LONDON — Veteran South African markets commentator David Shapiro is in top form in this, the latest episode of the Old Firm where we swap notes on the hot topics of the past week. The conversation starts with Friday afternoon’s quickie divorce after the entrepreneurial marriage of the year (Brian Joffe and Kevin Hedderwick) and moves on to lessons for investors on fallen angels EOH (which may not recover) and Sibanye-Stillwater (which looks a good bet to do so). In between we unpack the ongoing Eskom scandal and assess why the global top brass at McKinsey are staying schtum (did they know?), Sage’s appalling behaviour towards whistleblower Bianca Goodson and the sudden return of CEO Eric Wood in the building that Trillian shares with Shapiro’s business. – Alec Hogg
It’s over to Johannesburg and a warm welcome to David Shapiro in this edition of the Old Firm. Well, Dave, some very interesting news coming out on Friday. I was having a chat with Riaan du Plessis, the CEO of Phumelela. They’ve got nice, solid results. Big Rand hedge that’s come out there, (not too many people followed that one), but there was another bit of news with Kevin Hedderwick – formally Famous Brands, and most recently tied up with Brian Joffe but no more.
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No, 3 months and they parted company. I’m trying to get my head around it in the sense that here you have 2 very powerful figures, and I would imagine, (I think of late) and I’ve always had a soft spot for Brian (I’ve known him for many years), but of recent…I think the company that he created, Bidvest, I think the managers that he taught and mentored and that, I think have gone on their own and want to be on their own. Bernard Bernstein at BidCorp and of course, Lindsay Ralphs of Bidvest. I think Brian saw this as maybe a new life Long4Life but I suppose when you’re 70 and then you take in another chap of 70 or in his late 60s or something, and you start a business. I suppose you’re going to find a personality clash.
I think when you’re kids, when you’re in your 30s or 20s or that, and you start businesses – I think you’re probably a lot more tolerant. My read and I’ve got no insight to this at all, I’m just reading it from the outside. I probably think it was difficult for them to maybe get together – 3 months to pursue your own interests, you know there was a clash and markets responded negatively. The market has marked down the shares but it came as a bit of a shock to everyone that, after 3 months they probably couldn’t see eye-to-eye and have moved on. It doesn’t take anything away from either of them. I think they’re both brilliant businessmen but it’s probably hard to get married at the age of 70, and try and change your personality so yes, it’s a big talking point.
Well, you know, David – if you were to dump Linda.
I say it in a nice way.
If you were to trade Linda in – first of all, she wouldn’t be impressed. All your friends would be very upset but you’d find it very difficult to replace her.
I think nobody else would want me. I think you get used to each other and as you’ve grown up, I think it’s exactly like that. As you grow up you learn to live with each other. You tolerate all the nonsenses, she never closes her drawers and I go wild and that but I’m not going to change her but I suppose to find a new partner at the age of 70 – I think it would be very difficult, and I would imagine that and it doesn’t mean that either of them are or there’s anything wrong with them. I’m guessing a lot, Alec, before I get into trouble. I’m guessing what mind have happened.
But you’re putting a nice spin on it, it’s the 2 of them, 2 old buffalos, putting them around the same fire.
Yes.
It may be not the smartest thing to do. It might have worked but the chemistry didn’t. Have you heard anything more about why Joffe left Bidvest in the first place?
I would imagine very much the same kind of issue. I think Brian has done what he needed to do. You can’t take anything away from the businesses that he built. He’s left a legacy there and those businesses I still think are running on his legacy but I think his strongest point, and this is where I have respect for him, is the management teams that he built there and they can still continue. The fact that the share price never really collapsed after he left, and it’s gone up – save economic conditions and of course, that’s going to influence stuff but there was no major sell-off. ‘Joffe has gone and that’s the end of the company,’ quite the opposite. Lindsay is adapting himself pretty well. Although it’s not connected they’ve turned Adcock Ingram into a decent company now and I suppose they’ll put it on the block and sell it. Then Bid Corp itself, which is Bernard Berson, in Australia, who is still doing very well. I think maybe Brian’s time had come to say, ‘they don’t really need me any more – time to do my own thing,’ and there’s nothing bad with that.
But the shareholders of Long4Life who are betting on him and Hedderwick, now only can bet on him.
They can and he’s got to find someone young that he’s going to allow. I think, and my own personal view is I think he’s in a very difficult area of the market at the moment. I looked at Holdsport’s results, which they have now taken. Sorbet as well, which is not a quota company. They’re not easy to run in a very tight economy. People are watching their pockets. I don’t think they’re spending as much. Competition is coming into the market, certainly with Holdsport’s so, I don’t think it’s going to be an easy ride upward. A lot of people put a massive premium on Brian and are probably entitled to do it because of his past track record but I think, as reality hits us, as we learn a little bit more about these businesses, I don’t think it’s going to be that easy. It’s not going to be a second Bidvest but don’t take anything away from Brian. He’s one tough customer to handle.
Yes, but it’s very interesting to see that the entrepreneurial businesses sometimes operate or perform differently to the more corporates, and you think in this respect, of Discovery. Who’s share price has come under a bit of pressure recently. Even more so EOH – what’s going with those 2, let’s start with Discovery?
Discovery has come back quite a bit. Their results, (how does one explain?) – when you talk about entrepreneurial, it’s a very entrepreneurial company. I think Adrian has built a team of very clever people around him. They’re not scared to go into new areas. It’s that starting to give rewards but the results that we saw in the past that were driven by growth in SA are not coming through anymore, the 20% – 25% growth. So, you’re seeing a much more tepid growth. The shares have run ahead and I think they have run ahead on the view that the foreign companies would start to contribute in a bigger way. But they hit somewhere around about R150, but over the last few days we’ve been selling and they’ve come all the way back now to R137. So, we’re seeing a bit of a reversal, which is probably due. Maybe the run-up that we saw wasn’t due so just watch. I can’t identify who’s selling but they’re starting to underperform in the market.
EOH is something else. EOH over the last decade or so has just produced incredible results. Every year growing. Remember Asher? Do you know when I remember Asher Bohbot? When you were at 702 and he left in the 90s, I can’t remember when it was. I remember him coming in, in a very nervous way sitting down there and perspiring. You were interviewing him and he was a newcomer, it was a small company, and from that day to where he is today or where EOH is today – is an incredible growth story. He built a superb company – always growing and a lot through acquisitions but over the last year or so, there’s been question marks about governance issues. About employing people to get government contracts and a lot of accusations about how they got that business.
Asher has resigned. The results are still pretty good. I read Irnest Kaplan quite a lot and Ernie knows that area. He always comes out fairly positive about them but the share price has just gone backwards. It must be down by 25% – 30% this year, against fairly good results. I can’t identify why that share is as weak as it is without any real news around it. In fact, I’m just looking now. In over 12 months it’s a share that’s down about 45%, this year alone 43%, and the results show a completely different path. Results are very strong and good. The new management there stand behind those results and say, ‘things are good.’ But the market, (for some reason) just keep selling them down and down. We can’t get to the bottom of the story there. It’s one that we need to pursue.
Somebody knows something that we don’t know, and certainly we’re getting lots of whispers. There might just be a whispering campaign. That’s a stock that was R171 a share a year ago – it’s now R93 so, that is a significant decline. But there are a lot of question marks over any company, given what happened with KPMG and McKinsey, any company that’s doing a lot of public sector business, and that’s where EOH makes its money. It’s deep in the public sector and the way that you used to do business in the public sector it appears, certainly from McKinsey and SAP, Software AG, and KPMG on their side is that if you just cross the right palms with silver, and usually those palms where from the Gupta family, and you actually were in. That does appear to be something that’s uncovering now.
That’s exactly right, you’ve put it very articulately and I think people are beginning to question those businesses with strong government connections, and how is the business? I think there’s a lesson to people who might read this or who might be listening to your podcast and I’ve got a very favourable response, I must say. But Alec, when a company, and this is the Madoff syndrome, let’s call it that. When Madoff was making profits, regular profits of 10% every year at a time where the market was going down. That begins to create suspicion. In other words, where they start to outperform and they’re doing things that no one else could do you start to ask questions. I think this is one thing that bothered me long before the share price of EOH began to fall. I kept saying, ‘how can they produce these stunning results?’ Where every other business in the country was coming nowhere, well certainly in that area of the market as well, in IT services? Then it starts to, you start to worry. Maybe these are not real and it’s always a worry, where you just get these consistently, good, solid results. Nothing ever goes wrong. In EOH every division was outperforming and that also raises alarm bells. I know for young students or young people who look at the market they might think I’m silly but it’s a warning sign.
Well, those same young students weren’t in the studio with us again, reminiscing about the old Classic FM studios, David, when Gary Porritt of Tigon was sitting there. You said, ‘no, this guy is a wizard because he makes profit out of thin air.’ You didn’t mean it in a compliment.
No.
He wasn’t too sure what he could take from it but clearly, that was another example of a company that came from nowhere. It was actually, one of the top 40 on the JSE, from completely fabricated hot air.
Yes, the Sunday Times, every time around about November they have the top 100 companies or something like that. When you become a top 100 company it’s like the kiss of death. Whoever gets the prize it’s like the kiss of death because you know, give it 3 or 4 years, that company is going to fall and I haven’t got the records in front of me. Whether it’s been EOH or all these businesses that made that list because it’s based largely on share price appreciation. All of them have never maintained their top positions and you could take it that, give it a few years, they’re not going to be there any more or way down. So, with respect to the Sunday Times or Business Day, or whoever the organisation is called today – I always watch with cynicism.
David, you will remember David Carr, my colleague.
Yes, of course.
In the mid-80s David Carr was the editor and I was the deputy editor of Business Times and we had this idea that instead of using the old system, which was just based on earnings-growth. We would use a new system, which was on return to shareholders so, to a degree, David, and a much lesser degree, me of course, because I was only his number two, are responsible for that. They’re still using the same system. The system we brought in there, (return to shareholders) and it throws up these anomalies so, the companies that do perform. Dimension Data was the champion for a period of time, if you recall and we know what happened there was well.
That’s right, yes.
So, it maybe wasn’t the best system but we thought it was a better way of reflecting it than earnings and I’m sure Stephen Mulholland, of course who was in the previous iteration, and used to be in the earnings camp. He’s probably saying, ‘yes, I told you so.’ Now, you can see. These youngsters.
I suppose you have to refine these models all the time and make leeway for maybe the size of the company, liquidity, a lot of issues. I think many of the companies tend to be very small businesses that are pushed up and get to the top. I think perhaps that’s where…Listen, Alec, in the 80s, and I’m coming to your defence here. In the 80s I think there was a lot more liquidity in the market. Now you’ve got the distortion where you’ve got small companies and it’s quite easy to push them up. You know what I picked up today, just on that? Just an interesting stat. I was reading The Economist over the weekend and there’s some good articles there, particularly on the bull market, but SA is one of the few markets in which the size of the market, which is R14.1trn (I’ve converted it into Rand), is 3 times the size of the actual underlying economy, which is R4.1trn. A lot of that has to do with the heavyweights of our foreign listed shares like British American Tobacco, ABM, Naspers, and Richemont (all of those), who don’t do business here or don’t create value in SA, to an extent. So, I think our market is way out of line with the underlying and that’s an argument we always bring up when we start to talk about the exposure of the local community or the previously disadvantaged black empowerment as owning a percentage of the JSE.
That’s a fascinating stat.
So, just interesting how things have changed. It wasn’t always like that.
What’s the average internationally, (market cap versus GDP)?
That’s interesting, I must actually look that up. I’m going to add something else as well. I know we worry about the size of Naspers in relation to JSE but it’s no different in Hong Kong, where Tencent has a massive influence on that index. Even in the US, the FAANG – Facebook, Amazon, Netflix, and Alphabet/Google – you know what I’m talking about. Those 5 companies account for about 10% of the S&P 500 so, you’ve got 5 stocks. So, you do get this concentration risk in a lot of the industries, with a handful of shares making up big chunks of the index. That’s an interesting exercise. I must look at that. I must look at the markets with regards to the underlying GDP.
There was something in the Financial Times of London this morning about the FAANG’s in that concern. The one you missed there, David, was Apple, and it is true but if you have a look at the performance of those, Facebook, Amazon, Apple, Google, and Netflix – over the last 3, 4, and 5 years, they’re exponential companies and that’s why, as they’ve expanded they’ve got an ever-increasing slice of the market overall. There are some who now say, ‘10% is too much.’ In the context of the way those companies are continuing to grow, maybe it’s not enough. Naspers is 20% on its own, in fact 25% of the SWIX and, as you say, Tencent a similar thing in Hong Kong.
Talking about those heavyweights. Glencore is in our SA Champion’s Portfolio. That’s done fabulously well. I spoke to Mark Ingham, who you know is a really good independent analyst, and he’s thinking that it might be getting a bit toppy now. His fair value is a little below where Glencore is trading at the moment. What’s your feeling?
I think that possibly, he would reach that conclusion mainly on trying to forecast where metal prices are going to go. We’ve had a big recovery in those shares. I think Glencore, at one stage, was really an underperformer because of the burden of debt. One has got to look at Ivan who actually, in a very quick succession, managed to sell off a lot of assets and has alleviated debt where they’re now starting to expand. I think Anglo, Billiton, and Glencore (the big heavyweights) have been pushed higher on the prospect of China reflating and pushing up its economic growth again. I don’t think we’re going to see it. If anything, I think the prices will stabilise at these levels. We know that in China there’s a big push to combat their pollution and that might create closing a lot of factories, mills, and so on, as they push also to increase consumption above production or industrial production. I think the outlook is becoming a little more muted on those shares.
I’ve read a lot of stuff on Anglo as well and most of the analysts are also what they call, ‘neutral.’ Not necessarily underperform but market perform and that so, probably Mark is right. We’ve had an incredible run so far, this year. Glencore has been one of the top performers on our market. Alec, it’s not in the index, it has absolutely no weight in our index and simply because it’s free-float here is small. In fact, I’m looking over 12 months. It’s up 71% here. Since the beginning of the year it’s up 41%, and I think the reason is we haven’t built up a local following. I find it crazy that we don’t include it and funnily enough, ABN is also not included in our index.
Hence the big weighting of Naspers because those two are out. If they were in Naspers would be there.
Exactly.
David, just on a similar topic. Sibanye-Stillwater as it’s now called, after the Stillwater deal – I was just looking at that share price last week and it’s gone from a peak of R44 to R16 today. R16 is a little bit off its bottom point. Now, you know Barry Davison very well, the former CEO of Anglo-Platinum, and I met him for lunch Friday a week ago, and he was singing the praises. He’s a director of Sibanye. He says that they’ve done all their numbers, with the electric car move, etc. Palladium is still in a good spot. He says they’re not uncomfortable about the Palladium price. In fact, they do think there could be even upside from these levels, even though it has performed well. As a consequence of that the Stillwater operation, he feels, is not being properly valued by the market through the Sibanye deal. What’s your thought in all of that?
We don’t know enough about it. Neal Froneman comes in. He doubles the size of his business by buying Stillwater, which is not in SA. It’s not a mine that we have a very close understanding off. We’re also very suspicious or very dubious about the platinum price for the reasons that you’ve mentioned, no one is quite sure where it’s going. He had to raise enormous amount of debt or dilution to buy it but that’s Neal. He’s got a lot of courage, a lot of guts, and I suppose he’s got to work his way out of here, probably when the shares hit R70 or so. I think it was probably a little too rich but Neal is a kind of person who will trade his way out of this. I think he’s a great miner. He showed it with Sibanye and give him a break. Would I buy them at these levels? Probably this is the level to buy them. R16 is starting to form a bottom so, you can see at these levels people are beginning to believe in him and pick them up. I’m cautious of the mining sector. My own, personal view is I’m very cautious of it. I prefer the FAANGs. If it’s a choice of going for Sibanye – I don’t know whether you’re a technology man, I would assume you are. You’re always forward looking – I would go for the technology companies above some of our miners and just get away from some legacy issues and go there but you follow Neal very carefully. I like his views and I like where he’s taken this business.
David, let’s close off with on one of the issues that is confusing me. The whole Eskom story, where we’ve had a rollercoaster ride. We’ve had a succession of management, and the most recent CEO or interim-CEO or acting-CEO, whatever he was, has now been removed or rotated, which is the latest euphemism that these fellows use when they’re trying to describe something only they understand. It was like the oil stock, the SA oil stocks that were rotated when they were sold. The problem there, by the way, is emerging very fast because the people who bought the oil stocks, the strategic oil stock, they want them, they want them now and they want to move them out of Saldanha Bay so, that’s going to be an interesting story that’s coming through. But getting back to Eskom. It looks, on the one hand, like a complete mess. It looks like you have, well we know that Trillian (the Gupta front) has raked off R100’s of millions, if not billions, from the Eskom deals that McKinsey did for it. That’s all coming to the fore. We also know and today Bloomberg showed that the so-called contract that didn’t exist does exist. They’ve seen it – they’ve got copies of it. We’ve also seen the Eskom board perhaps justified in doing its most recent action but there’s so much in between that people are terribly confused. What are you making of it and what should we be looking at?
I’m in the same position as you, trying to make sense of it and where does this lead? The worry is how do you undo that deal? How are you ever going to recover the money from McKinsey without a major court case, and how are you going to recover that money from Trillian, which I suspect went from Trillian to the Guptas’ to buy Optimum. I think there’s a series here. I think whoever buys the rights to this series, I think is going to make any other business show pale into insignificance. Whether it was an Enron? Remember, WorldCom, Enron, and those scandals that we had? Even the Madoff scandal – I think this is much deeper than that and we can’t get to the bottom of it. We can’t get to the bottom of it because government is very slow in actually unravelling this whole process. But whether that money is written-off or whether we can recover it – I have my doubts. Without major litigation and in any case where are you going to find it and where does it exist today? Probably your best case would be against McKinsey but I think the Trillian money has vanished and it’s going to be very difficult.
McKinsey is being very quiet as well. McKinsey is still trying to brazen the whole thing out. Yet deals of this status and of this size have had to have gone through London. They’ve had to have gone through David Fine and his boss, the global boss, Dominic Barton Yet they’re saying nothing.
No, they haven’t and that’s also an issue. Whether of course they don’t want to say anything because their legal advisors have advised them to say nothing but whatever you read of Bianca Goodson, etc. If you read those statements there’s clear indications that there were meetings there and there doesn’t seem to be any work that has been done. Again, you’re dead right. Numbers of those kind do go through various head offices but Alec, it comes back to your point of government contracts. When you deal with governments, where the levels of corporate governance are low you’re going to know that there’s going to be problems down the line. I think that’s the sad thing. I know so many of the characters here. Trillian are on the floor above us. I see their parking lot is empty. I did see a brief appearance by Eric Wood, who hasn’t been around for a long time. I saw him on Friday walking around here so, obviously, there are a lot of issues. Whether these chaps remain in the country – I think that’s going to be another story? I think they’ve probably all gone, or vanished, or in hiding or somewhere but what a horrible standard.
You say, he was walking around then. He’s not in jail then. He certainly hasn’t been arrested or anything.
No, not yet, no. I just saw him. I haven’t seen him for a long time. We’ve got Glencore here as well, on the 3rd and 4th floor.
Have you seen them?
They’re always around. We’re on the ground floor here. The neighbourhood has gone, Alec. The neighbourhood has gone.
Nice company you keep, David. The whole thing about Bianca Goodson. She’s an incredibly courageous and brave whistleblower who really is the person, outside of #GuptaLeaks, who’s got this whole thing going. She then gets fired by Sage Accounting. Can you Adam and Eve it?
No, I cannot believe that. I believe…I don’t know whether Ivan Epstein is involved at all. I don’t think he’s that kind of person.
No, he’s not.
Isn’t he? Thank goodness.
You’ve got to put that on the record otherwise you’re going to get him on your back as well.
Yes.
Ivan called me immediately when he saw it and he said, ‘no, I’d never do this.’
I know Ivan well. I know his association with Sage and that, and it’s just so out of his character to have done something like that so, I could only assume that he wasn’t involved and that it was some other person who might have done that but to fire her for doing something like that? I thought she should have been made CEO so, a very brave lady.
Yes, Ivan Epstein left Sage in September 2016, he said. It’s a whole year and a few days ago but the decision…
I didn’t know that.
He retired.
I know he’s doing property development and he’s doing a lot of other things.
He’s an entrepreneur, Dave, and he sold his business, remember Softline, in there and he stuck around for a long time, but he’s back to his entrepreneurial roots, he tells me and having a lot of fun with it as well. But that story is one that is going to haunt Sage globally for years and years to come because once you put it onto the internet everybody knows about it. You can put as much marketing material out there to say how wonderful you are but if you decide to fire a whistle blower, who’s a national hero of her country because she’s uncovering corruption – wow, you really aren’t doing yourselves any favours.
I wonder if it says something about Sage Contractor as well, and I’m speculating here? With whom they’re involved as well that maybe they didn’t want to upset certain clients but that’s crazy? I don’t know. I’m sure Steven Cohen is still involved, which is Ivan’s brother-in-law, and again, he’s not the kind of person who I think would have engaged in that activity of firing Bianca.
Strange times. David Shapiro talking to us from Johannesburg in this edition of The Old Firm.
