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Financials in the red, but resources and industrials up: David Shapiro – Sasfin

Mr Price ‘is a top-class retailer, focused in the right area of the market,’

HANNA BARRY: The all-share index is up nearly 0.25% to finish the day at 52 185 points. The Top 40 is up 0.43% to close at 46 377 points. Financials closed in the red today, but the resources index rallied about 2.5%. Industrials are also up on the day.
    David Shapiro is with Sasfin. David, yesterday we started up and ended down. Today we were actually down in mid-afternoon trade, but have ended up.

DAVID SHAPIRO: Ja, you said that very calmly, the way that you actually gave those indicators. But if you were on the market it was a lot more active and volatile than that. We went through massive movements today and in fact, Hanna, if you look at the Top 40 index, you’ll see it was 0.4%, whereas the all-share was up 0.2%.
    So down below, below the heavyweights, there was a lot of selling still that continued. We can’t make head or tail of where the selling has come from. I would imagine that there were some big offshore sales of retailers. That’s why we saw huge pressure on retailers yesterday, which followed through to this morning, and then it slowly started to reverse. Perhaps the orders have been completed and bargain hunters came in.
    From trying to look at the currency, I’m not sure what led what – whether the currency had influence on our market or whether our market had influence on the currency. But we fluctuated there as well, sometime over R12.30/dollar, down to R12.20 and, as you mentioned now, R12.22. So enormous volatility in the currencies as well.

HANNA BARRY: You mentioned retailers – we did see Mr Price reporting full-year results, with profits from operating activities up more than 21% for the 52 weeks to March. It seems cash-based sales are the key to that.

DAVID SHAPIRO: Well, I thought overall it was a very good result.
    But just to go back to the market, to explain – yesterday we were down like 4%. We had been losing. We opened a lot lower this morning and recovered when those results came through as well. And it was one of the few retailers that ended up. But I think the big story – we knew those results, they had given us an indication of what the headline was going to be, but I think once you went into the results and you saw how each division was doing, how well, and also the fact that they are extending their reach now to Australia, going to test there as well – also brought a bit of cheer to the market.
    Here is a top-class retailer, focused in the right area of the market, middle to upper class, especially the young market. They’ve their own brands which give them a lot of margin. They can charge what they like on their own brands – they are not in competition with other brands being sold through other stores. So really a very good result and I think consistently over the last 20-odd years 23%-plus in compound growth. So all credit to management. It just shows you with good management, understanding the market, you can produce results in tough markets.

HANNA BARRY: Absolutely. It’s one of the only retailers to have grown earnings consistently like that between I think 1997 and 2013. It has grown ahead of nominal GDP. But it is interesting because Mr Price remains the worst performer in the FTSE/JSE Africa general retailers index. Do you know why?

DAVID SHAPIRO: No, no, no. If you look over the last year or so, I think you have to measure it over time. Even if you look over the last year, the last 12 months, I think the share price is up in the region of 30, 35%. So it has far outperformed the all-share index.
    But over the last couple of weeks I think there has been a sell-off, mainly because it’s running. Look, even at these levels, you are still at a 26 PE. OK, you can digest that if they are going to keep growing at 20%. It’s far better than if they were growing at 10% – and a good dividend. But it’s still in the rich territory. No one likes to buy companies with that kind of high PE. But, as I say, all credit to management. A wonderful operation.

HANNA BARRY: David, I saw an interesting tweet out just before the market closed around Bowler Metcalf – that’s of course the container and packaging company. I think they are issuing a trading update any one of these days. That share ended up nearly 10% and Adrian Saville, who is of course the chief investment officer at Canon Asset Managers, tweeted the JSE, suggesting insider trading because of Bowler; although of course the volume of shares traded would be small, that share price is up nearly 10%.

DAVID SHAPIRO: Well obviously someone has an inkling of what’s coming out. Listen, if you monitor the JSE especially in small companies you will always – I don’t know how the information leaks out but Adrian follows those shares. It’s a very small cap. It has been around for a long time but it’s a small cap. But of course someone knows something and hopefully the JSE follows up. But, if you want me to, every day I’ll give you an example of a little bit of insider on the JSE [chuckles].

HANNA BARRY: We could get ourselves into more trouble than we already do.
    David, briefly, the Aurora mine story – I just need to bring the listeners up to speed. This does date back years, actually, but it has recently resurfaced. Court papers allege that Nelson Mandela’s grandson Zondwa Mandela and President Jacob Zuma’s nephew Khulubuse Zuma gained access to two gold mines near Johannesburg without paying for them. Their company of course is Aurora Empowerment systems. The allegations are that they took over the mines from the insolvent estate of Pamodzi Gold in 2009 without putting up any money for them. Now, these mines – that’s Orkney and Klerksdorp and Grootvlei on Joburg’s East Rand have subsequently been sold and are now owned by other companies, but Aurora directors are being sued by Pamodzi’s liquidators who allege Aurora removed the mine’s assets and left the operations in an unworkable state, not to mention job losses, sale of equipment, and $10m of gold that is alleged to be missing. But I guess the big headline is the involvement of Mandela and Zuma in fighting these claims which are alleging fraud amounting to R2bn.

DAVID SHAPIRO: Well, whether they are ever going to make these charges stick and what will happen, whether they will be able to do a Houdini and get themselves out of this kind of trouble [who knows]. But I think they stripped the mine, if I’m not mistaken. I think they sold it off for scrap.

HANNA BARRY: That’s the allegation.

DAVID SHAPIRO: So who knows? It’s not a part of the market that I follow, but it’s an awful story. And how they got access to that as well is questionable.

HANNA BARRY: Apparently there is some law that allows a company to take control of a mine before the transfer of ownership is complete to prevent the mine from lying idle. So I guess that may have been…

DAVID SHAPIRO: You’ve got to pay for it. You can’t just take over and then absolve yourself from any kind of liability.

HANNA BARRY: Zuma alleges that he wasn’t involved in the day-to-day running of the operation because he was non-executive chairman. I’m not sure what Mandela’s story is. Also on South African politics though, was Mzukisi Qobo told Bloomberg that this is an example of how BEE laws can be abused. Not sure if you have anything to say

DAVID SHAPIRO: No.

HANNA BARRY: Interesting that advocate Wayne Gibbs, who was appointed by the North Gauteng High Court to conduct this independent inquiry – which by the way has lasted more than two years – interviewed 33 witnesses under oath and he has described the goings-on as some of the more serious cases of fraud ever perpetuated in the Republic. Anyway, that’s a big, big story in headlines.

DAVID SHAPIRO: I think it’s a big story because of the names that are involved.

HANNA BARRY: Exactly.

DAVID SHAPIRO: Mandela and Zuma.

HANNA BARRY: Share prices – any other shares that you’d like to identify?

DAVID SHAPIRO: I think the other thing is, you spoke about the resource market – how it went up. I couldn’t find anything fundamentally redeeming for the market to go up like that. But again, there was a big reversal in mining shares. We saw big gains in Anglo American. I don’t know whether it was just bargain-hunters coming in, because commodity prices haven’t done anything. The rand in fact went against miners. But that was the rally that actually supported the all-share’s gain today.

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