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More stock picks for 2015: Viv Govender – senior analyst, Vunani Private Clients

Some hope for a couple of South African stocks in 2015.

[Apologies for some indistinctness]

SIKI MGABADELI: Viv Govender is senior analyst with Vunani Private Clients. Viv, thanks for your time this evening. Offshore exposure – do you think that’s a good idea this year?

VIV GOVENDER: I think the rand has weakened quite dramatically and we do face some risk in the year. We are just barely above investment grade at the moment .. and, considering some of the issues in the country right now, we might just face further downgrades throughout the year. So we could see the rand weakening.
   But in terms of trade balance, etc, I think we should get some kind of positive uptick because of the weak oil price. It should benefit us if Eskom doesn’t blow the party by…too much diesel to prop up some of its generators. We should get something of an uptick …on the other had we are going to face the risk of downgrades in the year from the rating agencies.

SIKI MGABADELI: Goodness. So if you were looking domestically, then, at shares with South African exposure, would you pick up any?

VIV GOVENDER: Yeah, my pick would probably be Sasol. I do think that you might possibly see a lower price than right now. If one goes back to basically 2008 when we had the crash, we saw Sasol drop dramatically as the oil price dropped. Many people were more uncertain about the oil price going forward than we are right now.
   Right now what is actually happening in the world oil market is that Saudi Arabia and some of the Gulf states, the Opec states, have basically decided that they are no longer going to play the responsible Big Brother for the oil market. They are no longer going to be out there and reduce supply in order to prop up prices when they think that they are being taken advantage of to a certain extent by other producers like Russia and the US. They’ve decided to enforce discipline and they’ve said let the oil price fall, let’s basically shake up some of these higher-cost producers in the market, people that have effectively been taking a free ride on Saudi Arabia’s discipline – and all of the other Gulf states as well. I don’t think that’s going to be working. I don’t think we can see oil prices at this level, at $50/barrel, even $60/barrel for the foreseeable future. This is probably a 12-month or less kind of phenomenon. In the next 12 months I’d expect the oil price to be significantly higher than where we are now.

SIKI MGABADELI: Outside of just the oil price – I know that that’s obviously a big influence on what Sasol is doing, what Sasol’s share price is going to be doing, but they have been re-organising their company into more of a chemical producer. Do you think that they are going to have to accelerate that just to take away a little bit of the oil impact on themselves?

VIV GOVENDER: Well, the biggest project is this cracker operation they are engaging in, in the US. This is a huge, huge amount of investment, something in excess of a third of their total market cap; at current prices in excess of 40% of the total market cap, which is a huge investment for any company to make in a single project. So we are looking at a significant pivot into this particular thing. But again, because it’s involved in energy, …to an extent by the lower oil price they are looking at more…it’s going to be ethane, which is obviously going to be something in comparison to the oil price, because the oil price right now is cheaper and therefore… in terms of chemical manufacturing you could use basically ethane as a feeder, you can use oil as a feeder. So the oil price being low also affects that product to a certain extent.

SIKI MGABADELI: All right. You are also looking at Ellies?

VIV GOVENDER: Yes. Ellies – I do think the company has been under a great deal of pressure. We all know to a certain extent in the industry that it’s been under pressure. The company has come off quite a high level. There was a lot of optimism a while back with regard to the additional migration toward television. There also was hope briefly for the generator operations. With Eskom’s struggles, people would want to rely more on generators. I think probably, looking at the company going forward, they are looking to basically do a bit of a split there in terms of their operations. I do think that the company probably has some support pretty much near where it is right now. So I don’t think you’d be taking too much of a risk getting into it right now. And if some of the operation, also the forecast restructuring, does come into play, like we hope it will, we could easily see this company approaching the R2 level by the end of the year, which would be quite a large move upward, probably higher than the rest of the market is doing.

SIKI MGABADELI: So if in one of them there already you’d just suggest they hold tight?

VIV GOVENDER: You shouldn’t have been in here already. It would have been quite a painful ride… If you are in it at the moment, I do think that it’s going to be a case where the stock is likely to face some positives going forward. I’m still not too positive on that whole digital migration – the government has been very, very tardy in that and every single estimation in terms of when it’s going to be accomplished. I don’t think the next one is going to be hit, as well. But I do think the restructuring the company is about to undergo does see some hope of recovery. Probably not to the R10 level or close to where it was a few years ago…

SIKI MGABADELI: We’ll be watching that one close towards the end of the year. Your view on what the rand might do this year?

VIV GOVENDER: Like I said, we have two competing effects. If we do get a real downgrade, I think that’s quite negative for the country… I do think we should see a better trade balance come through, we should see some kind of improvement in terms of inflation, in terms of the stretching of the economy, the oil price where it is right now. The oil price is likely to give quite a nice boom to the economy as well. We are likely to see consumption increase. The estimates are a likely petrol price decrease. The average person driving a sedan is saving R50 per tank, and if you use four tanks a month that’s R200 extra in your pocket. Normally that money would be going overseas to the oil producers, and now it’s going to stay in the economy and have a multiplier effect. So we should see some kind of benefit from that.
   That being said, should we should see a downgrade coming through that would be negative for the country.

SIKI MGABADELI: All right. We’ll leave it there. Thanks to Viv Govender. Lots of Sasols in our picks so far, David.

DAVID SHAPIRO: Digital terrestrial TV? What’s going to come on stream first – digital terrestrial TV or Medupi? What do you reckon?

SIKI MGABADELI: I wouldn’t put any money on either one.

DAVID SHAPIRO: The only problem with Viv is he says the money is not going out of the country. If we’ve got R200 extra in our pocket a month, I promise we are going to buy goods that are imported. It’s still going to go overseas.

SIKI MGABADELI: This view on Sasol? We’ve had Chris Gilmour, Simon Brown, and we’ve now had Viv.

DAVID SHAPIRO: I think that Sasol is not a R400 stock; it’s probably not a R650 stock, but it’s not a R400 stock. So it’s somewhere in the middle, and I think it should probably settle closer to R500 during the course of the year. But I still think we face a lot of problems with the oil price. Yes, the rand is helping a little, but no-one can call where oil is going to be and, of course, what this means for the chemical industry as well. Chemical prices have also come down as a result of that so margins can also be squeezed. It’s the people who are using those products as an input into their factories that are going to benefit.

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