Markets & impact of mining strikes on AECI: David Shapiro (Sasfin) & Mark Dytor (AECI)
HILTON TARRANT: David Shapiro of Sasfin is with me in the studio. David, the market’s slipping. A deadlock in Italy. We've got a comedian called Beppe Grillo who’s got a quarter of the votes in those elections. This is what Nouriel Roubini had to say on Twitter:
“Italy is headed to new elections within six months as election results make Italy ungovernable. It is political, economic and financial chaos.”
DAVID SHAPIRO: And he’s from that region. So he should know what it's like. I think the big concern is that if it is ungovernable, then they’ll have to go to the ECB, the European Central Bank for some kind of assistance or support package. And that’s enough to scare markets – or it did scare markets today. So it dragged on. No-one could quite interpret what was happening in Italy. You saw interest rates went up there; Spanish and Italian bonds all kicked up. So that remains the big story.
Yesterday we were quite positive because Pier Luigi Bersani was victorious in the lower house. It's in the upper house that the problems lie. And Berlusconi with his dyed orange hair is still making a presence. So ja, it's an issue.
But strangely enough, looking at a America at the moment, the market’s going up there, economic data coming out there – much improved, particularly on the housing. Housing prices up, new home sales up, consumer confidence up. And Bernanke’s talking as we speak. At the moment he’s answering questions in the Senate, He is intent, as far as I could hear, on sticking to his policy or continuing with the quantitative easing until such time as unemployment comes down. So I think that should give comfort to markets, and hopefully it will give us a better day tomorrow. And then we've got the Budget.
HILTON TARRANT: Not much in the way of positive moves on the JSE. We saw SABMiller ticking up, as British American Tobacco ticked upwards. Impala – small moves upwards, and Woolies. Vodacom up over 1%. I think the big one, Imperial, almost 3% stronger.
DAVID SHAPIRO: But that lost yesterday. You mentioned British American Tobacco, SABMiller and Imperial – they were the big ones down yesterday for reasons I couldn’t find out yesterday. Today they reversed.
Overall it was a negative day. We are battling at the moment in a sideways drift. Hilton, if you look at that chart, you’ll see that a year ago, right from January to about July, we also drifted sideways, trying to find a way out. We didn’t fall but we didn’t gain. It was only in the last two months of the year that we broke out of that 34 000 level – 34 000, 35 000, it ran up to 40 000. And I think it looks like the same kind of patterns repeating themselves. I don’t think there’s enough reason to sell the market, but it's really difficult to get momentum behind us.
HILTON TARRANT: And 52-week high for Brimstone. A trading guidance out yesterday. It releases results next week. Cipla Medpro trading now well above that indicative offer price. Also a 52-week high for logistics firm OneLogix. Results out earlier today.
DAVID SHAPIRO: You are really digging low with these companies. [Laughs]
HILTON TARRANT: I'm not digging low. Investors are digging low, David.
DAVID SHAPIRO: These are not the popular traders. At least it just shows you there is demand.
HILTON TARRANT: Group Five is up there, Discovery is still up there.
DAVID SHAPIRO: Discovery and Nedbank attracting smart money. I think Discovery’s becoming a very popular stock. It's broken through scepticism that has been surrounding the share for a few years and I think people are believing in management.
HILTON TARRANT: On the downside, we spoke about the Foschini Group yesterday – R112.25 today. I did some digging in the charts and was looking at performance over the past year – hitting a high of R145.50 way back in August. It almost touched that again in January before pretty much falling off a cliff – not quite with the other retailers. David, this is almost a R30 drop on Foschini. The trading update spooked the market.
DAVID SHAPIRO: It did, but I also think they rammed it up too high last year. There was just too much good news expected last year and I think it was probably one of the big outperformers. And the trading update – you are correct. I still think it's a reasonable group. I think the results were reasonable and I'm not quite sure why people have abandoned it to the extent that they have.
HILTON TARRANT: Well, sales growth for the nine months to December up 5.6%; merchandise inflation 5.5%. So you are going nowhere.
DAVID SHAPIRO: Ja, against Truworths. Compare that result with Truworths or with Woolworths – you are right.
HILTON TARRANT: David, fourth-quarter GDP numbers – we’ll hear from Mohammed Nalla towards the end of the programme – were much better than expected.
DAVID SHAPIRO: They were. And, as Gugu says, it was mainly on the manufacturing and agricultural side. You saw a lot of strength in manufacturing – up 8% I think; agriculture up 10%. That’s annualised. But mining down 9.3%.
So it just shows you – it's patchy. It's patchy growth. I still think we are relying on the consumption to drive us forward. There are still worries in the mining industry. But that’s of course the aftermath of the strikes.
HILTON TARRANT: Well, speaking of those strikes, explosives and chemicals business AECI’s numbers out today. Revenue up 11% in the year, earnings down by a quarter. And if you strip out all sorts of BEE charges – I hate it when companies do this. They are real charges, David. There are costs to these transactions.
DAVID SHAPIRO: They are actual costs, but what they are trying to show you is: what's the productive side of it, underlying. So you should really look at the revenue lines if you want to do that. But it's very confusing. I don’t trust any of the numbers that come out on services provided. If you go and buy a service you ask, well, what is the headline number. You don’t really know it, you can't rely on them because everybody fudges their numbers. So if you want to find out the true earnings, you’ve actually got to do your own homework.
But AECI wasn’t bad, and I like the outlook statement, and I like where they are going in Africa. So together with Omnia, I think just keep a close eye on them.
HILTON TARRANT: Mining accounts for 50% of their revenue. Manufacturing for a third – 33%. Agriculture for 10%. I spoke with the incoming chief executive Mark Dytor. He starts his job on Friday, March 1. I asked him: Given half of this company’s revenue does come from mining, how did those disruptions that we saw last year in the mining sector affect specifically the explosives business?
MARK DYTOR: In the numbers that we have and that we put out a loss in terms of profit in excess of R100m on the bottom line, which was a major concern to us. Of course it wasn’t just one sector, it was all three of the mining giants that sort of went…and a lot in terms of the gold mining. So it is a concern of ours. We are still very cautious this year of the impact that may or may not have. But what I can say is that we are looking and we've received new contracts in Africa and in both explosives and mining chemicals.
And a third of our revenue is coming from offshore now. So we are definitely trying to eliminate the risk or diminish the risk, if you like, but are looking further afield in different markets.
HILTON TARRANT: That’s Mark Dytor. A third from outside South Africa. And he did also tell me that they are increasingly looking at other acquisitions in Africa. They’ve got a fairly strong pipeline of acquisitions which they will announce this year, and they are following Anglo American into places like Brazil.
DAVID SHAPIRO: Interesting. Why I'm interested in all of this – there’s a mining conference in Florida, and Ivan Glasenberg, who’s chief executive of Glencore, actually came out with a statement giving hell to his peers, most of whom have been fired now, for swamping the industry with mines. In other words, bringing too much production up – and of course causing losses and shrinking profits. That worries me, that we might actually see mining expansion subside, come down. So watch that – it's worth following what's happening there.
- - -
[Concluding the show]
HILTON TARRANT: David, just before we wrap the show, as we sit here staring at the relative darkness in the Melrose Arch precinct – another power outage has hit this area – the backlog, David, in the electricity transmission network in this country is R39bn worth of work.
DAVID SHAPIRO: Transmission? That’s little power stations all over.
HILTON TARRANT: Substations…
DAVID SHAPIRO: Refreshing them, renewing them, restructuring them. R39bn?
HILTON TARRANT: Mmm.
DAVID SHAPIRO: That nice! It's nice to know if you are a consumer. We’ll go back to Ellies and get those generators again for the winter.
• Subscribe to a daily email of transcripts from Moneyweb Radio - click here
It’s not just about a feasible business plan.