Kagiso: Taking profit on Naspers; questioning SA employment growth
South Africa's stock market darling Naspers (JSE: NPN) recently announced a change at the helm. Its visionary CEO Koos Bekker is off on another sabbatical. The last time Bekker did that, he returned with lots of ideas which helped send the share price soaring – and helped Chinese internet stock Tencent.
Should investors keep their shares in the expectation that this new sabbatical will produce a similarly happy ending? Abdul Davids, head of research at Kagiso Asset Management, isn't taking any chances. As a value-oriented investor he is banking some profits, he tells CNBC Power Lunch hosts Alec Hogg (editor of Biznews) and Gugulethu Mfuphi.
Abdul also offers his views on why there's a discrepancy between what the government says about employment growth and statistics that indicate that business activity has weakened. The civil service is a major job provider and these figures are quite possibly skewing the reading of South Africa's employment picture. – JC
GUGULETHU MFUPHI: The seasonally adjusted purchasing managers' index has increased in the month of February, due to a rebound in the New Sales Orders Index. While looking ahead, manufacturers are less optimistic about Expected Business Conditions. Joining us now in our studios is Abdul Davids, Head of Research at Kagiso Asset Management. Abdul, overall the picture looks as though it's improving. There is some positivity, but no doubt, there are some negative underlying factors, so it's not as positive for the outlook.
ABDUL DAVIDS: Yes, on the face of it New Sales Orders comprise the biggest component of the PMI, so recovery in that index is always welcome news and that it pushed up the PMI above the 50 level, as well, so 50 for 147, is quite a nice rebound. As you rightly say, we've seen business activity, whilst it has rebounded slightly by about point four index points it's still well above the 50 level. What is of concern is that the Expected Business Conditions index has come down by almost six index points as well. That coupled with the leading indicator, which is your ration of New Sales orders to inventories: that is well below one as well, so the outlook is not that rosy, unfortunately.
ALEC HOGG: Let's unpack all of this, starting with the increase in the New Sales. You do say in here that there's been inventory build-up ?
ABDUL DAVIDS: That's right.
ALEC HOGG: Would that have accounted for most of the improvement?
ABDUL DAVIDS: It could have. What we could have seen is that…bearing in mind that two months ago we saw quite a weak Sales Order – a decline in the New Sales Order – so presumably, we were due for a rebound in terms of New Sales Orders. However, if one combines the Supply Performance index, which is not an index we normally talk about, but that has also weakened a bit. There's an increase in that index – it's a weakening of that index and that, together with the weakening business index translates and means to us that the overall activity levels are still very protracted and still very low.
ALEC HOGG: This brings us to Budget and to the State of the Nation. In the State of the Nation Address Jacob Zuma said, which was repeated by Pravin Gordhan in the Budget, that we're creating jobs. If business activities are below 50 – in other words, in a negative frame – how's that possible?
ABDUL DAVIDS: Maybe the government is creating jobs. I'm not sure. Clearly, we don't track the government activity in terms of the PMI, but as you rightly say, we say the Employment index again dropping below 50. I think the problem with the industry is that we have overcapacity in terms of sheer numbers, so the number of unemployed is obviously very high. The irony is that we have a skills gap in terms of highly skilled workers: there's actually a short supply so there's an acute shortage of highly skilled workers, but the unskilled workers are in oversupply. Manufacturing unfortunately, in South Africa – even with the progression in mechanisation, for example – is still very reliant on unskilled labour and has significant exposure to unskilled labour. As a result, we see that index being fairly depressed over the last couple of years as well.
ALEC HOGG: But surely, Abdul, when you look at your numbers and you hear the official figures, does it not make you as the Head of Research, go and do a little bit more research and maybe unpack this for us, because I'm confused about how the economy's not growing and yet, jobs are supposed to be growing. Where is it coming from? Can you help us?
ABDUL DAVIDS: Well, what we have seen is that clearly, the civil service has taken up many jobs over the last five years. Just from the Budget, we know that civil servants, salaries, and teachers' etcetera take up a significant slug of the total Budget as well, so that has really been a component. In addition, bear in mind that you're almost guaranteed significant wage increases every year in that sector of the economy. We're therefore seeing a disproportionate share of total – if you include government as part of GDP – a disproportionate share of GDP going towards that sector of the economy. Ironically, that sustained the overall GDP numbers, as well. That coupled with Social Grants – the Social Grant recipients obviously, at record high levels – that component of the Budget is also quite significant. Ironically, that is sustaining the GDP of the economy to the exclusion of the private sectors. Government spending either directly through teachers' salaries, construction, or in terms of civil servants etcetera, but also indirectly through Social Grants, as well, is therefore crowding out private sector.
GUGULETHU MFUPHI: So let's say those six hundred thousand jobs had to be created in the next five years: how much more business activity would we need to see in the South African market?
ABDUL DAVIDS: I think the question is how much are we likely to see versus how much will be actually see. I think the dichotomy and the challenge here is to what extent can businesses supply to government. We've seen very little traction in terms of the formal sector supply to government. Previously, you spoke about the construction sector, for example, and we've seen a significant drop-off of construction to government over the last couple of years, so that's one sector that historically, has been a big employer. Obviously, employment numbers have fallen off quite dramatically. However if there's a rebound…if there are new stadiums to be built or new power stations etcetera, that would have a direct impact on the manufacturing sector from a construction point of view, as well.
ALEC HOGG: Abdul, you're our go-to man on Naspers. We can't let you leave without giving us some insight. Naspers is synonymous with Koos Bekker. He's been driving the business for so many years. It's been an incredible performer. Now that he's stepping away…
ABDUL DAVIDS: It's interesting because there are parallels to, I think, five years ago when he stepped away again for that one-year sabbatical. When he came back, Tencent –at that stage – was trading at around 50 Hong Kong Dollars and it has obviously gone up tenfold since then. Clearly, if one looks at the statement that was released he's going to look at San Francisco, Korea, and all of those places to look at new technologies and new ideas, etcetera. If he's coming back with many significant new ideas, for example technology and experiences etcetera, there's a potential to have significant value add to Naspers. I think the key challenge for them as they stand today is that… Clearly, Tencent is crowding out the rest of the Naspers portfolio, but the key challenge as indicated by the fact that they've appointed a guy like Bob van Dijk as the new CEO, is that they need to…monetise is such an over-traded word…but they really need to get traction and monetisation out of the ecommerce strategy. If they can do that over the next couple of years, I think there could potentially be significant value in Naspers. That's a key challenge because that's a market, which is almost nascent in terms of its growth. It's fast growing in terms of its nature, but there are some big players there with some big pockets, as well. I think it's very different to Pay-TV in that Pay-TV lends itself to high barriers to entry. If you go into traction quite early, you can actually have nice market for yourselves whereas ecommerce, because it's fast growing and you have bigger players there, you don't know who's going to be the ultimate winners in four to five years' time. That is therefore going to be the key challenge, but if they get it right, they could be worth a lot more.
GUGULETHU MFUPHI: Exponential growth is a word that Alec always uses when he talks about Naspers. Should shareholders believe in the exponential growth story?
ABDUL DAVIDS: It's a difficult one for me to say. Clearly, it has done extremely well. We're typically valuation-orientated investors, so we would rather bank our money and wait for things to settle down a little bit. The nature of share prices is such that it has done exceptionally well over the last couple of years, in fact – this last year in particular, so there's a lot of growth expectations build-up . As Koos Bekker will always say, we always pay their school fees and you don't know what sort of learnings are still to be done in the next year and by 'learnings' I mean 'mistakes along the way', so there could be hiccups along the way. For people who invested in Naspers five years ago – say, R50.00 or even R100.00 – they're well in the money, and to take some money off the table is probably a wise thing to do.
ALEC HOGG: Fifty Rand to well over a thousand Rands: are you selling?
ABDUL DAVIDS: We have taken some profit on behalf of our clients, yes.
ALEC HOGG: Abdul Davids is the Head of Research at Kagiso Asset Management.