Expert market analysis: Capitec, Sun Int, Metair
In the latest string of events related to Abil's troubles, Moody's downgraded Capitec Bank late on Friday afternoon. Today, Moody's share price has taken a substantial hit and those in the know are lambasting Moody's for making such an abrupt, irresponsible move. In other company news Sun International has announced that it will be partnering with international hotel operator, MINT, focusing on its African assets he deal will ring to the tune of R664 million. Also in focus is Metair with regards to its interim results announcement today, reporting a 16% drop in first-half headline earnings per share. Breaking all of this down and analysing the moves is Mohammed Nalla from Nedbank Capital. – LF
GUGULETHU MFUPHI: Let's pick up on that Capitec story before we actually speak to Gerrie Fourie, the Chief Executive, in a moment or two. It's rather unfortunate that the Ratings Agency's performing like this, given the fact that now the market is reading a bit too much into it.
MOHAMMED NALLA: I have stronger words than 'unfortunate'. You've seen the stock. It's reacting already. It's down five percent on the day and it's irresponsible in many respects. We don't have to go into detail. You've seen the SAAB's commentary about it. We've seen Capitec. They put out an announcement as well and basically, highlighting a couple of things that I guess regular viewers of the show would know. There are key differences between the business models of Capitec and African Bank. If you look at Moody's statement, they state two things: (1) they were questioning the SAAB's willingness I guess, in terms of shoring up a lender and the SAAB came out and criticised that particular counter, and (2) the similarity of the business models. Any market participant, who knows the smallest amount of detail on either of these two companies, will know that there are massive differences between the two. Firstly, (and Gerrie will actually tell you this in your discussion with him) they have a transactional base.
They have a retail depositor base, and these are fundamental differences that were very different regarding African Bank, which really just tapped capital markets without a defined transactional business and without a depositor base as well. Therefore, it's a different animal. Unfortunately, markets (especially banks) trade on sentiment – this is what really happens – and that sentiment is so sour after two weeks of being bombarded, and the weekend papers with Abil's negative news flow coming through that even the whiff of some negativity sees the stock down by five percent.
ALEC HOGG: We know there are some big short positions in Capitec as well, but I think that apart from the two issues you made a point of, Jean Pierre Verster, who went short of Abil and is quite happy with Capitec, he says one of the reasons is Capitec writes off bad debts after one month. Abil did it after five months. Now, if you know anything, which clearly, you do (working for Nedbank Capital), that's a massive difference. One doesn't know what is motivating Moody's to do this; perhaps the one horse has bolted. They want to make sure the other doesn't either.
MOHAMMED NALLA: The problem, Alec, is this could precipitate a crisis. You see the stock fall this sharply. If we see any blowing out in terms of their spreads and in terms of where their paper trades, they may struggle to actually go and raise funding. When you see depositors in their bank start to panic and go to the bank, you could precipitate what's called 'a run on the bank'. Unfortunately, that comes with much wider, systemic risks to the rest of the system and in this particular instance, as Capitec – and even as the South African Reserve Bank has told you – in many instances, it's unfounded. For me, that certainly leaves a bit of a bad taste in the mouth. Let's see if Moody's actually comes back with anything further to that, but as you say, the press releases out there for now, I guess, are sticking to their guns.
GUGULETHU MFUPHI: Another company out with a trading statement today, restructuring some of their sub-Saharan African assets is Sun International. Now, we often confused this with Tsogo Sun, but it does seem as though they're taking a different approach to their operations.
MOHAMMED NALLA: Yes, we saw them out early this morning. It's interesting in that there will be a consideration of around R600m to R700m-odd that comes through. They will still be involved in many of those operations, so from an operational perspective, it looks as though they still maintain control over the casino operations specifically, but they're selling off some of the actual underlying assets. In addition, the new player – MINT is the acronym for it – comes in and will be responsible for refurbishing many of those properties. You will recall a player like Sun International. They have many properties out there and perhaps they just said 'let's maybe get a smaller player that's going to be a lot more hands on to refurbish this and then we'll play in the spaces that we're comfortable playing in'. The market seems to like that. We saw that stock up, I guess in line with the broader market, but up over two percent today, so I'm guessing that the guys who watch this quite closely think that's good news.
ALEC HOGG: Metair down two percent on those results.
MOHAMMED NALLA: Yes, a little bit of a disappointment I guess, in terms of the Metair results. We probably have to split that out into two parts: (1) fairly recently, during the course of the last year, they acquired a Turkish company and they seem to be happy with the performance of that Turkish company, but then the domestic – Metair firmly in that manufacturing sector – and we know how fractured the labour relations have been there. They specifically cited the Labour Relations as a consideration in the announcement that they put out there, so I guess the market doesn't like it. In aggregate, if we look at most manufacturing concerns and specifically with exposure to that vehicle-orientated market, that Metair actually has, that's a tough space. It's a tough space. The NUMSA strike specifically, will have affected them as well.
Even just for the domestic outlook, we've seen commercial as well as passenger vehicles coming under pressure, specifically from the beginning of this year. Again, I think you're seeing that starting to come through in terms of the earnings and that consumer under pressure and specific sectors under pressure is likely going to be a trend that we should see impact on earnings of related companies over the course of the next six to 12 months.
GUGULETHU MFUPHI: Mohammed, just before we came into the studio, you were discussing a property company that I've never, ever come across Alec, and you said that it's actually one…
MOHAMMED NALLA: MAS Real Estate, but I'm glad you did. It's a little known property company – and I say 'little known' because it's not on the Main Board yet, so they're not a Main Board listing. It's called MAS Real Estate and for those of you, who watch that sector, it's borne out of that Atterbury stable and it's their offshore arm – so specifically European equity exposure. It's very much in a similar vein to a NeppI with a slightly different risk profile. They had some nice corporate action last year. They raised a lot of money. They went, acquired that Karoo land, and the bulked up the portfolio. Now, it's starting to look more and more like a real player out there in the market. They are going to be considering a Main Board listing and they were out with results. We didn't have the chance to look through all of the results in detail, but in aggregate, that's one of the stocks that's off everybody's radar.
People out there, go and have a look at the announcement. A good friend of mine actually flagged it for me and said 'go and have a look', and I quite like the dynamic there in terms of getting an 'outside of South Africa' exposure, but with some growth potential and then in time, the possibility for a nice Euro-denominated yield to come through as well.
ALEC HOGG: They're reporting Euros, I see.
MOHAMMED NALLA: Yes, so that's really the appeal here, Alec. As with a NeppI or with a MAS, you're probably going to be pricey with a fair amount of gold, so it's not going to be a healthy dividend payer just yet, but they will report in Euro and as you get that earnings growth coming through, it's coming through in Euro terms and you'll know. I've always said some offshore diversification is definitely prudent. This, in that property sector specifically, maybe for those who wanted a bit of a property flavour to that.
ALEC HOGG: They traded at R19.40. I'm just looking at it very quickly.
MOHAMMED NALLA: Probably R15.00 or so…
ALEC HOGG: It seems to be in that region, so at a premium to NAV – but I suppose it depends what the NAV asset value book market…
MOHAMMED NALLA: In addition, that's telling you that the market's pricing in a fair amount of growth. You'll see that stock's traded probably from around R15.00 when the NAV was down at around R9.00/R10.00, so it's had that premium. The premium probably stayed more or less static, for now. I do think the value unlock will be when they do consider Main Board listing. Liquidity will pick up. It's not a very liquid stock. When liquidity picks up and when it actually comes back onto everyone's radar, is possibly when you start to see some activity and maybe, and maybe you'll even see that bump the premium up a bit further. We want to see that earnings growth coming through as well, so be cautious around paying a premium if it's not justified.
ALEC HOGG: One for the notebook. Thank you, Mohammed Nalla. He is the Head of Strategic Research at Nedbank Capital and you can see what kind of focus they have on strategy over there.