David Shapiro on Taste Holdings, Advanced Health, and his current favourite counters

Results season continues in full swing, and David Shapiro has plenty to say about the latest numbers from Taste Holdings, a company that he likes although he regrets that it's too small for big asset managers to get a meaningful slice of it. Shapiro also gives his 2c-worth on Advanced Healthcare, a company that continues to see its share price rising rapidly – perhaps too rapidly.

To my mind, one of the interesting points he makes in this interview is that South African companies that service the middle market – people earning between R3000 and R6000 a month – are facing some substantial challenges. Layoffs in manufacturing and the ongoing impact of the platinum strike are weighing on this sector, and companies that target them, like Tiger Brands, Taste Holdings, and others could see some pared earnings as these impacts bite. Definite food for thought. – FD 

ALEC HOGG: What a warm welcome to Power Lunch. We have some big stories coming up in the next hour. We'll be having a look at ABIL through the eyes of its former CFO, Chief Financial Officer, who left at a time that he felt things were not going in the right direction. Dave Woollam will be in the studio with us in a moment.

There is also the Monetary Policy Committee Meeting that starts today. We'll be getting the insights from them tomorrow, whether or not interest rates in South Africa will be rising. We'll be talking to an expert and to David Shapiro – not to say that David Shapiro isn't an expert – but an expert and him, to get some insights into that one.

In addition, Retirement Funds and then a big story, there is a threat perhaps, to OTC Trading – Over The Counter Trading – hundreds of thousands of South Africans, primarily black South Africans, own shares in companies that are traded OTC. This includes the MTN scheme, it includes Vodacom scheme, some that have been launched by Naspers and Imperial. There's a huge market there. Hundreds of thousands of people involved here. The Financial Services Board wants to regulate or close down. We'll find out from the FSB about that in just a little while.

First, let's take a look at the news that's making headlines. Kicking off with some sad continental news, a 118 were killed last night after two bomb blasts rocked the Nigerian city of Jos. The bombs were placed at a bus terminal and adjacent market and there was no immediate claim of responsibility from the attacks.

Back home, South Africa's headline: consumer price inflation quickened to six-point-one percent, year-on-year in April, slightly above market expectations and outside of the six percent upper limit of the Reserve Bank.

In company results, Taste Holdings reported a twenty percent rise in full year headline earnings per share, the dividends up 22 percent. The group, which is set to face a legal challenge on the validity of its Domino's agreement declared a dividend of six-point-two cents. I'm not so sure it's facing the legal challenge. I had a chance to talk this morning with the CEO, Carlo Gonzaga. He says the challenges between Domino's and the U.S. and disaffected people here, in South Africa, who claim they have a verbal agreement but it still is an issue that Taste shareholders will be concerned with.

In other company news, Tiger Brands reported a seven percent increase, in first-half headline earnings per share. That's from the continuing operations, which is where we need to focus. The Group says it is making steady progress in implementing new strategies, which will help it regain what it's lost in the market place. The company declared a dividend of 329 cents.

For the rest of the day was the Spar Group. It reported a nine percent rise in first headline earnings per share. The company says it expects trading conditions to remain the same for the rest of the year, with particular emphasis on constrained consumer spending.

Finally, MediClinic International saw full year basic normalised headline earnings per share growth of 45 percent. I don't know why they have to give so much. David Shapiro – full year, basic, normalised headline earnings per share. Wow, if you're not confused, I am. Anyway, the group, which saw positive effects from acquiring minority interests in MediClinic Middle-East and currency movements, says it continues to invest for growth across all its businesses.

That's some of the headlines. Before we pick up with David Shapiro; let's take a look at what's happening in the markets.

Well, let's get that more in-depth view of the markets trade today. David Shapiro from Sasfin Securities is with us in the studio. Dave it's the second time for you already in the studio, in Power Lunch.

DAVID SHAPIRO: A lovely studio.

ALEC HOGG: Yeah, pretty good.

DAVID SHAPIRO: I enjoy coming back to the Exchange. I spent most of my life here. It's a pity. I enjoyed the floor. I enjoyed the…

ALEC HOGG: Were you an Open Outcry guy?

DAVID SHAPIRO: I was the Open Outcry for a long time and I just enjoyed the atmosphere of having people around there. You could actually hear the market winner win better. There was a buzz. There was an excitement about it. You can't get that in front of a screen. All the other markets today are significantly more efficient.

ALEC HOGG: But you're starting to get it as well. We can't unfortunately, pick up from behind us but the whole floor and the reception at the JSE is full of people, coming for the Taste Holdings presentation. I spent much of my morning in fact with Carlo Gonzaga, the CEO of Taste Holdings. This Domino's Pizza deal is transformative, David.

DAVID SHAPIRO: And how it is. Look, it's a very good company. I like Taste. Unfortunately, it's a little smaller than Famous Brands and therefore you can't get the kind of exposure that you would like. It's a wonderful brand and it's probably based more at the low end of the market, Fish & Chips, Domino's Pizzas and so on.

ALEC HOGG: Domino…

DAVID SHAPIRO: Alec, I have never…it is something that I cannot come to terms with that twenty years ago, when this country was transforming, no one believed that we would turn into a pizza eating country, and yet it is by far the biggest seller. Domino's is a…

ALEC HOGG: Or chicken.

DAVID SHAPIRO: And chicken.

ALEC HOGG: If you want to make a quick fortune, get yourself a KFC franchise.

DAVID SHAPIRO: Yes.

ALEC HOGG: But it now appears as though if you want to make a quick fortune, get yourself a Burger King franchise. He says, incidentally, he tried to do the Burger King deal two-and-a-half years ago and he got a bit worried about it. If he had another bite at that cherry, Hassan Adams wouldn't see him for dust, he says. He says they missed it. It is one of those mistakes but at least they got Domino's.

DAVID SHAPIRO: I wonder if there are any other global brands that they can bring in, but it just shows you how we've changed our eating habits.

ALEC HOGG: Pizza Hut?

DAVID SHAPIRO: Pizza Hut is KFC.

ALEC HOGG: Part of KFC, or so they say.

DAVID SHAPIRO: Part of Yum, sorry. It's part of Yum Brands.

ALEC HOGG: But the shares are up today, Dave, despite this concern of perhaps some legal issue, to do with the deal with Domino's Pizza. Carlo says it's not relevant to him.

DAVID SHAPIRO: It probably isn't and it will probably be brushed aside. We had the same with Fish & Chips, when they took over the franchise there as well. The previous owner made a claim as well and that also just disintegrated and went away.

ALEC HOGG: But that's done well at 394. I remember we were talking about it when it was a penny stock, well below a Rand.

DAVID SHAPIRO: I think, to me, if you want to go into the consumer side of the market, at a time you flashed up Spars' results and we've been seen from most of the retailers how tough it is. This is one area of the market that just continues to grow and I think will lead. If you want to invest in the consumer in South Africa this is where you should be. Taste and Famous Brands and don't write off Hassan Adams as well. I think he has a great company. He's a superman.

ALEC HOGG: After listening this morning to what Carlo had to say about Burger King, you are spot on. This Advanced Health – it continues to surprise me. It is only a R400bn/R500bn market cap company but it just gets stronger and stronger. If you recall, when Carl Grillenberger listed it he spoke to us. He said 'at R1.50, he'd be doing acquisitions'.

DAVID SHAPIRO: Yes.

ALEC HOGG: Today it's R2.62 – up another 14 percent. What gives?

DAVID SHAPIRO: I'm just worried that this may have taken on the same aspect as CURRO. Do you remember CURRO? It actually starts to run ahead of himself. He's a very sharp, good operator. I don't take anything away from him and he's a man I would back. I'm just worried that it might be running too far ahead of what he can [inaudible 08:19].

ALEC HOGG: Who can keep buying stock at this level?

DAVID SHAPIRO: I don't know.

ALEC HOGG: If the owner says, he thinks its worth…well it listed at R1.00, so he sells a lot of shares at a R1.00. He thinks its worth about R1.50/R1.60 from the information he gave us unless there's a takeover and someone picks it up.

DAVID SHAPIRO: There's a lot of money floating around. If you go back to the Coronation results yesterday, R100m per day, they're getting that they have to invest, so I think there's not much stock being created. There's nothing fresh, nothing new coming onto the market so when you do see something exciting, like Carl's company – remember he was Presmed and he did very well out of that – where you see that, it tends to attract a lot of the private client money.

ALEC HOGG: Entrepreneurs.

DAVID SHAPIRO: Yes.

ALEC HOGG: You never get enough of entrepreneurs. Just looking at the other list of the shares that are going up today. DRD Gold, I suppose a little bit on the gold shares. Ascendis Health, there's another small health company.

DAVID SHAPIRO: I'd rather go for Carl.

ALEC HOGG: Would you?

DAVID SHAPIRO: Yes.

ALEC HOGG: You don't like Ascendis.

DAVID SHAPIRO: I don't know enough about it.

ALEC HOGG: I like Ascendis. Gary, Shane, and Chris Dylan.

DAVID SHAPIRO: I'm big into Aspen. I'm big into Healthcare companies.

ALEC HOGG: And Adcock?

DAVID SHAPIRO: Give it time. I'm taking a step back. I think Brian has a lot on his plate, Brian Joffe, from Bidvest. I think they'll swing it but I don't think it's going to be an overnight success story.

ALEC HOGG: At the other end of the scale, Barlow World – four percent lower today, so some digest of that set of minutes.

DAVID SHAPIRO: It's a good company. I think they are doing well in logistics. I still think there are many question marks about mining expansion, about expansion in South Africa. We saw it with Reunert's as well yesterday. When you get down to real industries here, they're battling along a lot has to do with the mining strike and the slowdown in manufacturing and mining.

ALEC HOGG: It is a different area but Carlo was talking about the one area of his business that he is worried in and he's there with Fish & Chips and the chicken operation, is at the bottom end. He says the LSM is four to six, which is three-thousand Rand per month to six-thousand Rand per month. It fell off a cliff, he reckons.

DAVID SHAPIRO: Yes, well that's because of layoffs. That's because of the mining strikes. It goes right throughout.

ALEC HOGG: So what other companies would be impacted by this?

DAVID SHAPIRO: I think you have to worry about anything in the manufacturing space. I worry about even companies like Tiger Brands. I worry about some of the consumer companies. I start to be concerned that they can't pass their margins on, so you have to look at Woolworth's type companies, or companies at the top-end, where people are still employed, earning salaries, and still spending.

ALEC HOGG: Where would Spar come in, in all of that?

DAVID SHAPIRO: Midway.

ALEC HOGG: Middle of the market because their numbers are okay, do you think?

DAVID SHAPIRO: They're all right but nine percent is not good enough for a 15 or 16 percent multiple. Eventually it is going to tug on the share price. They can get away with it in one-half year or one year but, down the line, you can't keep producing nine percent and expect your share to trade at a high multiple. Eventually it starts to impact.

ALEC HOGG: David, we're going to talk in more broad terms about the over-the-counter market, which has been flourishing, particularly because of BEE shares. You've been a Stock Exchange man for decades. Is OTC something we need in this country or is the Financial Services right, to maybe, squash it?

DAVID SHAPIRO: I worry about it. Yes, it needs to be regulated. That is why you have a Stock Exchange, so that you can get a fair listing price. In many cases, I would imagine that sometimes in over-the-counter market you probably don't get the best price that you can because you're forced to go to that one area.

ALEC HOGG: But surely, it's better to have that than to have nothing.

DAVID SHAPIRO: Yes.

ALEC HOGG: Take this huge Sanlam BEE deal, where they haven't listed it, and there's a widespread between buyers and sellers. That's a huge deal. That's a R15bn company.

DAVID SHAPIRO: Yes, I worry about over-the-counter.

ALEC HOGG: It must be regulated.

DAVID SHAPIRO: I've been a Stock Exchange man for forty years and the one thing that this organisation is, it is incredibly well regulated and run. It is a superbly run business. Don't take anything away from it. There's a Stock Exchange Act. You can start a Stock Exchange and, in many cases, if you're going to advertise a price, eventually you fall foul of the Stock Exchange Act.

ALEC HOGG: But then why has no one else started one then? Why is there only one Stock Exchange?

DAVID SHAPIRO: Remember when the Stock Exchange did not want to go…

ALEC HOGG: Because they'd buy electronics. There were millions. There were dozens of Stock Exchanges.

DAVID SHAPIRO: There was the Union Stock Exchange. There were two different ones.

ALEC HOGG: There was Barberton, the oldest Stock Exchange in the country.

DAVID SHAPIRO:  All you need to do is apply for a license and then the companies will be listed, so you apply them a list and you buy and you have a regulator.

ALEC HOGG: But why's there no others? Is it just too expensive?

DAVID SHAPIRO: I think it is too small and it is too expensive. You have to see the systems that go to make up the Stock Exchange. Talk to Nicky Newton-King about that.

ALEC HOGG: Yes, many people complain about the JSE but, if you have a look at its efficiency and operations, it is very hard to compete with it. Well that was David Shapiro. He's from Sasfin Securities. More Power Lunch right after this. Don't go away.