RECM’s Van Niekerk: Key message in disappointing Shoprite numbers
The team at RECM are straight shooters. Founder Piet Viljoen has imbued a culture that seeps through the pores of his colleagues. Including the CEO Jan van Niekerk who provided the rational view on today's major financial news events in our CNBC Africa Power Lunch interview. It flows through the discussion, starting with support for Capitec from its former CEO through to Jan's perspective on the BHP Billiton de-merger of its SA assets into the appropriately named "SpinCo". But the key message for Van Niekerk is contained in very disappointing results from retailer Shoprite, whose shares dropped 7.5% of the numbers. – AH
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ALEC HOGG: Jan van Niekerk is in our Cape Town studio. He's the Chief Executive of RECM. It's interesting to see that Capitec share price bouncing, Johan. I'm not sure if you picked it up, but Rian Stassen, the former Chief Executive has bought R1m worth of shares – showing his confidence.
JAN VAN NIEKERK: Alec, good afternoon. I saw the share price bouncing. The shares have been hammered a bit in the last couple of days and we've seen responsible commentary from Capitec management. I think they need not necessarily reassure the shareholders, but I think their job is to reassure the depositors with the bank, and I think they're doing quite a good job of it.
ALEC HOGG: Last time we spoke on the whole Abil subject with yourself and your colleagues from RECM, you did say you weren't keen on the equities, but you did like the look of the bonds. How has that investment played out?
JAN VAN NIEKERK: Look, the bonds delivered a ten percent haircut, so all investors that owned secure bonds had to take a ten percent write-down, and those portfolios of RECM and that exposure, have done exactly that. Exposure-wise, we've managed to keep a small part of our portfolios. Those investors – who were not invested in the secure, but in the unsecured bonds and the briefs – at this stage, look as though they've lost all their value.
GUGULETHU MFUPHI: So quite clearly, lessons learned from that one there, Jan.
JAN VAN NIEKERK: Yes. Look, I think one can make many comments about this. In portfolio management, the idea is that you can't always avoid all losses. When constructing a portfolio, you need to manage the losses and permanent loss of capital. There are definitely many lessons to be learned for the investment community and for investors from what's happened to Abil, but you shouldn't just stop at Abil. The results that came out today from Shoprite gives you a broad indication of what's happening to the consumer in South Africa and Abil, as a provider of finance to the unsecured market, doesn't operate in a vacuum. They're part of an economy. They're part of a society and I think investors should look beyond just Abil. You should look wider and not just at the unsecured lending market, but more into the rest of society to see where the impacts are going to come through.
ALEC HOGG: So was that the big signal that you picked up from the Shoprite results.
JAN VAN NIEKERK: Yes, I must say Alec: that's the interesting thing. If you look at turnover up ten percent, there's good store growth. They don't disclose square metres, but the number of stores that seem to be up nine percent. They tell us that food inflation was four-and-a-half, so that tells you that the actual volumes in the existing stores are probably in line with what you see. This is a business, which now tops R100bn in turnover per year, so it reaches into a significant part of the economy and I think one has to heed that call. If you look at what's happened in the market after the Shoprite results, investors are now considering their positions and most of the other retailers, as well.
ALEC HOGG: Shoprite hasn't been a great performer in the past year. Another company that hasn't performed that well – or so we're told, by BHP Billiton – are the South African assets within that portfolio. A big announcement today, a demerger: it almost reminds one of all the excitement we had when Billiton and BHP got together in the first instance. Now, it's like Billiton's been put back into its own little camp.
JAN VAN NIEKERK: Yes, it's interesting if you look at the mix of assets that they're proposing to put into Newco (or SpinCo, as they call that), there's definitely a strong South African flavour to that. It's not unrelated to the kinds of returns that one would expect from those assets. At first glance, it looks like ten percent of their portfolio, so it's not that big in their life. However, it seems as though someone sat with the spreadsheet, looked at the returns on the investment capital that you can generate from certain assets, kept the best ones in BHP, and the rest are going to be spun out. I don't think it's a coincidence that many of those assets are South Africa. We know that the operational environment for mining companies in South Africa have become more difficult and the cost pressures are significant, so it's not a coincidence that those assets are there.
ALEC HOGG: Well, it's well named: it's SpinCo, because they certainly are spinning the story very interestingly.
In the new SpinCo, the coal assets (the South African assets) are being put in there, but the other coal assets are being kept in BHP. Jan, this looks to me like there's a lot more underlying it, that someone in the BHP boardroom took a decision: 'we don't want South Africa anymore', but maybe I'm wrong. Are there any South African assets left in the new BHP?
JAN VAN NIEKERK: Alec, it looks like they're keeping the energy coal in the new SpinCo, but the coking coal stays in the old BHP – that was when I quickly looked through it. I think there are some South African assets left in Billiton.
GUGULETHU MFUPHI: Jan, does this perhaps change your view on resources?
JAN VAN NIEKERK: It's interesting. If you look at this in the context of what's happening in the resources market: as we always say, good times create the opportunity for bad behaviour and tough times create the opportunity (or actually, forces good behaviour). We're in that part of the cycle now where all the executives in the large mining companies are new. They're all speaking the shareholder's language: return and capital, return of capital to shareholders, and free cash flow. I think that the disappointment for Billiton was that many people expected a once-off special dividend or a higher dividend. However, if you look at the language that they use in the results – announcement around dividends – they are very confident about the cash flow coming through and they're also going to capex to about $14bn per year going forward, as long as they're happy to announce at this stage for the next two years.
Definitely, a focus on just working their existing assets. Remember, these investments have been made many years ago. These are long-term projects. Many of those projects are coming on line now and I think that's typical of what's happening at the cycle now. At least, the decision in the resources boardrooms are focused in favour of shareholders, and I think that just reinforces what's happening in the cycle. In addition, we still see many of the resources companies – not just listed on the JSE, but globally – are trading cheap. The market is expecting a lot of bad news and that's priced into many of these counters.
GUGULETHU MFUPHI: Another share that's looking fairly cheap compared to what it was trading at six months ago is Adcock Ingram, publishing a very disappointing trading statement just yesterday – expecting HEPS to fall by more than 100 percent there, Jan. It does seem as though Bidvest has a lot of work to do, in that camp.
JAN VAN NIEKERK: Yes, there are two things. Firstly, it seems as though they are operating in tough environment, but in addition, this is a first set of results that's going to be announced under the guidance of the Bidvest Group. As with any good businessman, they're probably going in there and taking all the opportunities they can to write down, right size, and restructure, and that should come through as a single announcement or a write down. What is more concerning for shareholders is that there wasn't any indication in that announcement about positive or good news coming through. It's almost like management saying 'listen, it's tough. We are taking the medicine, but we can't tell you when it's going to get better'. That's the kind of environment investors don't like and get upset about, so if you do your calculation and figure out what the inherent value of that business is, there might be an opportunity coming through, especially when share prices fall as Adcock's price has been falling.
ALEC HOGG: Just a quick one, Jan. If you own BHP Billiton shares already, would you hold onto the new SpinCo shares?
JAN VAN NIEKERK: It depends on where the share price settles Alec, once it's been hived off. There's definitely not an issue with the quality of the assets that they're putting into that new SpinCo in our opinion, but it depends on the price that you will be offered. Obviously, BHP management is hoping that after the spin-off, the combined share price of the two companies will be higher than the current share price, otherwise they probably don't want to do it, but one will have to see. If the price is right, you can sell it but I suspect that given the negative sentiment around that, it might be cheap after listing.
GUGULETHU MFUPHI: Well, thank you so much to Jan van Niekerk. He is from RECM.