πŸ”’ David Shapiro explains the shock R35bn dive in Rupert company’s valuation

South Africa’s favourite market commentator gave us a glimpse of the insider’s world in this week’s episode of Rational Radio with Biznews.com’s Alec Hogg. Most investors were bemused by today’s R35bn slump in the market value of global luxury goods group Richemont, one of the major counters on the Johannesburg Stock Exchange (and hence in SA retirement portfolios). There was nothing untoward in the public domain, no official news announcement nor any other explanation for the price dive. But ever the sleuth, Shapiro’s digging revealed that the sharp selloff was sparked by an investment analyst’s report from Swiss bank UBS which took a dim view of Johann Rupert’s group – sufficiently powerful to take 6% off the share price. Shapiro helps us understand this, and offers insights into Sasol, Naspers and Prosus in his always entertaining contribution.

David Shapiro joining us now as promised. I’ve just been talking about a Search fund – somewhere between angel investing and private equity – where young entrepreneurs are supported by a fund, invest in an SME, go in as the chief operating officer and then grow the business together with the owner to eventually take over in time. Is’nt that an interesting model? Have you come across it before?
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No. A search fund. It’s really interesting. I know angel and I certainly know the other extreme. I’m an accountant, my brother’s an accountant, my son’s an accountant. And why I say that is that I certainly recognise the need for good controls, or some kind of person who knows accounting, who knows banking, knows regulatory environments that help companies grow. You find people who have got ideas and get very excited about them, but they don’t really understand the kind of journey they have to go through in order to make it a successful company. That’s the boring part of entrepreneurship – having some accountant sitting on your shoulder, just holding you back, or at least guiding you. So it’s very interesting that you’ve got people like that. It might not be accountants but it’s certainly people – I would imagine – with business experience and disciplines.

I loved what Warren Buffett said. “The language of businesses is accounting”. You wouldn’t open a shop in France if you didn’t understand French. You wouldn’t start a business if you don’t understanding accounting – or at least have someone who does on your team. Looking at the JSE without knocking Sasol again – because it went up this week on the oil price – what do you make of this?

First of all oil is stabilising, but I don’t think that takes any of the pressure off Sasol. I’ve been meeting various clients and attending presentations over the last couple of days and I think there’s a deep seated anger out there for the way that Sasol has performed, the way that they’ve held back on their accounts. And the point you make in terms of discipline, EOH had a trading statement this morning and it’s going to take years for them to re-establish this business – all of this points to discipline – the whole Sasol story is discipline. How can a company of that size, of that magnitude with that kind of power, have allowed things to get so out of control – the Medupi and Kusile type – out of control. You start off with a budget. How can you just miss it by mountains? It’s just so far away from where you originally planned and off course.

Remember the chief executive David Constable. He was brought in from Fluor Corporation. A young Canadian engineering, superstar, paid more than any other CEO in South Africa. He was in control and in charge – completely it seems – when he started this thing. Who does he hire to build it, but Fluor Corporation where he comes from. Surely there should be some kind of a check and balance against that? If a guy’s got a hammer everything looks like a nail. And now the shareholders sit.

Of course they do. And I think those questions should have been asked in the early stages. Did they go through the right kind of procurement exercises and tenders? But that it’s gone so badly, that it’s gone pear shaped, is just a mystery. Sasol started in the 50s or 60s making oil from coal and had such a proud record. To be where it is today is a very sad indictment of people along the way. They had great engineers and great people so where has it gone wrong? But I can list 100 companies on the JSE that have gone through similar type of situations where I think sometimes their ambitions have just run ahead of their skills or disciplines or both. It’s something – if ever you want to write a book – to go through 69 to 85 to 87 and take the track record of so many of those listings and how they failed and why. A lot comes down to managements over ambitions. They could run small companies – couldn’t run big companies – but that doesn’t apply in Sasol’s case.

David, you cannot get bored in South Africa. No matter what you do in this country, boredom is not an option. Richemont down 5% today. What’s the story?

I picked up a story that UBS downgraded them – they looked at all the luxury companies. I haven’t seen the report yet and I’ve got to dig on why they downgraded them. But they’ve also downgraded Swatch so it’s it seems to be Swiss watch companies. Yet they’ve revised their targets and it seems to be in a positive way. There’s something that’s worrying the market on the watch side as opposed to luxury a theme. I think that’s why we’ve seen them knocked today.

It doesn’t seem fair, people who’ve seen the UBS report, sell the shares and the rest of us have to find out second hand – thankfully we’ve got a friend in David Shapiro – most people wouldn’t have a clue.

That’s what we do. When I see unusual movements like Richemont, we start to dig. Google tells you somewhere along the way that they’ve downgraded it. So I’ve yet to go and find out the exact reason for the downgrade. The research is an analyst opinion and I don’t know whether that’s really in the public domain. So it’s some analysts opinion that has caused it – not really anything to do with the company – and that’s what we have to look at – big names like UBS do have a powerful say and can sway markets.

It must be quite ego boosting for the analyst who wrote that report, to see billions and billions of dollars taken off this stock. But tell us about Naspers and Prosus. I’m looking at Naspers and saying this is really cheap and you should be buying it in South Africa.

I agree with you. First of all it came onto the market a week ago with such a lot of fanfare. We saw Prosus got up to R1,200, Naspers itself was doing pretty well and then just the last day or two we’ve seen big selling and I can’t understand it – all the reports and views that we’ve collected – have been really positive. So while they’ve come under so much pressure in the last two days is a bit of a mystery. They’re dominating trade in a big way on the JSE, they’ve added up to about 30 to 35% of the value traded on the JSE. Even today – I took out the numbers – Naspers making up 23% of trade, it’s down over 3% and Prosus 2.5% down on 10% of trade that 33% of the volumes we see are attributed to those and doing a lot of damage to the index.

It’s also I suppose giving you a different perspective on the JSE itself. There were many who got out of the JSE stock, on the concern that the split would see reductions in the trading volumes.

I think for the meantime, it’s still trying to settle down. I would imagine we will see this for some time, but take take it away, our market will be very very quiet. We’ve seen action – there’s been a bit of action in Sasol and today there’s lots of action in Richemont, a lot of trading around Naspers and Prosus – I wish I understood trading – modern trading, high frequency trading – the kind of of trade that computers do. I’m still very old fashioned when it comes to the market and still look at it in that same way that I did maybe 20 30 years ago, so I sit here confused at the swings that we see dictated by this high frequency trading.

You’re not so old fashioned David and you cause chaos on Twitter…

David Shapiro is the deputy chairman of Sasfin securities.