Pinnacle “could be an amazing buying opportunity” – analyst
Pinnacle shares have plummeted after it announced that an executive, Takalani Tshivhase, was arrested on charges of attempting to bribe a police officer in order to secure a long-term contract for Pinnacle. The CEO has denied all knowledge of the incident, but Pinnacle shares have nevertheless plunged – although as Gary Booysen of Vunani Private Clients points out, a lot of the selling is likely related to stop orders and to traders covering their margin. The result is that Pinnacle is down more than 40% over just a few days, and that, says Booysen, suggests that there might just be a buying opportunity for bold traders. After all, even if Pinnacle faces negative consequences like the loss of a number of government contracts, government deals account for only around 20% of its total earnings – in other words, there's still a company there, even if this bribery charge leads to some major contract cancellations. Of course, this is not a wager for the faint of heart. It's early days yet on the matter, and more problems may surface now that investigators and reporters are digging around. – FD
ALEC HOGG: Old Mutual has announced terms to sell Skandia Germany and Austria while Poynting Holdings anticipates an interim increase in basic earnings per share of 58 to 78 percent – nice improvement there. Well, let's get a more in-depth view of those stories and others. Gary Booysen from Vunani Private Clients is with us in the studio. Perhaps, that Old Mutual story…Gary, how relevant is it?
GARY BOOYSEN: I don't see the stock market moving too much on the back of it and I think it's very much in line with their strategy as the news bulletin said. We've seen Old Mutual trading up to the top of its band, but no great shakes – no big movements, and we have seen some enormous movements on the market in the last couple of days I think Old Mutual is pretty much priced in.
ALEC HOGG: It's just more of the same. They've announced the strategy and now they're just cleaning up.
GARY BOOYSEN: We might see a little bit of a special dividend coming out of there with the cash release, which would be nice for shareholders – a nice little kicker.
ALEC HOGG: The shareholders have done well out of Old Mutual, particularly dividend-wise in the last couple of years. Poynting: is it a stock you follow?
GARY BOOYSEN: No, it's a little too small for us to follow in detail. There's obviously a nice trading statement from them and it's one, which the smaller clients will always go and have a punt on. The share price has done exceptionally well, but from a fundamental point of view, I couldn't really comment the company.
ALEC HOGG: Pallinghurst is an interesting company. That came out with results today as well. Brian Gilbertson, a well-known business leader here in South Africa, went on to make a big name internationally. It has always traded at a huge discount to what Brian thinks it's worth. Have you ever looked at those numbers in detail?
GARY BOOYSEN: No. Again, it's a small company that we don't follow in a great amount of detail. We focus more on small cap. The small cap industrials are more our focus at Vunani.
ALEC HOGG: Well, I guess Pallinghurst has had it all against it, given the way the whole Resources Board has been trading lately. Pinnacle might not be one of your stocks, but the story that's going on there…my goodness.
GARY BOOYSEN: Yes, that is one we cover though, so we're fortunate enough to have an [unclear 1:57] on Pinnacle. We've obviously looked at it in some detail, just because of the movement on it. Many clients…you'd be amazed at the private client interest. As soon as the stock drops to about 40 percent, everyone wants a piece of it. They don't want to wait for a bottom. They don't care if it's fundamentally bad or good for the company. They think it has to rerate, so we've looked at that in a fair amount of detail. You mentioned earlier that government business does take up a significant portion of the business, so probably around 20 percent of profit is coming from government operations. We look at it…even if they were to lose the entire government business going forward, you should only look at 10, 15, or maybe 20 on the outside, rerating in the share price. We think it is overdone but of course, you have all those unmeasurable aspects as well because you don't know what the reputational impact on the company will be.
ALEC HOGG: Have you met the guys there? Have you been going there much?
GARY BOOYSEN: Yes, I have actually met them briefly. Our analyst chatted to them immediately after the announcement. From our side, the FD was as surprised as everyone else from the look of it. He didn't have a clue that this was happening. Obviously, Arnold Free did know there was something. That announcement came out on the 5th of March, so he did have some idea that there was going to be…that the guy had been arrested, but from their point of view, they said that they're taking the view that these allegations are unfounded. I think that's the thing. There's a huge amount of uncertainty. Immediately after that announcement came out, there was all the speculation. They were looking at 'was the CEO selling shares just before'. You look into that. You read one SENS announcement and you can see that was part of the unwinding of a structure. It wasn't his decision to sell shares there at all. I think it could be an amazing buying opportunity – it really could. There's a massive amount of uncertainty and the company is a very solid company. It has very solid earnings in it.
ALEC HOGG: We often see that, don't we? You remember when Old Mutual was supposed to go bust and at R4.00, people were saying 'that's the end of the story'. Well, if only we hadn't listened.
GARY BOOYSEN: Exactly…Old Mutual at R4.00…can you imagine?
ALEC HOGG: I guess with Pinnacle, maybe one day you'll say 'R12.00 Wow'.
GARY BOOYSEN: I think maybe the feeling from our side…punished unfairly, because we still don't know. We don't have enough details to sell off or to wipe out almost R2bn of a company's market cap.
ALEC HOGG: And a company of that size, as well.
GARY BOOYSEN: When I say 'R2bn' that's 40 percent of the company. You therefore need to be pretty sure that you know the ramifications of that. However, we can feel it because clients…there are opportunistic traders. There are guys who are just there to stop losses. These days, with auto stop losses etcetera, once you pass about a seven percent drop in a share, it just becomes exaggerated as margin calls come in etcetera. It was a geared trading play, which was fairly popular among traders anyway. I know margins on it were only around ten percent and those are being boosted up again on Tuesday to about 30 percent, so you can look at Tuesday. There'll probably be a bit of action as more margin calls come in and more traders top out.
ALEC HOGG: So there's another reason why. The share price is falling, too.
GARY BOOYSEN: There's a whole other angle on that share price, rather than fundamental selling. We've also looked into the fundamental selling. You can't get those figures until March. You'll see what kinds of movements happened, and who the bigger players were who have been selling this company down, but we'll only know that at the end of the month.
ALEC HOGG: But you could do worse if you're a trader, than having a little position in it now.
GARY BOOYSEN: Take a little punt here for a little rerate…not a bad idea.
ALEC HOGG: I live down the road from the Deputy President, Kgalema Motlanthe, and today I happened to be walking, and nearly get knocked over by one of the four traffic cops on their motorbikes. They seem to think that when they're protecting the President or the Deputy President, they have to do crazy things. There were eight cars in his convoy. The reason is, he's going off to have a meeting at 11:00 (or did, this morning) with the mining sector – a regular meeting. It doesn't seem to be helping much, does it?
GARY BOOYSEN: Yes, that is interesting. It looks as though from the mining companies' point of view, they've really bunkered down. They've pretty much said they're going to hold out. They don't really have an option. They can't give in to unreasonable demands. I was actually chatting to our platinum analyst this morning and he's saying the figures are that if you look at Impala Lease where most of the strikes are going on – obviously, Mimosa and Zimplats are not being affected – but they've pretty much put all other staff on holiday. They've cut their costs to absolute bare-bone costs. To run Impala Lease I think, costs about R1.4bn per month to run that. They've cut costs by R1.1bn at the moment. There's just no activity there, so they've literally battened down the hatches and they're going to wait. They're saying 'we can wait a long time'. If you look at someone like Amplats, all the eastern mines are fine – no strikes at all. It's just Rustenburg, Union, and Amandelbult that's being affected, so they're also saying 'you know what, we have huge stockpiles of platinum, which we can sell. We can also afford to wait'. Amplats is probably going to be the least affected of the top three. Lonmin probably, which is production…
ALEC HOGG: They're all there, aren't they?
GARY BOOYSEN: Yes, that's it. They have much less diversification in their mines. Their production is completely halted, so they're probably the ones that are going to be hurt the most by this, but the rest of the guys are saying 'we're going to hold out as long as it takes'. I think that is probably going to be an interesting meeting, and it could be more of the same.
ALEC HOGG: Stakeholders of the mining sector: I guess he needs all that protection if he's going to see those guys.