Market analysis: Banking in SA, Bidvest, retail and investing in Africa
The big stories competing for business news headlines this week were the downgrading of the big four banks in South Africa by ratings agency, Moody's; Bidvest's move to up its stake in Adcock Ingram resulting in a confidence boost for Adcock's shares; and in company results the retail sector was in focus with Shoprite CEO Whitey Basson staying positive despite a troubled trading environment in South Africa. Bringing this all together for us is Director at Dreadnought Capital and expert market analyst, Brigid Taylor – she has an in-depth look at the news headlines, and adds her investment insights from a big picture Africa and South Africa perspective. – LF
GUGULETHU MFUPHI: Well, to help us get a more, in depth of how the markets are trading today, we are, joined by Brigid Taylor, a Director at Dreadnought Capital. Hopefully you won't shoot me down today.
BRIGID TAYLOR: Not today but we seem to be quite, good about coordinating our dress sense. It's fantastic.
GUGULETHU MFUPHI: Yes, I love it too.
BRIGID TAYLOR: Yes, me too.
GUGULETHU MFUPHI: I'm not complaining. Yes, you see, Alec is feeling left out now. Now, to draw you into the discussion Alec, to touch on one of the stories that Thumi read out for us, the ratings.
BRIGID TAYLOR: Yes.
GUGULETHU MFUPHI: Is there any relationship between the downgrades that we've seen from Moody's, downgrading four of our big banks, together with Capitec, and the Rand or is that, just speculation?
BRIGID TAYLOR: No, I think that the Moody's announcement for me was, really I know there was a lot of criticism around the stability of the South African banks. I think, however, what we need to keep in mind is what they really were highlighting, is the underlying vulnerabilities in the South African economy. One, because of the fact that the consumers are under so much pressure and we're running such, high unemployment, and the continued pressure, on consumer's remains, so disposable income is being eroded. How do we service debt, and the vulnerability around banks' loan books is, being brought into question, and I think that's really what they were trying to say. I think what this draws into question is, how accurate and how backward looking are the rating agencies, if they're not in line? If we look at what S & P had to say, versus what Moody had to say, where's the discrepancy?
Surely, it should be a model that's run according to statistics that are available, information that's available, and make concise decisions, across the rating agencies. There shouldn't be such a massive divide and there's been a lot of speculation around the credibility of the ratings agencies, currently. We look at Capitec, downgraded, and they asked for the rating and they paid for the rating. That's an interesting divider.
ALEC HOGG: And then downgraded on two-points that were false, and the Reserve Bank said 'these points are, actually not valid'. Yes, it's interesting but on the markets themselves, Mr. Joffe, I tried to get hold of him. He obviously saw the phone ringing. He switched me off, you know, as people do. I don't think he's with Cell C. People thought I did that to them all the time, at Cell C, because they could never get through, but anyway, I think Mr. Joffe is a little happier today because his Adcock share price is up six-percent. On the suggestion that Bidvest will take a controlling share, which was always the game plan anyway, they've done it continuously in all other instances that they've done something similar to that. Would you be buying the shares at 52, given that Brian paid 70 for them?
BRIGID TAYLOR: Well, you know, I think that the markets have come back a little bit. You really just have to look at whether or not you think that pharmaceuticals still have value. I still think that healthcare has, got some form of value, in terms of where we're going to, if we look at all the Ebola scares etcetera. People are concerned and there is a driving force behind that nature of business. I think, yes, you're right. I think he is, probably quite relieved.
ALEC HOGG: Yes, we're talking to the Competition Commission a little bit later, on that story, so it is interesting. The Competition Commission won't let him get the business and down-size it. They won't let him retrench anybody. It makes it tough to do business in South Africa, if you've, got a Regulator who says 'okay, we're going to protect jobs. It doesn't matter if your company is inefficient'.
BRIGID TAYLOR: Well, this is the thing and we've said this before on the show. Unfortunately, I think, there's a conundrum for business in South Africa. You have a low growth projection. You have a lot of cost pressures, which erode your profitability, and you've got a consumer that's under pressure, as well as the fact that business itself, conducting business in South Africa, there's a lot of barriers to entry, in terms of BEE. In terms of your employment ratios etcetera, as well as the fact that they type of protectionism around the employee, is so stringent, in terms of driving better business. What are we trying to achieve? So we've got to ask ourselves where's the balance and are we getting the balance right and, potentially, I'm not sure that we are currently.
GUGULETHU MFUPHI: Are you reading into the retailer's story, after we saw the poor trading statements, the end-results, from a local perspective, the share prices took a bit of a knock. Even though there is a slight, recovery today.
BRIGID TAYLOR: Well I think that the interesting thing for me, on the shareholder's side it is still…we looked at Shoprite earlier, and Shoprite was quite an interesting scenario because they've invested so heavily in Africa. I think they've put up a 120 stores, in the last year. That's significant; however, it is a 15-year plan. This is not a quick fix, so if you look at Africa specifically, your lower LSM groups are growing significantly and your medium, your middle-sized economy is growing significantly, so the business plan is right. However, that initial investment has to be made. The concern though, is in the South African market because of what's happening to the consumer, retailers are just out of pocket.
ALEC HOGG: I was reading more about Nigeria and Shoprite's investments there. They've got only ten stores. They could have 300/400/500 even. The problem is the land legislation, in Nigeria, is not exactly accurate. There's lots of little issues, also I heard, for instance there's a lot of protectionism, not heard but read that Dangote Cement, for instance, makes a 60-percent profit margin, because they don't allow cement imports, so if you build a shopping centre in Nigeria, it will cost you double than what it would cost in South Africa. There are many structural issues that, that country has to get right first as well.
BRIGID TAYLOR: Well I think so and I think that we deal with this, in terms of travelling into Africa. This is something that we've discussed quite a lot. I'm doing quite a lot of work with Thomson Reuters and they've got a tool that access information around land reformation. It's a good way to be able to market or manage your experience around what is available and what is not available. Not just on hearsay but what is, in terms of the public it should be in the public domain, so if you look at the likes of what's happening in Africa? There's a lot of talk now, we're doing a congress in March next year, talking about, what are the success stories? What really works but what doesn't? What are the hindrances? Is it around land reforms? Is it around things like you're talking about? The infrastructural issues that pertain to that specific region, taxation, legalities, and how do we combat those?
From a perspective that there's so many variants in the pot because we are not just one economy and we are never, going to be. It's going to be a robust economy, in terms of the African Continent. That's the challenge for business owners. However, they are very keen to allow business in and it's about negotiating, and encouraging skill creation, and looking at education, to create that investment portal. More and more that I travel into Africa, it is quite encouraging to see that there really is an impetus to do that. Whereas I feel like in South Africa, there's an impetus to almost, stop that.
ALEC HOGG: Well, look yes, Nigeria again are a good example, 40 years of military rule, infrastructure crumbled. The thing that surprised me, probably more than anything else, was only recently the Nigerians require that you need a driver's license to drive a car. There's a huge culture between what many people in the first world, and in many ways in South Africa, we're a first world country, and what is actually happening on the Continent. So there are opportunities but we've got to learn a lot.
BRIGID TAYLOR: Look, we take for granted that, and I often say this to Europeans, is you take for granted all of the developments that you've made are…they are just something. It's like a habit. You know that it happens, it functions, it works, and it is just something that you assume. In Africa, all of that still has to be built and a lot of it has been in a process, so the very minimum legislation or acts, have been put in place because there has never been real need. Now, all of a sudden, there's this interest and you're seeing it from offshore as well as locally, in terms of doing business in Africa. Making the assumption that, they are already in a first world type scenario. They are not but they recognise that, so it's about ensuring that the right people are educated in the right way.
It's about ensuring that the right people are educated in the right way, to get things put in place that speak to what's happening globally, so that people are speaking 'apples for apples' or we are talking in the same language to one another. So we know that if we shake hands and we do a deal that the law stands. That the law means something and that there is a reference point, and a point of delivery. I think that that is something that is slowly starting to develop. But, as I mentioned earlier, if you look at what's happening, in terms of their growth, it is going to be a process over the next 15 years, of really seeing Africa change, in terms of the frontal frontier.
GUGULETHU MFUPHI: Going back to basics, no doubt. Well, thank you so much to Brigid Taylor. She's a Director at Dreadnought Capital.