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Updates on EOH, AB InBev, Implats and Sibanye

Stephen van Coller making progress at EOH and platinum is abuzz – Nesan Nair from Sasfin Securities.

SIMON BROWN: I’m chatting now with Nesan Nair, portfolio manager at Sasfin Securities. Nesan, I appreciate the early morning. EOH numbers out yesterday (for the year ended July 31). Operating profit, but still a headline earnings loss; some nuances there. I’ve got to say this has been, I thought, a really good turnaround and fix-up by Stephen van Coller. The market, perhaps, is a little more jaundiced. What’s your take on the results, and EOH looking forward?

NESAN NAIR: Good morning, Simon. I tend to agree with you. If you look at the sort of mammoth task Stephen was given, it was a business that was in terrible shape reputationally. I think the first thing that he had to deal with, as a result of many corporate governance failures – that was something else that he had to deal with. And even operationally EOH was a combination of many sort of disparate businesses put together. You can imagine the labyrinth of complex contracts that they had to deal with – and you can’t be everything to everyone.

I think what he managed to do in the last two years is to simplify the business, identify what they are strong at and try and focus on that. Unfortunately, you’re going to go through a period where your profitability is impacted. It’s very costly to get all the ships to sail in the same direction, so to speak. But I think the main thing is that there’s progress here. He’s definitely making headway, I think, in the right direction – a small (operating) profit, R147 million – but as you said at the headline level it’s a clear loss while they continue to work reorganising the business.

Read: Can EOH become the poster child for crisis turnaround?
Listen: EOH CFO Megan Pydigadu discusses its annual results on the SAfm Market Update

SIMON BROWN: Anheuser-Busch InBev’s (AB InBev’s) third-quarter results: the stock was up 13.5%. I’m not sure how much that was people liking it versus a short squeeze, because it is the most borrowed stock on the market – or, put it another way, extremely hard to borrow – which means there’s a lot out there already. Were the numbers as good as the jump suggests?

NESAN NAIR: I couldn’t imagine the numbers getting worse, to be honest. Volumes were up, revenue up on the back of that. But of course it made sense, especially in South Africa, you had the easing of lockdown restrictions, and alcohol sales being permitted over the third quarter as well. So not unusual. I think the market was anticipating probably flat or slightly worse results. But I think also your point about the shorts out there

…the shorts out there are creating a helluva lot of volatility in stocks like this.

I remember not so long ago Tesla used to be the biggest short in the world, and look at it now – a trillion-dollar company. My faith in the shorts is not entirely as strong as what one might think.

But just on AB InBev, I think at these levels it doesn’t make sense to stay short on a stock like this. The potential for recovery is very strong and, if they can address the debt levels in the company and maybe do a rights issue, – but if they can address the debt levels – they should be over R2 000/share.

SIMON BROWN: Yeah. And those debt levels, thank you – SABMiller shareholders are smiling all the way to the bank around that one.

A last point. We are seeing mining activities: Implats wants to buy Royal Bafokeng. Sibanye Stillwater announced a deal on Monday and did it on Tuesday, and then announced another one on Wednesday.

Listen: Sibanye-Stillwater’s R14.85bn cash offer for Brazilian mining assets

We’ve now got African Rainbow Minerals wanting some of the assets out of Anglo Platinum. We kind of knew it was coming, and it’s all sort of arrived this week. My sense is, if you look at the Implats deal, Royal Bafokeng makes sense. It’s better reefs – not even adjacent. It is the same reef that Implats is mining. My concern is they are buying at the top of the market.

NESAN NAIR: Yes. This deal, Simon, you remember when RB Plats (Royal Bafokeng Platinum) listed back in 2010, it was always a bigger shareholder than Amplats was. It was always in the cards, this deal. It was, as you say, … it’s a contiguous mine to the Implats mine around the area, and Implats had the smelting capacity. All those [things] made sense for them to buy it.

But right now, I think where palladium and platinum prices are, Implats obviously sitting with a lot of cash right now and in a much better position to do the deal, it was a deal that was always going to happen, and it looks like it’s going to happen this week.

But what I’m also sort of scratching my head to think about [is that] on the one hand we know that commodity prices are quite high and commodity companies tend to do these sort of deals with highs in the commodity prices.

But at the same time I think the market’s concern around inflation is creating the scramble for very good assets out there, because in an inflationary environment you actually want to hold hard, real assets.

So from that perspective it may make sense at these commodity prices for these sort of deals taking place right now. If we anticipate the next 10 years it’s going to have much higher inflation than we saw in the past. It will filter through ultimately to commodity prices. So that’s the only sort of reason I can imagine why there’s a scramble for these good assets.

SIMON BROWN: Yeah. That’s actually a great point. I hadn’t thought of that. Of course Sibanye also gave us an update, and basically they made $1billion in the quarter, and they can afford to … that’s what they are buying. They basically buy Brazil with one quarter of profits. The numbers are insane.

Nesan Nair, portfolio manager at Sasfin Securities, I always appreciate the early morning time.

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So the glibly stated connection between the futures market and the underlying share price is just given as read, but this glib assumption has never been explained. It can only be connected by the market makers that operate in both arenas for the purpose of manipulation of the underlying to their advantage. Perhaps this is why it is never mentioned. This way an intentionally corrupt practice can continue to be accepted as normal? Please correct me where you can, if you can.

End of comments.

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