In the inaugural edition of Alec Hogg’s Rational Radio Live, market veteran David Shapiro explains why the share price of Sasol has dropped almost 20% in the last two days – and the reasons behind the double digit drops today of once fashionable Brait and Massmart.
I’m not a duck. I don’t like bear markets. I only come out in bull markets. I don’t do well when the screens are all red. David, it’s taken you a long time to come out but I guess there’s a first for everyone but these markets today are pretty red, hey.
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Yes. Alec, I’m actually surprised I must say, from a global point of view, US markets seem to be holding much better. I think we’re all waiting for the other shoe to drop. Even looking now where they say it’s pretty weak, they’re only down about just over 1% and I think if we look from the peak that we saw not too long ago, they are down about 3 or 4%, which we can handle. I think the big concern is that there could be more weakness. We don’t know where it’s going. It seems as though China and the US are moving further away from any kind of solution and that’s beginning to trouble markets. Alec, you know the biggest story today was the oil market. I don’t know whether you picked it up. Oil came back 5%. Now, you’ve got to read that against escalating tensions in the Middle East – specifically, between the US and Iran and also, where OPEC are continuing to cut production. Oil was booming up and yet today, you have a massive turnaround – a massive 5% cap, which shows you the kind of nervousness that we are seeing in markets.
Poor old Sasol, Dave. They’ve been under a lot of strain with the oil price going down $3.50/barrel. That wouldn’t have done them much good.
No. In fact, yesterday Sasol 13% followed by another 6% today, which is probably a combination of what we saw yesterday – deep disappointment with the cost of the Lake Charles project and the big worry is that they’re not going to make their returns that they’d promised on this ethane cracker and on this chemical plant. I saw a whole lot of analysts now downgrading their outlook for Sasol. Alec, one of the big points that had the share up was that view that once Lake Charles was over, capital expenditure would be out the way and the money would flow to the bottom line. That’s the one point. The other point, as you correctly pointed out today with the oil price coming down; is that commodity prices are also going to impact on their returns so a lot of disappointing people around here.
Dave, on a day like yesterday where Lake Charles comes out (and I guess there would be some people who would be buying when everybody else is selling); for those guys, would they then today, be carried out even worse because there’s another 6% as you said – so, 13% yesterday, 6% today – or would they be doubling up their bets?
That’s interesting, you know. What interested me yesterday is that the JSE is dominated by Naspers. Not a day goes by where Naspers doesn’t make up between 18 to 20% of daily turnover and yesterday turnover in Sasol matched Naspers. In other words: exactly. For every seller, there was a buyer so there were a lot of people who were coming into the stock. I don’t think there were big short positions in the share because generally, people were feeling more favourable towards the oil price and also more favourable towards what Sasol promised. The analysts I think, were more overweight the stock than underweight so you’re right. A lot of buyers who came in yesterday I think, would have felt a lot of pinch. Alec, the markets that we used to talk about back in the 90’s and those early days are no longer there today. You have a huge amount of trading and high frequency trading, which causes massive movements in either direction –-huge amounts of the JSE’s profits or the global exchanges today, make their money more from hedge fund trading and derivative trading and that’s why we see the movements that we do in markets. Highly exaggerated and not anything we were used to in the past.
And big trades – volumes of nearly five million Sasol shares today worth R1.8bn – 20,000 deals. That’s active but there were two even worse than Sasol today: Massmart and Brait. Any stories there?
Well, Massmart came out with a trading update. They gave it at the AGM, a 20-week update. The sales looked okay but when it came down to the bottom-line, operating profit down 50% and they said their headline earnings (this is 20 weeks out of 26, so only six weeks to go). We’re very close to there so we can get an accurate position. They believed we’d be down as much as 60% – now, that’s a huge loss – shocked the market, and that’s why we were down about 13%. Look, a lot of that (and we don’t know the numbers) has to do with currency weakness or the translation of profits that they make from the African operations into local operations into the Rand. We’re going to have to wait for half-year for the major results, but it did shake the market considerably.
This is a stock that was R95. Then they came out with an announcement to say that Guy Hayward (the CEO) would be leaving sometime this year. Well, it’s not surprising. Maybe it’s down 50% on that point a year ago, so you’ve almost got the feeling that the Americans thought they could do better. My goodness. It’s gone from 95 to… What’s it today – 67?
R67.75.
Cheaper. So, if you’re taking a punt at 95, thinking the Americans would come and fix it, you really are licking your wounds.
Yes. It’s been tough enough in retail as it is but what’s gone wrong there, I can’t say. I’m not sure. I always thought that when Lamberti started Massmart out of Makro, they were always leaders in retail (or one of the leaders). Walmart came in and everybody believed that the Americans would show us how to do retail. If anything, it must be on their sell list and it just highlights the difficulties of trading in tight markets like South Africa where growth… In fact, I don’t know if you picked up today in the MPC meeting – the Monetary Policy Committee meeting. The Reserve Bank have now downgraded their outlook for the South African economy from 1.3 to 1%. We all that 1% would be the turnaround from last year where a broker was 0.8%, that it would double and we’d be closer to 2% and slowly, things are getting worse and for the Reserve Bank to come out at 1%, it gives you an idea of a backdrop, which a lot of companies are operating in very difficult conditions.
So, I’ll give you two upsides to that. The one is: there’s only one way to go from here and the second thing is, we’ve got an independent Reserve Bank because they’re not talking up the market. Dave, the other trading statement that came out today (and it bemused me that Brait is still somehow got its supporters) but that trading statement finally gave people a very good insight and this Christo Wiese company is really in trouble.
Alec, I can’t express the disappointment because when they received the money from the sale of Shoprite, they had huge amounts of cash at their disposal and it just appeared that management there were just too gung-ho in wanting to do deals. And you know New Look, which was supposed to be the main driver of their value, is now a zero. In fact, I think they’ve got a liability overhanging them with New Look. It doesn’t even appear but as you said, this is a company I’m trying find NAV. Their Net Asset Value was reduced. They only gave you total numbers.
It’s down by ¼, so this is an investment company. It’s down by ¼. It’s just extraordinary. If you look at New Look in the UK, walking around there, you’d know this thing’s in trouble. You can see it. It jumps out at you. Yet, South Africans are piling money into the company. What did they pay for it, Dave? Was it £700m? It was a ridiculous amount of money.
It’s a huge amount. I just looked at the…they were the R10bn market cap. I’m trying to quickly look and see if I could see where they were…where the shares have come from. Yes, R170 down to where it is today and this was back in 2016 – more or less exactly where we are now. That was three years ago. The shares have come all the way from R170 to where it is today – R10/share.
Yes. They paid £763m for New Look and you can work that out to about R14bn.
I remember. I sat through with management and the whole idea was to get into Russia. They believed they had the right person who would be able to expand into Russia. That was the original New Look. Alec, it’s just one of many disappointments that we’ve had to endure on this market. The losses that we’re seeing on the JSE: yes, a lot has to do with what’s happening in global markets and growth in the South African economy but you can’t ignore the mess-ups that a lot of our companies have made and the issues that they’ve had to handle. From the EOH’s to even Aspen, whom I admire and like very much – just a strategy gone wrong badly – a little too ambitious and having to pay the price now. We’ve been let down by a huge number of companies. We can add Woolworths and a lot of others as well and more lately, Massmart and Sasol.
