South Africa’s favourite market commentator David Shapiro reflects on Sasol’s disastrous month and finds a silver lining in a share price that he reckons looks incredibly cheap; and encourages the Ramaphosa Administration to make the right call when deciding on the new Eskom CEO – because the person at the top, he reckons, has a critical influence on the success (or otherwise) of any business, especially big ones. – Alec Hogg
So the whole Sasol setup looks like they might be getting things together.
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Well, the results came out. I think they were in line with expectations, but I’d like to put it in perspective. The big question is – because management is being replaced, the two joint CEOs stood down – to actually bring to life this monster that they’ve created in Louisiana, which is a cracker plant. While they will get all the engines burning, it’s taking a bit of time to get it up to full production, but because this is in the chemical industry there is always a concern around the prices that you’re getting for the product produced. There’s still a little way from getting production to the levels that they intend. What surprised me, if you do the numbers, this share price should be trading a lot higher because you’re virtually buying that cracker plant in Louisiana for nothing. According to the numbers – what they should be generating in cash – we should be seeing a share price for Sasol round about anywhere from R350 to R400. We are still hovering in the area of R286 a share, which tells me that the market is still cautious about where Sasol is heading. But on the face of it – it’s a share price that should be a lot higher – so if they do get things right I think you could see things picking up but I’m saying a big IF.
What about the departure of the joint CEOs.
They had to fall on their swords. This was a mess of gigantic proportions – mainly due to huge overrunning costs and lack of control over the overruns – so it was the right thing for both to step down. I don’t think they could have escaped what probably would have come next, an interrogation of how they allowed this to happen. It was quite a damning report. It just highlighted a fundamental lack of control and governance – not stealing – rather just incompetent management of the project.
It’s such an interesting story, when they first postponed the results ahead of the postponement, we had an interview lined up with the joint CEOs. Sasol got hold of us and said the joint CEOs are available on Monday morning. This was on Friday. Over the weekend they got fired. That sounds to me like a board that has just had enough.
Absolutely right. I think it’s the first time we’ve seen that exercised, they had enough. The whole board has to be questioned and interrogated. These decisions are not made solely by the CEOs – sometimes they’re persuasive – but that’s why we have non-executive directors to act for other stakeholders which include the employees, the outside contractors… They got off lucky, I think the board members got off lucky. The two CEOs did the right thing but markets are still not warm. I like to see what shareholders are thinking, because if they really feel that things are going in the right direction, we should see the share price a lot higher.
You know the new CEO?
No, not at all. It’s from within – which is the right thing to do – people are familiar with things, but a lot rests on this Louisiana project. And I don’t know enough about that side of the market. I must also point out – which I love about the markets – the market doesn’t need accounting. It marks down the cost of the projects to what they believe is a fair return. So the market is very efficient and it’s only later that Sasol’s official accounts will write down that plant to where the market is. So the market has written down their plant on the strength of what will be a fair return over time. So if you look at the market cap of Sasol, it’s already marked down the cost of that $12.5bn project. So we’re trading at about R180bn market cap. $12.5bn equals R183bn – the market cap of Sasol is R179bn Therefore you can either say that the Louisiana project is in at zero or alternatively it’s been written down to a fair return.
Extraordinary. Talking about big projects. One of the big projects that South Africa has been carrying like a millstone, is the Medupi and Kusile power plants. Now we we hear that there is going to be a new chief executive of Eskom (Andre de Ruyter was confirmed as CEO after the interview had taken place) – we haven’t heard his name yet – have you had a chance to have a look?
No I haven’t. But they need a petrol or electricity man, a person who understands energy. You cannot leave it up to a political appointee or someone who doesn’t understand the industry. And if we are ever going to get it right we’ve got to start moving in that area. The time for politics is gone. This is really the foundation of the South African economy. Without power, you just can’t function. Once they appoint him, they’ve got to listen to him. They’ve got to go along with what he suggests – which I think is going to be very difficult – but absolutely necessary. We’ve seen what’s happening at SAA. at the moment the country is being crippled by it and by the strike.
But is the country being crippled David? When last did you fly SAA? And when you listen to what Tito has to say – I loved his quip – when we were in the budget lockup and he was asked about it, he said it’s so unfair that the rich people are being subsidised by taxpayers so they could fly around the country through SAA, whereas the poor people have to use trains that keep breaking down. There is a complete misallocation of resources and yet we don’t seem to be getting that story through. All we hear is that the workers – justifiably – are pretty p’d of. It’s the corruption of the managers that’s caused all this trouble now they have to lose their jobs and so on. I suppose it’s a bit of a Gordian knot.
It is. We haven’t got the money to finance us through this difficult period – there just isn’t the money around. They should be making fortunes of money. They’re in an incredible position being here on the southern tip of Africa. Not only are they flying into Africa but they are flying all over the world from South Africa, with the right airlines, with the right kind of service. Why should we be travelling Emirates or Qatar or any of those other airlines and making our trips longer than we need to. We should be capturing those air slots – to Australia to anywhere else. You have no alternative. The best news I’ve got, is that – I fly to America – and I’ve avoided SAA but I heard they’re putting on the new A350s, which is an updated beautiful efficient new plane. Of course that’s going to swing my vote as long as the costing is right.
We all want to fly SAA. I think the whole country wants to support the national airline, but not while it’s in such a mess and has been plundered in the way that it has. David just getting back to Eskom. Can one man make so much of a difference?
Oh absolutely. If he’s a strong willed person. Don’t underestimate leadership. Let’s have a look at the richest companies in the world. From Bill Gates, the influence that he had – Bezos, LVMH’s Bernard Arnault – very powerful leaders who have got huge influence on the direction of the companies. Warren Buffett. Will Berkshire be the same with the same kind of personality or sway that he has over market? So I think it’s very important to get a strong man in that position. We can go through the whole of economic history in South Africa – the big companies where leaders are important – so have the right kind of person yes, it can make a big difference.
Talking about leaders, Allan Gray who was excruciatingly shy and created an extraordinary company in the Allan Gray Investment Council, did you have a chance to even meet him?
I did, on numerous occasions. As you say, a very reserved man but with a very strong head. The one thing I’m going to say is that – I started on the market in the 60s and 70s and I’ve been there ever since – and there was a period in which a lot of the institutions were under scrutiny. Allan Gray set down certain rules that you never broke. They conducted themselves with exemplary attitude towards ethics. They were ethical – to the point of you could not influence a trader by taking them out for lunch or inviting them to the rugby and so on – with them they were absolutely straight down the line. And those were the ethics that were set at the top by Allan Gray. I always remember him for that. They produced incredible people who have come out of that stable.
It’s almost like, if you find somebody in the asset management game who’s worked at Allan Gray, you feel comfortable with giving them your money because they’ve gone through that ethical process. I guess in journalism it used to be the same. The old Business Mail – the Rand Daily Mail – you knew these guys weren’t going to provide envelopes. The same from Allan Gray, you respect them, you respect their opinions and you know where they stand.
So he set those governance rules and yes a good school to have been brought up in and a big loss to South Africa.
He was 81 years old when he passed on from the Eastern Cape and highly celebrated there, the whole Gray family – the Gray clan – we had a lovely piece on Biznews Premium, one of the cousins Don Gray wrote a tribute to his cousin Alan and he said that anyone in the family who wanted to study anywhere in the world, including Oxford – he sent quite a lot of them to Oxford – Allan Gray would pay for it. Quite apart from all the money that he put into education for other people. Many thousands of disadvantaged South Africans who benefited from his largesse. So I was glad that he came back to South Africa after his stint in the US with Fidelity and then built an amazing company.
And he did it without fan fair, without headwinds and that’s a true benefactor and so great respect for him and a very sad loss.
