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Stock picks for 2015: Chris Gilmour – Absa Wealth & Investment Management

The rand likely to remain under intense pressure…particularly thanks to ‘nice’ Eskom.

SIKI MGABADELI: Chris Gilmour is with Absa Wealth & Investment Management. He joins David Shapiro and me here in the studio. Chris, we are talking oil, so we must go first to Sasol. because that’s one stock that you are going to be watching this year as well.

CHRIS GILMOUR:. I think as the year progresses, Siki, Sasol could be quite a fascinating stock because, going back to what David and Mike were saying, already you are seeing at the periphery that oil exploration has virtually shut down. You are seeing marginal wells being closed. At some point in time – and I don’t know when that is, maybe it’s $50/barrel, maybe it’s $45, maybe it’s at the extreme end $30, I don’t know when it’s going to be – but when it happens I think you will see a vicious rebound upwards and I think it will be very, very quick. I don’t think we are going to see $100/barrel any time soon, certainly not in the next couple of years. But I think we could get back to that $60, $70 range, or even $75, $80, because at the end of the day there is the cost of extracting oil. It doesn’t all come out of the Middle East. In the Gulf of Mexico, for example, it costs just to get the wretched stuff out of the ground quite a few miles under the ocean $65 to $70/barrel.
   So what I’m saying is there is a self-correcting mechanism in place. At some point in time the excess in terms of supply actually starts coming to a bit of a halt. So whether there is a conspiracy going on, whether they are trying to put the screws on Mr Putin, whether it’s a re-run of what happened to Ronald Reagan and the Saudis back in the 1980s, we just don’t know. Only time will tell what is actually happening there.
   But I do believe what will happen is that when the turn comes it will probably be quite vicious upwards. And that is why, coming back to your original question, I think Sasol is one to watch because it has taken a lot of pain. David, I don’t know, it’s come back from R600-and-something.

DAVID SHAPIRO: We were down 18% last year.

CHRIS GILMOUR:. So it will probably go even further, even if it’s just on sentiment. Let’s not forget, the nature of Sasol is changing more from an oil company into something that much more closely resembles a chemical company. Nevertheless, I think sentiment will weigh heavily on this one unless and until it is perceived that you’ve got a bottom in the oil price.
   Also don’t forget that Sasol is much more closely correlated to the rand/dollar exchange rate than it is to the dollar oil price, and I remain a very, very strong bear on the rand. I think the rand is going to remain under intense pressure as the year progresses, particularly thanks to those nice people at Eskom. I don’t think we have even the foggiest idea of how bad things really are at the utility.
   So once we get a taste of power outages every couple of days for quite a few months, maybe six months on the trot, then I think we’ll really understand just how bad things are at Eskom. … I think the rand will remain under intense pressure.
   So, with that being the case, I think Sasol, if you watch it and it gets down to maybe the high 200s, low 300s, that will be a point to start looking at a nice rebound in that stock.

SIKI MGABADELI: … Just stay and close your eyes.

CHRIS GILMOUR: I suppose there’s going to be an opportunity cost of hanging around in this one, but I’ve always liked Sasol from the longer-term perspective. I do believe this is a temporary interruption. As I said, I don’t think we are going to go back to the glory days of oil prices of $120/barrel any time soon, but I think we are going to get back to significantly higher levels than we are currently experiencing in the not-too-distant future.

SIKI MGABADELI: Let’s talk retailers. It was a very strange year last year from some really interesting news with what we saw with Steinhoff, and the Woolies deal with David Jones to the Ellerines of this world – and everybody else is having a torrid time. What sort of year do you expect for retailers?

CHRIS GILMOUR: I think it’s going to be an even tougher year than last year. Unsecured credit will continue to be reined in, administered prices, again from those nice people at Eskom, coming through, much, much higher on that front, making the ability to spend that much more difficult. And wage increases are going to be held in check.
   The only one bright spot, I think, will be the lower oil price. So if people are having to spend ;less on fuel, it means they’ve got proportionally more to spend on consumer goods. But Azar Jammine put it very well in the paper this morning – the current reductions we’ve had so far give the average consumer about 1% more in their pocket. It’s not massive. It obviously depends on how far you’ve got to commute, for example, every day. So it’s not a broad-brush thing. So that will help.
     But generally speaking I think it’s going to be another very, very tough year for retailers and most retailers with a few exceptions really are priced for perfection. There is one that stands out. It’s initials are PnP. It’s at an eye-wateringly high price/earnings ratio, close to 40 times. To me it’s a crazy price. It’s a good company and I think it’s doing all the right things. Mr Brasher is doing a really, really very good job. But I think because they’ve taken their eye off the ball for so many years leading up to his appointment, I think clawing its way back is going to be an exceptionally long and difficult process, and I think the current price is just way too high.

SIKI MGABADELI: Mr Price did fairly well last year – among some of the best performers. They’ve really done well over the years. Is that just about their model?

CHRIS GILMOUR: Mr Price is a very special company. In many ways it’s South Africa’s GAP. This company has got huge iconic status. People don’t go to it because they want cheap and nasty stuff. They’ve got some very, very good stuff, and it’s fashionable. And it’s fashion at a good price. But they go there because they actually want it, not because they are forced into it by economic circumstances, like with some other retailers which I won’t mention. So I think Mr Price is a very special company and they’ve been able to handle this set of economic circumstances extremely well. Bear in mind also they are in my opinion the only clothing retailer that has got online right and they’ve got it right in an incredibly good and intelligent way. And they are also moving to the rest of Africa at a very, very rapid rate – far faster than most people imagine. The store in Accra in Ghana, for example, stands in comparison with anything that you’ve got in Sandton. So if you put it all together, Mr Price’s formula is incredibly clever and incredibly intelligent.

SIKI MGABADELI: And quickly, the db x-tracker funds are something else we can be watching this year.

CHRIS GILMOUR: Ja, I think with the rand continuing to decline, I can’t see anything stopping that happening. I think if you want to participate in the rapidly growing American economy – and I think that US economy is going to grow quite a bit faster than most people give it credit for – it’s the easiest an cheapest and most cost-effective way of getting exposure to the US economy. DBX USA.

SIKI MGABADELI: OK, so one must look at the USA. David, lots of people watching are the US for their economic growth. Europe is in trouble. China – we are not so sure. They are still going to have high growth, but not so sure. The US recovering.

DAVID SHAPIRO: The one we have to watch out for is Europe, because America can’t exist on its own, regardless of how big it is. And the other is that if the oil price does come down – Chris mentioned that there might be a reduction in investment in fracking. That might also take a little bit of an edge off the US economy. But we don’t know. We are speculating. I think companies can last a lot longer than we think. They’ve got the means to do so. But those are the two areas that we have to watch on the US economy.

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