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Green Flash Properties next to list: Wayne McCurrie – Momentum Wealth

‘Bonds are significantly undervalued relative to property.’

SIKI MGABADELI: We are talking markets with Wayne McCurrie of Momentum Wealth. On the day the all-share is up about 0.25% at 52 240. Most indices are looking stronger on the day. Global markets also look stronger at this hour. Asian markets ended higher.

Wayne, we have seen a little bit of strengthening in the rand. Would you put that down to the Reserve Bank’s repo-rate hike?

WAYNE McCURRIE: That’s all it is. It sounds so strange to say the rand has strengthened. When last have you mentioned those words? It’s definitely all to do with what the Reserve Bank does. Of course, the inherent problem with the rand at the moment, why it’s so weak, is because of the commodity prices. A lot of people will think it’s because of what’s happening in South Africa. Obviously that has an influence, but by far the biggest influence is in fact the downturn in resource prices. And it’s the same for Brazil, Russia, Canada, Australia, Nigeria – you name it.

HANNA BARRY: And resource stocks definitely came under pressure today. Interestingly, they lifted yesterday, lifting the market a little. But across the board we are seeing weakness in Arcelor Mittal, Aveng – that’s of course construction – Exxaro, Harmony, all of them. Sibanye is not looking very good at all.

On the upside, Mr Price seemed to pare back some its losses.

WAYNE McCURRIE: But it had a terrible trading update. If there is one thing I don’t understand – the consumer in South Africa is just under pressure. I’ve seen estimates that show that personal consumption, expenditure next year will be anywhere between 1 and 1.5% – remember that was 3.5% about two/three years ago. So the consumer is coming under pressure, and yet the retail shares are some of the most expensive on the market in the consumer-facing area of the market. It always used to be justified because of the Africa expansion programmes, but of course Africa expansion programmes with the low oil price don’t exist. There is no Africa expansion with the low oil price – Nigeria, Angola, etc.

HANNA BARRY: We are starting to see that eventually reflected.

WAYNE McCURRIE: I think we are going to see a bit of a slaughter there going forward – but that’s just my view.

HANNA BARRY: A trading statement came from Naspers today to say core headline earnings per share for the six months to September will be between 37% and 42% higher than the previous period – that’s at 1 528c. Now the share didn’t rally that much, but I think when you are at R2 165/share, where do you go?

WAYNE McCURRIE: Exactly that. In fact, more important than the actual rand value is the price/earnings ratio. Now the market is 17, 18, 19 you can say over time. Naspers is 100. So it’s four times more expensive than the market. So therefore it had better be showing earnings growth way in excess of what the market is showing. So it did deliver. Look, the share price didn’t come down, so it delivered more or less what market expectations were. When you are at a 10 price/earnings ratio you can show 4, 5. 6% earnings growth. But when you are at 100, you’d better be showing big numbers.

HANNA BARRY: Absolutely. The share’s up about 0.75% but, as you say, that PE ratio is at 121, in fact. It speaks to your argument.

WAYNE McCURRIE: What’s the difference between 100 and 121?

HANNA BARRY: Let’s look at Lonmin now. We have been discussing Lonmin quite a lot this week because of that rights offer yesterday. But today the share is down 86%. It was trading at 29c/share.

WAYNE McCURRIE: That’s right, because now you have the right to buy another 42 shares at 21c. So when you take your original share, plus the value of the shares that you can take up, you’ll end up more or less with the same amount of money you had in Lonmin after deducting what you pay for your new shares. So ja, it’s correct. That’s an adjustment to the share price.

HANNA BARRY: We had an article this week on Moneyweb which I did discuss with David Shapiro – but I would be interested to get your point of view – from our Mineweb editor, Warren Dick, basically saying, the day before the rights offer, that shareholders should not support this rights offer because essentially what you are doing is paying for poor management.

WAYNE McCURRIE: Yes and no. First of all, I don’t think you are paying for poor management. You are paying for poor quality ore grade in the ground that management can do nothing about. Secondly, you are also paying because their cost of production is, I don’t know, $1 300/oz, and they only get $850. Look, management might be partially to blame, they might not be. I don’t know. But the primary problem is the grade of the ore under the ground and how much it costs you to get it out of the ground. It’s actually very, very little to do with management. That’s essentially the difference between a good platinum mine and a bad one – the ore in the ground.

So let’s deal with the other part of the statement now – the rights issue. There is a big argument to be made that shareholders should just say no, I’m not throwing good money after bad. But of course that’s why they are offering it, why they had to offer it at a 94% discount. That’s like saying to someone, look, I want to sell you this thing, it’s not nice, it’s not a very good asset, it doesn’t look good at the moment, but I’ll give you a 94% discount. And of course if you don’t take up your rights you do get a share price falling from R2 to 29c. You dilute it down to nothing. This is by a country mile the biggest discount on a rights issue that I’ve ever seen. Normally when a company is in trouble – Super Group, Sappi, even African Bank, their last rights issue – they were all 10. 20, 30% discounts, not a 94% discount.

HANNA BARRY: Unbelievable. It is quite something to watch the markets at these times. Another property listing today – Green Flash Properties issued a prospectus today. It’s incorporated in Mauritius. It’s investing, it says, opportunistically in undervalued real estate assets to provide investors with an exposure to high-yielding property, whatever that means, predominantly property in Europe. So effectively undervalued European properties, mostly dual-listed in SA and Mauritius. But we’ve just seen so many properties listing.

WAYNE McCURRIE: Why not? It’s the latest hot thing. Remember all the new building and construction listings, remember all the new platinum mining listings. Why not list something when people are prepared to pay a very high price for your shares? Property shares are very expensive. So it’s quite normal.

HANNA BARRY: So it’s a good time for listing. Is it bubble territory, though?

WAYNE McCURRIE: I wouldn’t quite go that far. But what I do know is if you are faced with a question of should I buy government bonds or should I buy property, only that question, you would buy bonds. Bonds are significantly undervalued relative to property. By the way, that doesn’t mean the price comes down. Overvaluation is not a high enough criterion for prices to fall.

HANNA BARRY: Good point.

WAYNE McCURRIE: People, when they are buying something, are going to carry on buying it. I do agree. European property is probably cheaper than South African property at the moment. Of course, you take the almost unbelievable off-chance that the rand might strengthen against the euro, but let’s leave that there. But yes, property listings are the next big thing. Remember the building and construction – anyone who had a gravel pit in their backyard came and listed. And they are not here any more. I think the properties are not quite in the same boat, but they are listing for more or less the same reasons – they can sell their assets at a very good price.

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