Wilhelm Hertzog: Takeover talk at Blue Label, Glencore; and two cigar butt stocks

Transcripts of my chats with Wilhelm Hertzog are regularly among the best read of those with market commentators. Today's edition is sure to maintain that record. The RECM portfolio manager had plenty to contribute on the takeover offer for Blue Label, one of the stocks his firm bought heavily into long before it became popular; and is full of praise for Glencore CEO Ivan Glasenberg's run at Rio Tinto. Hertzog also offers insightful comment on Esor, now trading at one eighth its net asset value; and Ellies, a stock whose management he knows well (and likes). Lots of profitable food for thought flowed from this discussion. As it tends to do when we get the RECM guys other side the camera.- AH 

ALEC HOGG: Before we go into the big stories of the day: that set of results – the only one that's come through this morning (Datacentrix) – looks like they're getting their act together. Is it one of those stocks that, given it's tough times over the past few years, has come onto your radar?

WILHELM HERTZOG: I must say it isn't something which has featured very prominently on our radar. It is a stock, which our clients have owned in the past. I guess, in the early 2000's when we had the big shakeout, following the IT bubble of the late 90's to 2000 era. In that period, many of these information and communications companies became ridiculously cheap and at that point, our clients did own some. Subsequent to those years, we haven't had as keen an interest in them. Datacentrix has always been reasonably well managed, in our opinion. I think the transformation from being what they used to call a 'box dropper' of just supplying hardware to companies, into becoming a more 'services and enterprise-orientated' firm, makes sense. Many companies are following that route and yes, in this set of results it does look like it's been bearing fruit for them. It's not a company that we've been keeping a terribly close eye on.

ALEC HOGG: Well, it may be one that could come onto your radar now, because it is down from R5.00 earlier this year, to R4.00 at the moment. I have to ask you about two other stocks. They're small caps, they are completely out of favour, and may be 'cigar butts' in your terminology. The first of these is Esorfranki. When Bernie Krone came into the studio a few months ago, and the share price was around 35 cents, it looked like a steal given that the net asset value is 196 cents. That share has gone down to 25 cents. Today, there was the announcement that the Chief Executive who replaced Bernie Krone (who's become Chairman), has given up his Financial Director position as well, so he was CEO and CFO. They got a new Financial Director. Twenty-five cents. Net asset value is eight times as much of that. Is this a cigar butt?

WILHELM HERTZOG: Sure, it sounds like it. I haven't paid too close attention to the company myself, but definitely, with those kinds of metrics, it sounds like there may well be value. Now, I don't know the composition of the NAV and one has to look at that. Often, there are intangibles, which may not necessarily be worth carrying value etcetera, and much of the NAV of a construction company is tied up in contracts, receivable, or that kind of asset, which is often of dubious quality and not necessarily all that recoverable. That's probably what the market is telling you, given the current share price that sounds like the kind of circumstance and the kind of share price, which definitely is worth a closer look. At the current share price, the market cap is very small,

I would imagine and that makes it a bit more difficult for institutional investors to allocate meaningful money to such an opportunity. I think that if you buy 100 such opportunities over time, and just diversify across them, you're likely to do well. It's certainly an interesting scenario.

ALEC HOGG: The market cap is down at R107m now and I suppose a juicy one for private investors, even those who bought in a little while ago at 35 cents. The other one that is a fallen angel of the small cap world is Ellies. Now, we got a really good story on Biznews this morning, written by Craig Martin who used to have a website called Sharetips on Ellies. He reckons that they should have seen the trouble coming as far back as three years ago. This is a stock that has fallen completely out of favour. The share price is down from R9.00 to…well, almost one-tenth of that – so nearly a negative ten-bagger. Is it one that would start interesting you?

WILHELM HERTZOG: I think so, yes. Certainly, Ellies management are a team that we have come to know somewhat, over the years. We actually think they're pretty decent operators. Yes, they may have gotten a bit carried away in the optimism around their own business two or three years ago, and that maybe led them astray somewhat. Largely, there is a solid business and if they can see through the tough times they're having now and raise the capital that they're looking to raise and basically, steer the ship through the rough seas of the moment then there may well be an attractive opportunity in the longer term.

ALEC HOGG: You'd be much happier buying them at the current price of R1.60 than you would have been at R10.00 – that's for sure.

WILHELM HERTZOG: Absolutely.

ALEC HOGG: A stock that you guys were talking about in quite glowing terms at your roadshow earlier this year, is Blue Label Telecoms. It's done well, so well done on that. It's also had a takeover bid. Do you have any insights into who might be sniffing around there?

WILHELM HERTZOG: I don't have any particular insights. At a results presentation or a conference that one of my colleagues attended, management recently mentioned that it doesn't sound like it's one of the big, mobile network operators. Other than that, we don't really know. Certainly, at current prices, we think the buyer is getting a good deal if the 'all-in' price, including the control premium, is going to be anything in the vicinity of the current share price. We'll see how that develops, but we certainly don't think the buyer is overpaying. We won't necessarily be delighted to dispose of our entire stake or our clients' entire stake at these kinds of prices. We do think it's a great business, owner managed, plenty of skin in the game, and the guys have been around the block. They know their business and they have a very strong position in the market, so that's something one doesn't want to let go of, too cheaply – definitely.

ALEC HOGG: So if you're a shareholder (as you are) in Blue Label Telecoms, no need to start selling the shares, even at the R10.00 that it's trading at, at the moment.

WILHELM HERTZOG: Obviously, R10.00 is a bit of a takeover premium and a bit of the upside potential of the firm for the long-term is priced in already. Potentially, one would be looking at decreasing one's exposure somewhat at this price already, but we definitely don't think it's expensive at this price and we don't think it's something to be sold 'hand over fist' at these prices.

ALEC HOGG: I guess it depends where you bought in and you bought in a lot lower than that. Well, the big story of the international market is Johannesburger, Ivan Glasenberg, who is taking a run at Rio Tinto with his Glencore Xstrata. Last night, Rio Tinto came out with an announcement to say they had rebuffed him in August and that seems to be interpreted by most people in London that Glasenberg is going to have another go at it. Do you think that given everything that's happening in the iron ore markets and in the commodities market generally, that Glencore is doing a smart thing here?

WILHELM HERTZOG: Absolutely. I think they've played this whole iron ore cycle very smartly, having had basically, no exposure to the metal to date. Now, it's quite clear that our iron ore cycle is entering a downturn and in a proper fashion. It's quite likely that companies with substantial exposure to iron ore will be sold down significantly and that you may well pick up assets on the cheap. Rio Tinto's iron ore assets are probably the best in the business and if you want to own iron ore assets and especially, if you're not sure how long or extended a potential down cycle will be, they are the assets to own. Rio Tinto is the one company that should be able to see through an extended down cycle, so I think they're doing a very smart thing here. Potentially, I would say the fact that Rio Tinto has rebuffed them now, may even play into their hands because this iron ore cycle/down cycle is still in the very early phases.

If you look at how long the up-run has been, one could quite easily see a fairly extended down cycle as well. I think Glencore and Ivan Glasenberg definitely are the class act I would say, in the large cap mining space when it comes to allocating capital smartly, doing the counter-cyclical thing, picking up assets on the cheap, and keeping a calm head when all else about them are losing theirs in the euphoria of a bubble. I think it's definitely a very shrewd move and a good opportunity for them if they can pull it off at the right price.

ALEC HOGG: Well, we'll be watching our homeboy as he carries on doing his best to create the biggest mining company in the world. That's what will happen. If Glasenberg manages to do this deal, Glencore will then overtake BHP Billiton as the biggest mining company in the world. What is interesting about that is that Glencore has recommitted itself to South Africa, to investing more in South Africa whereas, as you well know, BHP Billiton is the one that's been spinning off its South African assets. It wants nothing to do with us. Wouldn't that be ironic – to see the Johannesburger actually pulling off a massive deal of this nature? That was Wilhelm Hertzog. He's from RECM.

After the break, we talking Lesetja Kganyago, who's the newly appointed Reserve Bank Governor. It was all over our program yesterday. Lots of thumbs up from the marketplace, and lots of thumbs up from our market commentators. The man himself will be with us in the studio in a little while. Don't go away.