Market analysis with Sasha Naryshkine: Woolworths, Massmart, Implats, Adcock
If there is anyone around to lend an expert ear to what is happening in the markets it is Sasha Naryshkine from Vestact. He spent the morning analysing the slurry of results that came out today, and was ready to unpack all of the details with Alec Hogg on CNBC's Power Lunch this afternoon. Today we had Woolworths and Massmart releasing full-year results – noting very different spectrums of performance in the sector in which they operate. We also had Impala Platinum out with results, unsurprisingly showing signs of strain from a very difficult year hit by strikes. Sasha and Alec end off their discussion with Adcock Ingram which came out with half-year results today reporting a 'hefty' headline loss per share. – LF
ALEC HOGG: Well, let's get a more in-depth of how the market is trading. Sasha Naryshkine from Vestact is with us in the studio. Well Sasha, let's start off with those retail results. Woolworths looks pretty solid….Massmart not as much.
SASHA NARYSHKINE: Yes, Massmart not as much. I think it's taken a lot longer than maybe even Walmart (who have long timeframes) would have liked. They would have wanted something to happen a lot quicker. Obviously, there've been some major hurdles and obstacles to overcome. Ironically, it was Charlie Munger who said Costco had done more for society, than any charitable organisation he'd ever come across. Meaning that the lower prices, to the people who absolutely need lower prices does more, in his opinion, to purchasing power in coming years.
ALEC HOGG: That's Capitalism, isn't it? Capitalism is a question of an efficient economic system where everybody benefits.
SASHA NARYSHKINE: Ironically, Government – who you'd like to think have the best intentions at hand, want the most vulnerable in society to benefit from a deal like this, whereas they were just on the side of Labour. Let's be fair.
ALEC HOGG: Well, you don't know what you don't know, and so you implement what you think you do know which leads to unintended consequences. Life is full of them.
SASHA NARYSHKINE: Well, look at what's happening in Venezuela: fingerprinting systems to make sure people don't buy too much toilet paper.
ALEC HOGG: Venezuela is, hopefully, not the role model that South Africa's political masters are looking for into the future, but sometimes I wonder. Looking at the numbers that came out of Woolworths today, they're still set fair at 47 percent return on equity.
SASHA NARYSHKINE: It's interesting how they categorise it. They're pretty blunt. They say their core customer is the upper-income customer. They have a lot of work to do with David Jones. For the better part of half a decade, David Jones has been going sideways. If they can do what they did with Country Road… Remember that they own all of Country Road, which I guess we shouldn't underestimate the power of owning that extra 12-odd percent. This is against the backdrop of shareholders probably contributing more money to pay off the R9bn bridge loan. They've said that there'll be a rights issue announcement I think, in September. A 'back of the envelope' type of calculation suggests somewhere in the region of 15 per 100 shares or maybe even a few less if the share price remains at this point.
ALEC HOGG: They're raising that money very cheaply. The equity is extremely expensive at the moment.
SASHA NARYSHKINE: Well, they're trading at a 20-odd times multiple.
ALEC HOGG: Exactly – five percent.
SASHA NARYSHKINE: Sometimes you pay up for specific companies. Now I know you and I would have divergent views on Woolies, as a business. We like it a lot. I know you've been saying for a while that you think there's a problem. At the end of the day, what are you buying here? You're buying a retailer that's going to have, roughly, 50/50 split. I think they're currently at 47 percent to Australia, if you include David Jones. I guess it depends on what your outlook is for the Australian economy, which is probably going to battle some headwinds as a result of slowing Chinese economy, if not for their own consumers then broader resource utilisation. What I mean by that is slowing demand for raw commodities. That could impact on Australia, but equally, that could have the same impact here.
ALEC HOGG: The view has to be 'can they compete in Australia'. My view is it's a South African retail sector, which comes from the international comparisons. They have the highest ROE's of any retail sector in the world. We see what Massmart is doing: fighting now in the courts to get anti-competitive practices changed. Woolies isn't going to find it as easy when they go into Australia, as they'd find it here. I think those are just the divergent views between us.
SASHA NARYSHKINE: A subtle difference with Woolies and some of their competitors who've gone to Australia before is they've been there since 1998, and Ian Muir comes from that background. Probably the big difference is that they have nearly a decade-and-a-half worth of operational experience on the ground.
ALEC HOGG: You know how long it took them to get Country Road right.
SASHA NARYSHKINE: It took them a long time and people forget that Country Road was a beaten-up retailer when they bought it all those years back.
ALEC HOGG: And it was a dog for a long time.
SASHA NARYSHKINE: Exactly, so maybe people are too quick to draw comparisons with David Jones. Having said that, you have to back this current management team to be able to deliver you the same as the shareholders.
ALEC HOGG: So, an Ian Muir fan. I don't diss Ian Muir, but I think he has a much tougher job with David Jones in Australia and it's going to get tougher here in South Africa.
SASHA NARYSHKINE: Probably.
ALEC HOGG: Whitey Basson: there's an interesting point. For the first year, Shoprite will be investing more into other parts of Africa than in South Africa. That has to tell you something about the outlook for that side, but we have lots more others to cover. What about Impala – down five percent again?
SASHA NARYSHKINE: It didn't miss by much in terms of expectations. I think it was just one cent on earnings but obviously, there's a lot more detail there, which tells you it's going to get even harder before it gets better. Costs are becoming a more significant portion. I think the part that people have been a little bit bemused by is 'why hasn't the platinum price gone up by as much, with the shortage'. Well, that's because there's been a lot more above ground than many people anticipated, in the form of investments…
ALEC HOGG: They were able to meet the supply. Something very interesting (and I know you read the results very carefully): in the Massmart numbers, Guy Haywood (the CEO) said the possible impact of that platinum strike for the country is much more significant than what we understand at this point. If you take that, together with the Impala results today where everything should have been in the numbers and yet, it's still down five percent, maybe we aren't fully appreciating what those strikes really did.
SASHA NARYSHKINE: You're talking from an investor confidence perspective…
ALEC HOGG: From a national perspective, from Impala Platinum's operational perspective and from a Massmart perspective.
SASHA NARYSHKINE: What are businesses going to do next? You're right. Massmart has the ability to be more nimble and spend money, like Shoprite, north of our borders. However, if you're Impala Platinum, your assets are here and in Zimbabwe. It's not as though you can move them to Botswana where maybe the government would be a little friendlier to mining businesses. I guess that's more than just a subtle difference between those types of businesses.
ALEC HOGG: A very good point. Just to close off with, Adcock Ingram…
SASHA NARYSHKINE: Shocking. In the commentary at the end, they say they've done a lot to change perceptions around productivity and accountability. We know that management had their eye off the ball – the previous management. They say they're starting to see early signs of turnaround.
ALEC HOGG: Okay, so Mr Joffe might not have made a complete disaster there. At the moment, it doesn't look like it.
SASHA NARYSHKINE: No, he's not.
ALEC HOGG: That was Sasha Naryshkine. He's from Vestact.