RECM’s Jan van Niekerk analyses FirstRand, Steinhoff and Ascendis Health

FirstRand came out with its highly anticipated results today, despite seeing a 21 percent jump in full year earnings, its share price is down over two percent on the day, perhaps due to the lack of a special dividend being announced. Regardless of FirstRand's share price, it is certain that the financial services group is in a better position than competitors. Analysing FirstRand's results, as well the expectation of Steinhoff's results, and Ascendis Health's position is RECM's Jan van Niekerk. For analysis of the headline making news for the day, have a listen to this podcast. – LF

ALEC HOGG: Well, Johan van Niekerk who's the Managing Director of RECM is standing by in our Cape Town studios. Johan, you must have been interested in the last point that we made in the news headlines – Trans Hex. I know you guys have been pretty bullish about it for quite some time – 21 percent improvement in the output – not bad.

JAN VAN NIEKERK: Alec yes, good afternoon. It's not a bad number. It's not surprising either. We know that diamond prices, globally, have been stable and have been improving. In addition, the currency has moved in the last half, so if you look at the comparative numbers, it's very much in line with that. However, we're glad to see that the guys are actually still producing and selling at decent cash prices.

ALEC HOGG: Well, the financial results from FirstRand for the year-to-end June, are dominating most of the headlines in the corporate space this morning. Twenty-one percent is pretty good going when you compare the struggles that some of the competitors are having – specifically Standard Bank, I guess. What are your brains trust making of the numbers?

JAN VAN NIEKERK: Alec, it's interesting. If you look at the different divisions, one of the smaller divisions is Wesbank and that was up two percent on a divisional level, but for the rest it's pretty much smoke paying on 20/21 percent for all divisions. The retail bank, the corporate and investment bank, and the private equity division, so this is just a phenomenal business. We know that banks are fairly complicated businesses and the team that's been running this business for the last number of years, has done incredibly well. It's interesting to note that the net interest income for FNB has been improving over time and we know that's the 'Holy Grail' for many bankers. Their strategy of adopting technology, having less branches, and having people use technology more must be paying off in the sense that it seems like its attracted more deposits for them to use.

In some way, they've been able to link that money at better margins, so those are very good numbers and we would commend them on those.

ALEC HOGG: R255bn market cap is where FirstRand is at the moment, putting a little bit of distance between themselves and Standard Bank. Is this something that you would have anticipated a few years ago?

JAN VAN NIEKERK: Yes, it's interesting, Alec. At the time, 5/6 years ago, this business had a bit of a hiccup in London with their trading division and at the same time (if you want to compare to Standard Bank now), Standard Bank walked on water. It's interesting how, from a valuation point of view things have turned around. Today, the market is definitely appreciating FirstRand much more and still holds some level of scepticism about Standard Bank's changed strategy of coming back from global emerging markets and focusing more on South Africa and Africa.

ALEC HOGG: We are expecting the Steinhoff results in a little while. I'll be popping out there this afternoon to talk to Markus Jooste. We have had the trading update. If you were standing in my shoes, what questions would you be posing to him, Jan?

JAN VAN NIEKERK: Alec, the burning question on most investors' minds is about their global ambition and their growth strategy outside of South Africa because it seems quite clear that management have stated those ambitions, so one would like to get a sense of just how hard they're going to push that. The other thing that (as a South African investor) one would like to know is just how things are on the ground in South Africa.

ALEC HOGG: Yes, it is interesting. The JD Group, which you guys have made some serious investments into, was described by a columnist on Biznews the other day as being 'the drunken uncle of the Steinhoff operation'. It's a 'drunken uncle' who seems to be sobering up – at least, moving in the right direction.

JAN VAN NIEKERK: Alec, there's quite a bit that can be taken out of the JD results yesterday. Obviously, the headlines are all about the increase, the impairments, and the provisioning on the loan book. However, if you look – fundamentally – at the bottom at what's happening in the business, the best way I could describe it to my family this morning was to say 'Steinhoff has bought this house and they're busy renovating it. Currently, if you look at it you can see the windows are knocked down, the floors are removed, and the garden is dead because the builders are there', but they're doing all the right things. We can see that Head Office cost is removed. The implementation of their software system in the business is almost time… In line with this kind of strategy, it's seems as though they're not going to stay involved in the financial services part and they've lined up a buyer for that business.

You can definitely see that Steinhoff has a very specific plan with this business and as you've mentioned before, someone like Steinhoff wouldn't pay a lot of money to own a large chunk of a business, and then not create value in there. We think there are quite a lot of things going in the right direction in the JD Group.

ALEC HOGG: As far as Steinhoff itself is concerned, the shares are still available at below that R52.00 rights issue price. Would you be a participant at these levels?

JAN VAN NIEKERK: I'm sorry. Is that in Steinhoff?

ALEC HOGG: In Steinhoff, itself. I know you're big in JD, but in Steinhoff itself…

JAN VAN NIEKERK: It would seem that the market is appreciating Steinhoff for what it is and they're quite optimistic about the future, so we have not participated in the rights issue at Steinhoff and probably not at this level either.

ALEC HOGG: So it's R1.50 below the rights issue and still not juicy enough for you. The share that's really been doing very well – a small stock that's been doing very well – in the medical sector, is Ascendis. We have the CEO, Karsten Wellner coming into the studio in a little while. It listed last year in November, has done far better than anticipated at the time of listing, but it's been through acquisitions. Is this the kind of business strategy that would make you nervous?

JAN VAN NIEKERK: Alec yes, we've met with Karsten and his team, and we looked at the business. We understand why the economics in a business like that is fantastic and at this stage in the lifecycle, it makes all the sense in the world for them to be growing through acquisitions. If you look at some of the other examples – I think Aspen is a fantastic example to set – I think there is a lot of room for growth. If you look at the market in South Africa, there seem to be other lines of products that they can still incorporate into their business. They also have the backing of a very strong team that goes from coast to coast, to work with them so we think this is definitely a business with opportunities. However, as always, one would be concerned about a strategy where it is 'acquisition at all costs'.

I think this is the first time that Karsten's going to be talking to the market about those acquisitions and what they've meant, and as an investor one would have to get your head around exactly how much work they do in preparing for those acquisitions. It's not completely un-sensible, but if they do acquisitions just for the cost of it then we would be concerned. They just don't have enough of a track record to assess that yet.

ALEC HOGG: That will be the area, which we'll focus on with him. How are these newcomers to the business actually performing? Just from a broader perspective Jan, we've seen the oil price come under pressure. Of course, we know in this country, the gold price has been struggling. What is that telling you about the picture for the economies and for the world as a whole, when you look ahead? Clearly, these are big things but they do affect investors' opportunities.

JAN VAN NIEKERK: Yes Alec, you mentioned gold and oil at the same time, and in the same breath there. I think they are two different things working there. The peak oil scares etcetera in 2008 has caused society to put a lot of effort into how we dig for oil, how we find it, and how we produce that. There have been a lot of investment made globally, into getting carbon energy out of the ground. I think that's starting to pay off and we can see how that's influenced the whole energy complex all the way from natural gas – even coal and oil. The one scenario that the world is probably not preparing for is for a prolonged period of low energy prices, which could be a boost. We don't know how these things work, but it seemed as though a lot of work has been put into that area. We struggle to get our heads around the gold price, so I'm not really going to comment about that.

In the South African economy, it does seem as though things are tough on the ground. When we speak to those business that are involved primarily in the local economy and there seems to be a trend with most businesses to start doing more and more business outside of the borders of our country. It seems like this time around, as opposed to the late 1990's/early 2000's, companies are quite sensible in the way that they approach diversifying their businesses outside of our country's borders. As an investor and as a market commentator, one has to take heed of that savvy/clever businesspeople are starting to restructure their businesses in that way. Again, as we spoke the other day when Billiton was spinning off their South African operations, all of these things seem to be giving us the same messages in that it appears that it is easier to do business in other places, than in South Africa for now.

ALEC HOGG: Let's hope those messages are being heard loud and clear where they need to be hears. That was Jan van Niekerk from RECM.