🔒 David Shapiro: Many years since we’ve seen such great value on the JSE

In the latest episode of Rational Radio, SA’s favourite market commentator shakes his proverbial head at the excellent value offered by industrial companies listed on the JSE, pointing out some of the obvious bargains. While Shapiro will be doing his homework on exciting new plays like the JSE’s first Cannabis stock Labat Africa, he’s excited about the medium-term upside potential of blue chip shares that have been hammered by Mr Market’s Coronavirus reaction. Fascinating insights and fresh investment ideas – as always. – Alec Hogg

Alec, the market value of Hulett is R400m.
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Tongaat Hulett. Really? They’re down to that? 

Yes. In other words, that’s what the market’s valuing it at. With all those rolling lands and exactly as Dave said, all those processing units, ArcelorMittal was valued at R100bn maybe a few years ago. It’s down to R1bn now. So, you can buy all those steel mills for R1bn. It’s mad.

You can buy Newcastle for R1bn.

Well, you know it. If anybody knows how the processing, the plant involved and what a steel mill is…

I was an operator in a steel mill for one long – very long – university vac. 

And so, I think those real assets in South Africa are just being chucked away and valued at absolutely nothing.

Would you have a go at Labat Africa?

I would look at it. Oh, absolutely.

Because if they get it right, there’s cannabis.

There are a couple, cannabis and the other one is plant food, where companies are developing plant food – new substitutes. Yes, it’s a wonderful theme. I handle other peoples’ money so I have to be very careful with it. I can’t just be frivolous and take gambles with it but we look at those and we study them very carefully. So, I’m excited about where we’re going and where the world’s going in the next couple of years.

Dave, you mentioned Tongaat Hulett. I did talk at the top of the show to Dave Woollam about the sale of the starch operations – R5.25bn roughly a half of the R13bn in debt, so they’re going to halve that but it seems to be a company that’s still struggling to find its way out of the problems that it’s in.

Absolutely, and that’s why you can buy the company for R400m-odd. How they’re going to make the other R8bn…they’ve got the land but no-one wants to buy the land at the moment and if you can do what Brian says – start converting it…

Take the sugar and put it into cannabis.

Or something like that. 

Just think of that. Wow.

It’s something to look at. There might be other products that they can grow that would have a worldwide acceptance… This is land and its beautiful land. You know that area far better than I do. This is KZN.

Cannabis grows when you spit the pips out as you saw at Melrose Arch. It grows double in KZN and even better in Mpumalanga…

And if he’s got the processing and he gets a head start on everybody and can process this and turn it into whatever product they need, there’s an industry. You know, you can create industries. In this country, we’ve got to be innovative.

An industry that has done well for two players but not for the third, is mobile phones. Cell C is still having its problems. I see that Blue Label’s result were just out. Now, they’re talking about selling water – measuring metres for water. Why in heaven’s name did they go into Cell C in the first place? 

I asked them that question and I think they were badly advised and perhaps overrating their own capabilities and I say that in a nice way. Where other people had failed, I don’t know what they thought they had. In fact, I had a conversation because having monitored what was happening in other markets… If you look at the US, it’s down to three operators. Sprint is just gone. I think you’ve got T-Mobile, AT&T and Verizon. That’s it. The whole of the United States. Why would you have four to five here?  Leave it to MTN and leave it to Vodacom, maybe Telkom can find a small space in that but they wrote off R5.5bn-plus in two years. I mean, that’s a massive destruction of wealth.

How do they keep their jobs – the Levy brothers?

I don’t know. 

It’s not a rhetorical question. It’s more of ‘do they have the equity that ensures that they control the company’ so that they keep the company or would it be the board that says, “Sorry. One mistake. It’s okay.”

Well, I think the board’s responsible for that mistake as well. So, it’s the same board that can’t fire itself but as an outside investor, I’m surprised that no-one’s actually asked that question. How do you write off…? When Peter Matlare wrote of R2bn-odd for Tiger Brands in Nigeria, he didn’t last long after that and so it goes. A lot of other managers, having written off massive amounts are shown the door. In America, it’s almost immediate. So, how people hold their jobs like this? It’s going to take a long time for them to get their credibility back. People are going to question what they’re doing and I suppose it’s a very…what do you call it? It’s like a club and they still probably attract…

A bar mitzvah club?

It could be.

Isn’t that what they used to call it?

I have to tell you in a nice way because you’ll appreciate it. When they went into the deal and I’d made a comment on TV, they phoned me back and I said, ‘Brett, Mark, the shuls need you don’t lose this money’ because they are very magnanimous. They are very, very charitable chaps and I think they kept… They did a lot of good work with the money when they had it and I said ‘don’t lose it’, which unfortunately, has happened.

Well, Tongaat have also lost it and today, we saw the RCL entrants and it was interesting to see that their sugar is a gross part of their business whereas in Tongaat, they’re very concerned about it pulling them further down. I don’t know if you had a chance to look at RCL.

I haven’t but this came out of the Remgro stage – Rainbow Chickens and that. I have to look at that. It’s also been battered recently and that. I don’t know. That’s another story. Where does Remgro go? Some of these old businesses that we built our reputations on, that we used to follow so closely, have just kind of gone nowhere and I don’t know whether this generation has gotten too old. I think they all need to re-look at their business models.

Well, the numbers are confusing again because headline earnings are down by 2.5% but they say ‘underlying headlines earnings up 24%’, so it’s once again these confusing numbers.

Oh, Alec. 

Surely there must be a way to clean all of this up so that it’s simple and you can understand it.

I’m with you. I’m an accountant. I’m a Chartered Accountant, you know, and it confuses me because you want to look at the whole worth of the business and it’s very confusing. Even this Infra-16 is extremely confusing and I’m saying, “Why are you introducing these standards, which make things distorted?” If you want to know, ask Buffett. If you read his newsletter, it was all complaints and moans about mark to market and how it’s distorting the underlying value of his business. If there’s anybody who knows how to value a business, it’s Mr. Buffett – the true value of the business. He’s moaning and groaning, and complaining and saying, “Ignore all that” and I think for a person who doesn’t understand accounting; reading these results is very difficult and if you feel confused, don’t worry. Everybody else is confused as well.

But that doesn’t fix it because you’re trying to help people to invest and to understand. You mentioned Warren Buffett’s annual letter. He also has been a vociferous opponent of EBITDA and Charlie Munger – who’s 96 or 97 now – similarly and yet, I still see in the financial community, EBITDA is still… In a nutshell, what is EBITDA and why is Buffett so against it?

It’s Earnings Before Interest, Tax and Amortisation. Those are real expenses. You can’t ignore them. And that’s what they’re saying. They’re saying in the operation of a business, interest is a very important factor because if you’re overborrowed, interest is going to be high. What accountants and analysts are trying to look at, is the actual operational side. They’re saying, “Let’s look at the gross profit – your trading profit as being a true reflection of this.

So, if you had a pile of cash, you could go and buy this business with your cash and then you would make all the EBITDA so the cash-flow would come to you. But surely, you’re going to pay tax on it anyway, so why don’t you factor the tax…?

Tax is a very important factor as well and certainly depreciation is a massive factor. What is depreciation? You’re allowed to write off your assets but they give you that write-off so you can replace it with cash, if you understand what I’m saying. You’re writing off a machine, but that said, it’s giving you the opening to put money aside to buy a new machine so they’re saying ‘yes, machines are going to depreciate’. It’s a real cost, and if you haven’t provided for that, you’re going to get caught because you’re going to buy a new machine, so I agree. I just think it’s absolute rubbish. To me accounting is an absolute fraud today.