Expert insights on today’s markets: Abil, Spar Group, Gold Fields
All eyes in the business sector are focused on Abil at the moment, as the bank has been placed under curatorship. The Reserve Bank stepped in at the weekend to announce its R17bn rescue plan for Abil after its share price plummeted 97% at the close of last week on the back of crippling losses expected by the bank. Developments around Abil were furthered when it was announced today that the trade of Abil's shares and debt had been suspended on the JSE. Taking a close look at the state of Abil and other newsmakers, Gold Fields and the Spar Group is Viv Govender from Vunani Private Clients. – LF
ALEC HOGG: Let's get a more in-depth view of how the market's trading today. Viv Govender from Vunani Private Clients is here. We're going to talk Abil, but just to pick up on the Gold Fields story, it did receive (and it was in Business Day's story this morning): Gold Fields sent out an announcement to say the license is not at risk. It's interesting. I guess, in a case like that, you look at what the market does. If its license was at risk, the market would have collapsed around it but clearly, there's a bit of sensational issues.
VIV GOVENDER: Obviously, when it comes to the mining sector at the moment, there's a lot of sensitivity around the fact that labour has obviously been under pressure. Even during the wage increases, as they did with the AMCU strike in the platinum sector, it comes along with increased job losses. A lot of emphasis has been placed on the fact that the mines have not placed enough emphasis in terms of social and other responsibilities. Personally, I believe that if you want to make a business contribute more to the economy, tax it more. The mining business should be out there to mine. If you think it should be contributing more in terms of social or other compliance issues, tax it (a royalty tax, or whatever). Don't force it to actually be a mining company and a social work company as well.
GUGULETHU MFUPHI: Does this create an opportunity for debate? You have companies such as RB Platinum who had to do a lot of that corporate social responsibility development, but then there is the question. How much can a company do when they're already being placed under pressure to continually increase wages for their workers?
VIV GOVENDER: Yes, as I said, you may have some companies that are either good at it or they're not but generally, you want a company to focus on their core business, a company that focuses on one thing, that has a speciality and expertise in for instance, extracting matter from the ground. Having to deal with social issues and housing issues, etcetera… They should perhaps be forced to pay a higher tax, which would go towards the community they work for and the politicians and the social workers who are basically trained to do these things, should be the ones going in there and doing it.
ALEC HOGG: It's the unintended consequences of trying to do good. You think about Tito Mboweni talking about launching a State Bank a week before Abil, who are lending to the people he wants to lend to and they can't repay it, so Abil goes bust. Who's bailing them out?
VIV GOVENDER: It is a State bank now.
ALEC HOGG: Well, the shareholders are putting in R10bn and the bondholders are putting in another R5bn, so it's an interesting story. The whole Abil story though, is in a way unexpected because it was such a quick disaster when it came, but we've been hearing warnings about this for a long time.
VIV GOVENDER: Yes. Look, the model was basically, flawed. If you want to give credit out, the gold standard for this kind of bank is the Grameen Bank in Bangladesh. The founder there won a Nobel Prize (I think it was a Peace Prize). What they go after in the Grameen Bank is they say 'okay, we lend small amounts of money to very poor people, but we lend them for specific requirements: things such as building up capital, building a business, or increasing something that's going to last them for the future'. It's not for going out and buying for a party or wedding etcetera. Abil, on the other hand, said 'we lend you money, but we're not going to say what the money's going to be for', and the fact of the matter is that many people got into it to borrow money, to consume it.
When you do that, you always get yourself into a pit. When you borrow money to invest it, build up a business, or build up your capacity, you are going to have a better future. If you borrow money to consume, your future's going to be much worse.
ALEC HOGG: Maybe they should pick up the phone to Mohammed Yunus and ask him to come through, and give them some advice on how to refocus Abil. You have an accountant in there now who's pretty smart – Tom Winterboer – but he's never run a Grameen bank, that's for sure.
VIV GOVENDER: The Grameen Bank has been incredibly successful. It primarily lends to women because (not to be sexist) apparently, women are much better re-payers.
ALEC HOGG: But they don't have great shoes in Bangladesh and that's why.
VIV GOVENDER: The thing is Alec, if you give a Dollar to a woman and you give a Dollar to a man, the woman would spend a far greater amount of that Dollar on her family – on making her family better off. A man is much more likely to consume. That's the impression at Grameen.
ALEC HOGG: Consume it. How?
GUGULETHU MFUPHI: Boys and their toys. You were the one who told me that the last time.
ALEC HOGG: I think the shebeens are going to lamenting what happened with Abil.
VIV GOVENDER: Banks, like the Grameen Bank, have been incredibly helpful to the country. It's made the country better off (Bangladesh, that is). People who were looking to go and borrow money for things that are important, such as educational needs, to extend their houses, and to start small businesses: not all of those people are entrepreneurs.
ALEC HOGG: It's a really good call – the point you make there- but just getting back to the market itself: did you have any clients who were playing around late last week? We had Brigid Taylor here, telling us on Friday that it was a free option. Well, that free option of 38 cents is now worth nil, as of today.
VIV GOVENDER: It's possible.
ALEC HOGG: It's worth nil. If they're going to be diluted to….
VIV GOVENDER: I don't know. That's true. It was a free option and the question is 'what would the payoff for this be'. It ended on Friday at 30-something cents. We're looking at the situation where there's perhaps a one-in-ten chance that it could have turned around slightly. A one-in-ten chance still needed to go three or four rounds, which was not an impossible amount. It was a possibility – a very remote possibility. We're talking about one-in-ten or one-in-twenty, but had it turned around, you would have gotten returns of 20 times.
ALEC HOGG: So the traders have had a punt, but they've lost their money.
VIV GOVENDER: Yes, they've lost their money.
ALEC HOGG: And the bondholders have had a punt: they've lost ten percent of their capital (at least). Certainly, the Reserve Bank says that at the moment. That's really the big loss, but Abil will survive.
VIV GOVENDER: Abil will survive. Look, it fulfils some kind of purpose in the country. The big banks don't much like getting in the space that Abil gets into. The only problem was that Abil was going into places or was lending in cases where they shouldn't have been lending. There is definitely a need for credit. If you look in all parts of the developed world, credit is available rather freely and there's a reason for that. By having credit, you're able to take people and get them through small humps in terms of circumstances of the moment and give them the ability to turn ideas into profit etcetera. These things are important for an economy, especially for an economy like ours where we can't rely solely on the private sector to create jobs.
ALEC HOGG: I used to serve on the EXCO at Absa – I'm not sure if you're aware of that – in the 1990's and one of the things you never did was you never borrowed short and loaned long. You never borrowed from wholesale markets and loaned to the retail market. Clearly, that is one of the things Abil did.
GUGULETHU MFUPHI: Alec, I just want to interject there because there's another group of investors that we're losing out on, and that's the BEE investors. Abil does have Eyomhlaba and Hlumisa and it's interesting to log onto their website. They say there's no guarantee here, that investors might not get their money back – so again, another group of investors who unfortunately, are on the losing end, as I've mentioned.
ALEC HOGG: They're gone, like all shareholders and I think that's a very good point. Maybe before we do Abil to death (because we still have Cas and we also have Leslie Maasdorp coming in where we'll talk about those issues), what about the big news from Spar? It's been overshadowed by this, but a fabulous deal.
VIV GOVENDER: Yes, and it appears to be a very cheap deal as well. Look, apparently the operations they're going to buy are going to be in the region of about six percent of their earnings and about 30 percent of revenue. The margins there are therefore a bit lower, as you would expect towards normal competition etcetera. I may have some issues around it. Why is it so cheap? That could be a question here. Tesco recently (and Tesco would probably be the equivalent of Checkers in South Africa as they are operate in the same region): they've had real trouble in terms of their profitability etcetera. It could be a case of getting into a market that's under pressure and I've seen some interesting analyses from places like Walmart, etcetera. They're saying that the online shopping, which is much more developed in the first world than it is in South Africa, has started taking a little bit of growth out of their models. For instance, you see places like Amazon.
Amazon goes out and gives you, for something ridiculous such as R1000.00/$100.00 per year: you get free next-day delivery of your items. If you want to buy milk, it's not exactly an item where you'll need to go to the shop to make sure the milk is the right kind of milk, etcetera. You tick a box of milk and bread…you just tick all these essentials, Amazon will deliver it to you the next day – free. They'll give you access to something like one million songs that you could play on your iPod or your phone, etcetera. They'll give you access to their books. I think you get a free book every month. You get free movies to watch as well as free television – all for R1000.00 per year ($100.00 per year), and this is the kind of competition that you are seeing retailers facing in those parts of the world.
Can you imagine South Africa, if you had a situation where for R1000.00 per year, you would have all these extras plus you could just tick a box on your phone or whatever, and have your milk, bread, and all the essentials delivered to your house?
ALEC HOGG: That's an interesting point, because the price looks like a steal. However, it's not South Africa, where Spar is going to be operating, so good luck to them is what you are saying, in other words.
VIV GOVENDER: Yes. Firstly, it's a lot more aggressive in terms of competition. I think the most successful international operations from our retailer have been mostly to the developing world: places like Africa. People who have gone to developed world, Woolworths notwithstanding (we don't know how they're going to do as yet, but generally, have been under a great deal more pressure because that's a much more competitive market than we are experiencing.
GUGULETHU MFUPHI: Tough times ahead or maybe interesting times ahead in the retail space with Woolies also going into Australia. Many thanks to Viv Govender from Vunani Private Clients.