David Shapiro on Discovery’s ‘blackhole’, SA Inc sell off and the missing prosecution

This week on Rational Radio, David Shapiro spends a lot of his time searching for answers to Discovery's massive sell off which has seen the stock fall to around R100 a share. There's talk of an analyst and a gaping R15bn hole, while National Health Insurance also finds itself amongst a bag full of potential reasons. SA Inc also experienced a marked sell-off recently, with David searching for a reason to buy. While Steinhoff's investor presentation and the topic of Markus Jooste also come up for discussion..David, you've had an interesting week on Twitter. You came out a couple of days ago saying that you've heard that there's a R15bn hole in the Discovery balance sheet. Today, thank goodness you said there isn't a hole. Whats going on there?.___STEADY_PAYWALL___.Let me put it in perspective. We've got clients that hold Discovery, so whenever I see unusual price movements I like to know why the prices are falling – particularly in Discovery's case where the share price had gone down recently from about R140 all the way to R105/R106. We know that national health could affect them, but that's far away and R250bn worth of spending before that really takes off. So it appeared to me that there was more to the story. I investigated and found out that an analyst at Macquarie Group – Larissa van Deventer, had done a report on the insurance sector which she valued and this is why there was a bit of backtracking. She valued certain of their life business on – let's call it a 12 year horizon which was in line with some other insurances, versus a more aggressive valuation that discovery used. She said on that basis that it could leave their reserves underfunded by R15bn. So hence the story. There have been subsequent presentations, I haven't heard Larissa – she canceled her meeting with us today, but I don't know whether it really had an effect on the market. It's a worry that analysts are taking different views to that of Discovery. So that's where it came from. The sad thing is that they've fallen below R100. I'm trying to find out why our market is under such huge pressure. This has got nothing to do with me, the tweet or Larissa. There's a much bigger sell off taking place here which I find particularly disturbing. We've come under severe pressure and it could be a massive emerging market sell off, it might even be local institutions deciding to cash in – when I say cash in, in a literal sense just take some money off the table, leave it in cash earn 7/8 % and wait to see what happens. We've seen shares like Sasol down at R280, Aspen has been absolutely devastated, they're down around under R70 so a lot of value has been destroyed on SA inc. It's concerning because we don't know where this is going to end nor do I know who's behind the sell off..In June Discovery's share price was R150 and It's below R100. By taking the rational approach and a more reflective view, is this not an excellent buying opportunity?.That's what I'm trying to find out. That's why I like to get to the source of the weakness to understand why this is taking place. That's why you start to dig. Why has the share price fallen, why are we seeing such weakness and is there more? It's not insider trading but that's why I always respect the market price because it tells us something that we don't know. We've got to sharpen our pencils and find out why these shares have fallen as they have. It may be a wonderful buying opportunity but I want to be sure that there's nothing happening that I don't know about. I don't want any surprises. If that is the case then it is the same for a whole lot of other industrials as well. But I want to know that there is a recovery taking place. We've seen a big sell off in SA inc and I think as a result of that, there could be some surprisingly good opportunities. For the meantime we're taking a bit of a beating here..Getting back to discovery, if there is a R15bn hole in the balance sheet – sure knock it down below R100 from R126 two or three days ago, but if there isn't – and you appear quite comfortable that the analysts got it wrong and that the company has got the right answers, then surely to goodness Warren Buffett would be saying buy as a result of the fake news..We're going to find that out when the results come out..They're not going to lie to you – it would be out of character if they were to have a hole in their balance sheet. It just doesn't seem sensible. But maybe the analyst has got her reasons. We've had enough analysts in the past who've actually waved flags haven't they? Tongaat, Steinhoff and they go on..That's right. Don't you remember Dion Basson in the old days? I remember he was a superb insurance analyst. So you know he picked up certain issues and was criticised, but I can't say the same. Valuing insurance companies are such a difficult part of the business because you need to understand how those businesses operate. Discovery has got some very smart people. My position is based on why the share price has fallen this far and I'm digging for answers. If management at the time of the results can satisfy us, then it is going to be an excellent buying opportunity. I think they've got a lot on their plates. We still haven't heard about the bank, the overseas expansions. I think a lot of those expansions are funded from money that they generate..But they're generating positive cash flow in the UK now..Yes, I see what you mean. I've got a daughter that works there so I'm concerned. I have an interest there. I have an economic interest in that a lot of our clients are in the shares, so the last thing I want to see is a permanent weakness in the share price..Such a pity that the analyst didn't come to you today to talk about it but I'm sure that's going to happen in due course. Dave, did you keep an eye on the first investor presentation from Steinhoff in 20 months?.I saw that. It's quite interesting to see where this is going, where they are redirecting the business. They want it to become a holding company and not interfere with the underlying businesses. They are also going to proceed with certain legal cases that everybody wants. You can't do anything at all till that's out the way. You've got to get all the cases against the company done before you can actually rebuild this business..There was a question on our interactive channel asking for an update on the class actions and from listening to the presentation and the webcast yesterday, they aren't giving us any update on that because, as you say Dave, until they know… and it's interesting you've got a lawyer as a chief executive, you've got two other big time international lawyers who've just been drafted onto the board to look after the litigation. So they certainly are focusing their attention on getting all of that behind them. But the question of course is Markus Jooste. Still living in Hermanus, still driving his Bentley 4X4, still holding court by those who don't want to believe the realities..I know. That you won't find in America. In the US within a couple of months, the case is sorted out, settled, chap in jail. Bernie Madoff only took a few months – one of the biggest frauds that they've experienced there. I think it's a big problem here that we are not faster to the courts. I think people start to lose respect for the law and also believe that if you're wealthy you can get away with crime..One last point on this and I guess jailing Jooste would have some kind of a reflection, but listening to the analysts today, they do paint a dirty and dark picture for South Africa, but they also say – Azar Jammine and Rhandzo Mukansi from Futuregrowth, both saying this country could turn on a ticky. It's poised to turn but it just seems as though it's taking too long for investors to believe it and some are now losing hope. Are you?.I don't know, I don't like what I'm seeing in the market now. Why I say that is that, when we get beyond a certain point, it's going to be very difficult to turn around – almost like a tipping point, because at that stage people get very disillusioned, they sell out, they capitulate and look for other plans. We've got to move before we get to that point of capitulation. That's what disturbs me about what I'm seeing on the stock market. Also, we don't want to lose those skills. We don't want the people who are running the business to say I'm not investing in South Africa at all, I'm just going to conserve cash and see where this goes. So you start to get this downward momentum which becomes more and more difficult to turn around. For me the turning point would be the SOE's, government addressing Eskom with a plausible plan, something that can work with the right kind of people and a strong message going out there. I'm not challenged by the National Health Bill. I think that's very far away, what is a worry is Eskom. We've got to do things immediately and we're dragging our feet. When I look at the market – and there's just red all over my screen at the moment, it does scare me and scares the people for whom I invest..But David, never forget, was it chapter 8 in Intelligent Investor? The character called Mr. Market who is a manic depressive, who doesn't take any medication, he's very much in the depressive stage now. Benjamin Graham or Warren Buffett might say to you, "see it for what it is" so let there be red. You've assessed the company's value and don't let Mr. Market talk you out of it..I've got to do the research again. Alec you've got to be satisfied. We can't invest on hope and pray..You should never invest on hope and pray, you've got to invest in intrinsic value. And if the intrinsic value of discovery was R150 last week, it's still R150 today. If you can get two hamburgers for the price of one, buy them..I haven't convinced myself yet but that doesn't mean I'm unconvinced. That's why I'm searching for the stories. Once I get the story – even if I buy for R110 or R120 I'll be happy with it. So we we dig for the story..David the digger and continuing to do so.

David Shapiro on Discovery’s ‘blackhole’, SA Inc sell off and the missing prosecution

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