🔒 David Shapiro: Homework, not blind faith required with fallen angels like DSY, ASP, SOL

In this week’s edition of Rational Radio, SA’s favourite market commentator David Shapiro wades into the investment market controversies surrounding Discovery, Sasol, Blue Label and Aspen. His advice: the shares may look really cheap, but before knowing that for sure, you’ll need to do your homework – and wait to see a recovery in the prices before jumping aboard. – Alec Hogg

David Shapiro is our man on the markets. It’s interesting, I asked Mike in that interview, what makes you different? What’s the secret sauce? And he said they realised a long time ago that they had to grow their own timber. They had to promote their own people internally and it really is a big distinction. He was saying he loves it when he sees companies trying to find chief executives from different parts of the world because it just shows that they haven’t really been approaching the basics correctly.

I’m a big critic of human resources because in many businesses HR become nothing more than salary clerks doing nothing else but  presenting or promoting the aims of the management and what they should be doing is actually training up people and looking after people within the organisation. SA Breweries was great. They always took people from within divisions.

If you have to go and look outside you’re never going to get a person with the same culture and in most of those cases when you bring an outsider, a lot of insiders leave and you lose a whole layer of top management. So good for Mike. I always liked Wilson Bayly Homes, it was one of the noble construction companies and always seemed to hold their own. I know they’re having a few issues in Australia at the moment but still a very strong company.

Yes, he’s very happy with handing over the reins now as he turns 70 in October. Another company which has grown a lot of its own timber is Discovery. We had a good chat about it last week. You were going to see the analyst from Macquarie who apparently found a R15bn hole in this account.

Well it has caused a furore. It was just a difference in opinion on the valuation techniques. In fact we are seeing the analyst tomorrow. The appointment was cancelled but it did cause quite a bit of discussion and I think that management haven’t quite answered it yet, they are in a closed period. What disturbs me is I look at the market for clues about whether things are going right or wrong and I’ve been looking at a company Blue Label and I see they’ve fallen below R3 and it worries me delaying their accounts and the same thing with Discovery. The fact that the share price is now in the low one hundreds. We know the consequences of National Health but where you find a share price in August has fallen over 20% and hold it there. It tends to say that the deeper issues that we have to look at which may be that the economy is slowing here and they’re not quite generating the returns or the earnings that they should be to fund all those very ambitious projects that they have. So you’ve always got to look for a bigger story when share prices fall. So there are issues, maybe the valuations are stretched but at the moment we can’t get the answers simply because they’re in a closed period.

You mentioned Blue Label. That’s a company whose stock has come down a long way. What are you making of what’s happening there?

What’s also happened there which I can’t understand, they are delaying their accounts which should come out either today or tomorrow for the year to 30th May. Now where they delay their accounts pending a deal and that deal is a life saving deal. I’m surprised that the Stock Exchange didn’t insist that they publish their accounts and I don’t think the deal has been signed but it’s obviously pointing to very difficult conditions when they took over Cell C. The mobile companies today chew cash, they need lots and lots of capital development and they sell a product that everybody wants for free. You want to go to Starbucks and use their free WiFi. So it’s also pointing, especially recently that the share prices have fallen to lows that we haven’t seen since the listing in 2007. Also just pointing to a situation which I think is going to be very difficult or costly for them to turn around.

But this is the negative 10 bagger in the last four years. In 2016 it was trading at R21 now it’s heading towards R2.

Yes that’s Cell C.

Yes, I used to have it in the SA Champions portfolio, although I’ve stopped those ideas a while ago. But in the SA Champions portfolio we sold out when we saw the problems coming with Net1. Remember they got together with Net1, then they bought Cell C, and just as well we sold out. It was a small loss but it wasn’t really much in it. I was worried about the scandal that was hitting Net1 at that time. It’s a good story of Buffett’s, when you see a scandal hitting a company run for the hills.

His story has caused quite a lot of aggro. He used to say you know “if you see a cockroach in the kitchen, sooner or later you’re going to meet the family.” What that means is when problems hit just be careful. It’s best then to sell out and wait until it settles. You can always come back once the problem is sorted. The share price also points towards towards issues. We saw it in Tongaat, we are seeing it in Aspen to a large extent now as well. Aspen is down almost 30% in the last month. There is no turnaround, no one’s coming in to save the company. Funny enough Sasol is picking up a little bit now. They are in a better position than they were last week. Meaning that maybe the market overreacted to the numbers. So it’s a warning. Rather wait for the company to turn around and be sure that it’s on a recovery path.

I guess Steinhoff shareholders will be feeling exactly that now. After all the problems hit and the share price fell from what was R50 down to R7 at that point. Many people were still piling back in thinking that it would get back to R50. and thats when the scandal hit and if you listen to Buffett that’s the time to bail. Now it’s at 87c.

Yes exactly. Everybody tried to look for value within the accounts and say they’ll overcome, but there was just too much for these chaps to handle. Whoever is trying to save the company, just run. You can always look for good companies but don’t look for your fortunes in buying a bad company.

But even with the good companies, we’ve seen with Discovery they’re hitting an obstacle. Tell us about Sasol, you seem to be a little more comfortable than many. It immediately came out that they would be postponing their results on Monday and the share price dropped 16 percent before re-covering on the day. Whats happened to Sasol now.

The share price performance seems to be creeping up and stories begin to circulate that the trading update that they gave a couple of weeks ago will not be adjusted and that the investigation is looking for certain control issues between the contractors and the company itself. It’s probably of a technical nature so I’m reflecting on the share price. The way that it’s performing just shows you that whatever stories are out there, investors are slightly more comfortable with the situation.

That doesn’t detract from the fact that there are going to be massive write offs and it’s going to take a long time for them to recover the kind of money that they’ve plowed into Lake Charles. I’m merely saying that things are slightly better than they were last week but still it doesn’t get management off the hook.

The price has halved in a year in the last year. Does that mean that it’s now offering value or over priced.

You’ve got to decide whether it offers value. You’ve got to be sure that this project actually does what it was supposed to do. That the Polyethelene prices hold and that management gets this functioning properly. We’re still a far way from that. This is a new plant and there’s always teething problems with it. I would sit on the sidelines and see if it starts to function well. Even if you buy it at R4 or R5 you’ll still make plenty of money knowing that the problems are behind it.

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