti. He is still, when he comes across, he’s got an enormous amount of energy and a lot to give the business.  He probably was a great admirer of Bill Lynch, and he probably wants to carry forward that sort of legacy.  I think that often we don’t give ourselves enough credit for the wonderful business leaders that we have in this country. If you look at the three businesses that we’ve talked about, Adrian Gore, Whitey Basson, and of course Christo Wiese, and Mark Lamberti – these are incredible business leaders that any country, anywhere in the world would probably love to have. We don’t champion that enough.

Famous Brands and business leaders there, who are getting out, there’s a progressive sale of Famous Brands shares by the Halamandris family. 

I suppose they’re not getting any younger also, with size and scale, it gives them liquidity in order to be able to exit. Directors and management still control, I think, somewhere in the region of 33 to 34 percent of the company. So even if they were to take their stake down by ten percent, it would be somewhere in the region of R310m worth of sales. I guess we’ve seen probably somewhere in the region of R150m, if memory serves me, if you add them all up. It is probably in terms of their overall stake, it is only about five percent.

We’ve got on the BizNews page of each company; we have ten SENS announcements per company. All ten going back to the 9^th January on Famous Brands, are sales of shares by directors.  This is not just a few offloading.  This is a serious strategic decision by that family, and we’ve heard nothing publicly, outside of the fact that they have to disclose SENS.  Would you be, at this point, a buyer of their shares if the directors are selling?

The short answer is yes.  Mainly, because there isn’t the liquidity that is afforded in other larger sized companies, simply because of a lot of insiders holding the company, specifically.  While they’re being fed into the market, there are many more institutional types, who suddenly it fits their mandate, in terms of size, scale, and liquidity, that they are able to hold the business.

Would you be a buyer and the shares are up 150 percent in three years, what goes up, doesn’t always come down. 

No, that is not necessarily the case.  I think it is ultimately about worrying whether or not it is a quality business.

With a P of 25?

They’ve always traded at a P of 25, even when they were at ten Rand a share, they’ve traded at that, and the directors will suck out, so you will probably get a deal.  Unleveraged, so they have the ability to do a pretty big, ballsy acquisition without adding too much debt.

Okay you’re a buyer but many aren’t, including the directors but what about Discovery, before we finish?  We’ve got Adrian coming in a little later.

Yes, I did a ‘back of the matchbox’ calculation. I figured if his shareholding is worth 7.77 percent, I think that’s the exact number, he’s up for between R310m and R388.5m just himself sticking in, if they are raising four to five at R90.  The directors have indicated and the RMI have indicated that they’re given irrevocable, they will follow their rights.  If ever you needed a stamp of approval on somebody, and if there is an energetic guy, there is one.  He’s going to follow his rights.  I don’t know what the conversation is going to be like between him and his banker, but great business.

Probably very easy.

Probably but I think, also, what’s interesting in those results is the way that they will be able to franchise and whitelabel the Vitality product, which has proved brilliant here, because the life insurance model is working.  They are disrupters, not too dissimilar, and I know they probably wouldn’t want this comparison, to Apple, so somebody else invents the product, and they absolutely perfect, nail it, and disrupt the rest of the market.

They are also driven by or trying to make us change behaviour as human beings. That’s the whole Discovery secret. Make us healthier. Make us eat better. Drive better and if we do all of that, then it should work for them.

It’s working for me.

I can see it’s working for you, Sasha the man who gets up every morning at 04:30, 05:00.  When do you go running?

I haven’t been running for a while, I had a bit of the flu but when I do, it is at 04:00ish.

Okay, after he bangs through the day and does what he should be doing, to make Discovery very happy.  That’s Sasha Naryshkine, the director of Vestact.