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Market watcher: Wayne McCurrie – Momentum Investments

Wayne advises avoiding construction shares now. Wait for the Aveng inquiry.

HILTON TARRANT: Wayne McCurrie of Momentum Investments is with us again this evening. Wayne, the market’s up 0,5%, as Gugu said – 40 892. A pretty strong day, all things considered.

WAYNE McCURRIE: Ja, right across the board basically. Every major sector was up, so it was a good day, driven by the resource shares. We had Anglo American up quite strongly, we had Sasol up strongly, and we had Amplats up strongly. So Anglo is up 2% and Sasol up 2%, and Amplats up almost 3%. So it was a good day.
   The only sector that turned a little bit sour after the African Bank story came out was the banking sector, so that closed down 0.5%. They are certainly better than they were earlier on, because when the Abil news broke I think the share was down 6, 7% and it actually closed down virtually unchanged. It was down a 0.33%. The moment that the story came out that it was one branch, with a couple of people, the market calmed down quite dramatically. Of course, I don’t know why we didn’t know about this a long time ago – that this occurred somewhere, because companies must inform the market of both good and bad news, and then things don’t really catch you by surprise. All of a sudden there’s a R15m fraud for loans worth R15m the fraud unit issued – or whatever the case is – and the next thing the number R300m pops up out of the system and the market worries about that. But we’ll see when you interview him now.

HILTON TARRANT: Leon is joining us shortly. Wayne, a late Sens announcement out from Aveng, the construction group. Listeners might be familiar with Grinaker LTA, the well-known construction company owned by Aveng. One of its executive directors, Mr Stephen Pell has resigned, effective today. This is what Aveng said: “Having become aware of untested allegations been made in the media regarding alleged historical anti-competitive practices of companies at which Mr Pell was previously employed, which occurred prior to him joining the Aveng Group, Mr Pell has in the absolute interest of the company offered to resign.”
   Now Stephen Pell was, before he joined Aveng, an executive director at Stefanutti Stocks, and he actually joined Stefanutti from Stocks Building Africa when they did that merger. We saw the reposts in the City Press and the Rapport newspaper on Sunday. His name has obviously come up. Is this pretty much collateral damage now?
WAYNE McCURRIE: Look, this is going to severely affect  building and construction shares for a long time now. These Competition Commission investigations No 1, take a long time; secondly they cost a lot; and, thirdly it's  serious offence this – it's not a light offence. It's a very, very serious offence. I was quite positive on the building and construction shares. I thought they were over their worst. I reckon you don’t touch them now. You wait for the inquiry to happen. It is a very serious offence.
HILTON TARRANT: You’ve actually got the Competition Commission inquiry – the fast-track settlement process, and now you’ve got all sorts of other threats about potential criminal charges being laid against these executives. 
WAYNE McCURRIE: There’s going to be big fallout from this. It's going to affect the sector essentially materially for quite a long time.
GUGULETHU MFUPHI: Wayne, let's touch on the oil company, Sasol, which released a trading update earlier this morning. Their profitability increased slightly, but was obviously impacted by an increase in costs as well as revenue taking a knock there.
WAYNE McCURRIE: Ja. Look, a couple of things about Sasol. The actual operations – i.e. how much stuff they’ve produced – was quite good. So their operational efficiencies were quite good. Two problems. Costs, as you mentioned – costs are high. But we know that in South Africa, make no mistake. We know about costs escalating here. So that’s not untoward, I suppose. They’ve got big write-offs in Iran, the currency devalued – they are trying desperately to sell the business there. But the rand price of oil has gone up quite materially in this last while. We are going to get another petrol price increase – oil is almost $120 again. And that’s good for Sasol. But the most important thing of all is this is a 9 P/E share – it's almost half the market’s valuation. So even though earnings are only up 5%, that’s already in the price and we saw the share price go up 2%, as I said earlier on.
GUGULETHU MFUPHI: Another company out with a trading update was distribution and logistics company Dawn, for the six months which ended in December 2012. Now the earnings could increase by as much as 93% but, going forward, with the increase in petrol price, could this also impact the…
WAYNE McCURRIE: Look, by and large they could probably pass most of that on. But it's a highly competitive industry. I'm not too sure why the earnings are up so massively. There might have been a specific item in last year that caused the big percentage increase, but we'll have to see more detail on that. But of course they are not paying a dividend at the moment, so we'll have to see what they do about that, if we get anything there.
HILTON TARRANT: Wayne, computer company Mustek, responsible for the well-known band Mecer which South Africans all know, headline earnings per share up anywhere between 135 and 140% – so more than doubling there. We've seen Pinnacle, which is involved in similar things with its Proline brand, making personal computers, assembling them and distributing them here in South Africa, at record highs – over R20/share there. Some strong earnings coming through. It's a bit of a puzzle. We spoke about this on the programme on Wednesday evening with Simon Brown when he was with us. A bit of a puzzle, given where the personal computer market is at the moment.
WAYNE McCURRIE: Well, they seem to be making money on it. It's a relatively small company, R600m market capitalisation. But it looks quite cheap and of course these results are up 8% today. It's just flying. So the market really received these results very positively. And I suppose if you show, quite frankly, any earnings increase at an 8 P/E, the market’s going to push your share up.
GUGULETHU MFUPHI: Aquarius Platinum today were out with an update, revenue down 29%, cash flows and production also impacted there. Not surprising, because last year the mining sector did take quite a substantial knock.
WAYNE McCURRIE: But the platinum shares have turned. Aquarius is up 3% today. The market knows what's happening, the market knows there are going to be disastrous results. You are going to, very shortly, have the platinum sector as a whole producing a loss. So you are going to have a negative P/E. It's actually going to be a negative number because they are all going to show losses. So Amplats is already showing a loss, Aquarius – we are going to see the losses coming through here. But I suppose you’ve got to sit back and say, well, that’s the current situation – what's it going to be in five years’ time?
GUGULETHU MFUPHI: That actually brings me to a question that we got from Pakalani, who’s from Polokwane. He wants to know: what do you think about Lonmin shares currently at R50 a piece. Can they bounce back?
WAYNE McCURRIE: I would rather buy Amplats or Impala. Lonmin’s a very tightly held share. It's not actually that well understood in the South Africa investment community because no-one here actually owns it. It has very small trade. To be quite honest, I'm not qualified to talk about Lonmin. I just don’t know enough. I'm very positive about the platinum shares longer term, and in fact they’ve had a reasonably good run in the last month or so. I would personally rather buy Amplats or Impala. Lonmin almost went bankrupt. They had to do this massive rights issue at a huge discount. So they haven’t got the capital to ride through any storm coming, though I don’t think it will happen.

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