DAVID SHAPIRO: Pinnacle Holdings plunge; Capitec and Warren Buffett
David Shapiro has seen it all in his decades in the stock market and in this fascinating discussion he offers his thoughts on the crashing share price of one-time tech darling Pinnacle Holdings and warns why investors have to be wary of small cap stocks. He also expresses his opinion about Capitec ahead of our discussion with CEO Gerrie Fourie, and looks ahead to the 2014 Berkyfest – our annual pilgrimage to Omaha to hear the wise words of Berkshire Hathaway chairman Warren Buffett. – AH
ALEC HOGG: David Shapiro from Sasfin is with us in the studio. This Pinnacle Holdings story is not fun. Its price has halved in two days. It's not often you see a share price doing that.
DAVID SHAPIRO: It's a very ugly story and the sadness is that Pinnacle were cited as being competition to EOH. It was one of these high growth companies with the Rand very much in 2012, settled down about 2013, and has now come off. Even if you looked at analysts' reports, the outlook was still very positive for Pinnacle as a services company in the IT area. Once you have an executive accused of bribery, then who knows how far that will go and what other deals might have been gotten through that.
ALEC HOGG: What occurred to me is Chris Smythe, who is a crack shooter…remember, he was the acting CEO at the South African Airways. He left there and joined Pinnacle Holdings. He was the Financial Director and he departed some time ago – I don't remember when or how – and you wonder now. Immediately, your suspicious mind says 'well, maybe Chris saw something there that he didn't like and left'.
DAVID SHAPIRO: Maybe, you don't know. One never knows. Alec, it's always a worry around small companies. I don't say 'don't go into small companies'.
ALEC HOGG: It isn't so small. This was a R5bn market cap.
DAVID SHAPIRO: In the small and medium-sized, you really have to know your companies and you have to allow businesses to build up a track record so you get to understand the MD's, CEO's etcetera.
ALEC HOGG: Before we get off Pinnacle, they also have quite a lot of loans out there. They have a medium term note program of R2.5bn which is their market cap. Are those notes going to be smashed as well?
DAVID SHAPIRO: Those are very vulnerable, because if some of the corporate clients start pulling out business – worried about where the company's going – you don't pay back those loans. There was absolutely no reason to suggest that this was going to happen. Yes, results were flattening out. It was harder to get new businesses than in the past, but have a look at analysts' reports. There was nothing to suggest that this company was going to go on the skids or that this was going to happen. However, there are questions marks now. In addition, there are many question marks around corporate governance because they knew about this a few weeks ago. Why didn't they put out a SENS statement then? Why did they delay? There was also some selling of shares during that interim period as well, so there are many question marks over this and think that's the reason why people are just abandoning their shares and selling out.
GUGULETHU MFUPHI: Corporate governance: that almost reminds me of the situation we saw recently with Jacques Schindehutte at Telkom, so quite clearly, investors do take this kind of action very seriously, and they respond with regard to the share price.
DAVID SHAPIRO: Well, you have to question the people in charge. In this case, the CEO has been sent on a corporate governance course.
GUGULETHU MFUPHI: He said it was a misunderstanding, so we'll find out.
ALEC HOGG: That's pathetic, really. If he doesn't know corporate governance now, you're not going to teach it to him on a course.
DAVID SHAPIRO: Alec, if you're running a big business, you have to know what's right and wrong. I don't think you need courses. You just need to know what's the right thing to do, and what's the wrong thing to do. They don't teach it. That's the problem. You learn an accounting degree. You learn a science degree. There aren't any ethics degrees. There's no teaching around corporate governance. You are assumed to know it, but I think generally, people know – it's biblical – what's right and what's wrong.
ALEC HOGG: My mentor, Danie Cronje, when I worked with him at Absa, said he'd met a chap once who came to borrow money. He said 'these are my set of principles, but if you don't like them, there's another set over here'.
GUGULETHU MFUPHI: Talk about being a straight-talker. Don't beat around the bush. David, Capitec – as Alec mentioned – is a darling of many investors. What do you make of their earnings?
DAVID SHAPIRO: Look, it's a very good result under the circumstances. It's not the high growth that we've seen but you understand why. At the bottom end of the market, where the market in which they're positioned has been under strain, but they seem to be handling it very well, and I think that's the importance. Compare them to Abil. In all fairness, is a much smaller size than Capitec but as Alec said in the introduction, they're giving all the big banks a run for their money. Where their business model differs is that they do take deposits. They take in deposits unlike Abil, who has to go out into the market and borrow money, and many people use them for their convenience, because of
their low costs, and a number of matters. It's certainly a company to watch. Is it the right buy it under these circumstances? I'm not sure. Everybody's banks are going up. I'm not quite sure why they're running up as hard as they are, but the bank index Alec, I think is at an all-time high. I just think it's sentiment drive that's pushing it there.
ALEC HOGG: The matrixes are all good for Capitec – I did many numbers before we talk to Gerrie Fourie a bit later – and a cost-to-income ratio of about 32 percent. I remember talking to the CEO of a Kenyan bank and they were below 40. I thought wow, compared with South African banks in the 50's and some of them at 60…and these guys are at 32 percent.
DAVID SHAPIRO: Do you know why? They don't have the big branch structures. There branches are very small. They're highly computerised. I think they took over Boland Bank or the remnants of Boland once Absa did all those consolidations. I think Boland was just discarded. They took it over and I think that formed the base of their IT operations, which is still incredibly well run, and you can add on – it's scalable.
ALEC HOGG: Culture, David, it's all about culture. When I visited them there in December, they said we do not hire bankers. We hire people from the retail sector, so if you want a job at Capitec – and their staff numbers are growing and growing – don't go there and tell them you're from the banking industry. Tell them 'I sold a pair of shoes to David Shapiro'. What was it called again?
DAVID SHAPIRO: I don't know if they make men's Jimmy Choo's.
ALEC HOGG: But the banking index is an interesting point.
DAVID SHAPIRO: Alec, I think yesterday's move on the market and today's follow-up is a sentiment drive that things globally, are coming right. I also think there's a lot of money sloshing around in our market that doesn't know where to go and is trying to find cheap stock. It's the only explanation because fundamentals haven't quite come through yet.
GUGULETHU MFUPHI: You said 'globally things are coming right'. I'm happy that you're an optimist, because every day we speak to people and they're worried about China, Europe is still slow, and the U.S., the slight pickup there, could be a negative for us.
DAVID SHAPIRO: Acid tests: say 'if you're so negative, have you gone short or are you selling? Have you sold your stock?' They all talk that way, but they still hold on to their shares, which means they're not really negative. Got it?
ALEC HOGG: It's a nice story, though, isn't it? You have to be a little bit contrary to catch the headlines or so people think when they come here. We would rather have people just telling us straight and it is… When you have lots of money sloshing around, where is it going? If it doesn't go into shares, where does it go?
DAVID SHAPIRO: Ask Coronation how much they're taking in every day (or Allan Gray). They have to put it somewhere and unfortunately, the stock on the shelves isn't increasing. We don't have new listings. There's nowhere else to go, so you end up looking at places. I don't think the fundamentals are there. In the global market, it's different. I'm happy about where the U.S. is going – slowly coming right – Europe is not as bad as it was etcetera, but from a South African perspective, I don't know.
ALEC HOGG: How many more sleeps until the Oracle?
DAVID SHAPIRO: I have to work it out.
ALEC HOGG: There aren't many.
DAVID SHAPIRO: I'm going two weeks ahead of it. I love it. I always enjoy it.
ALEC HOGG: The Oracle of Omaha (Warren Buffett) . We have to get Gugu to come and join us in Omaha one year, although it is expensive, it takes 30 hours to get there, and 30 hours to get back. It's quite a business. I've worked out Dave, I'm going to be away for a week, of which, four days will be spend travelling – three days in Omaha and four days travelling.
DAVID SHAPIRO: I can only get there via Detroit. I haven't been there before – that way. It's very difficult to find flights. One flight from New York to Omaha, because there's so much demand, was twenty-six-thousand-Rand. I managed to get a cheapie.
ALEC HOGG: Via Detroit…