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The South32 assets ‘are kind of the second tiers, and I’m very picky in my resource space’: Simon Brown – CEO and founder, JustOneLap

Simon prefers Netcare to Mediclinic or Life Healthcare.

SIKI MGABADELI: A look at the markets now. We are up, boosted by those resource shares. The all-share index is up 0.75% to 54 409. The Top 40 is up 0.33%. The rand is trading at R11.85/dollar, R18.54/pound and R13.45/euro. Gold is at $1 226.95/oz, platinum at $1 176.60/oz and Brent crude oil at R66.16/barrel. It looks like it’s stuck around that level.
    Simon Brown is with JustOneLap and joins us now. Hi, Simon.

SIMON BROWN: Good evening, Siki.

SIKI MGABADELI:  Well, we are up. Resources are really doing well and of course the big story is the debut of South32.

SIMON BROWN:  I must say it was a broad-based rally. But undoubtedly resources won the day. What we are seeing if we step back is a market that goes up two days and then down two days, and was kind of really drifting sideways the last little bit.
    Some good results today and, as you said, South32 arriving on our bourse, Code S32, and trading at R20, which I thought was reasonable, those some valuations are pitching it closer to R40. But I thought the R40 valuation was decidedly crazy.

SIKI MGABADELI:  It was quite interesting, just looking at Australia. There are reports coming out of there – and people had also expected it to trade a little bit higher than the launch price, which I think was around A$2.13.

SIMON BROWN:  And really what we’ve seen here are two points. Firstly, these are assets that Billiton does not want, so why do I want them is my first question.
    The second issue is you are always going to see some initial selling pressure, people who say I don’t want this, so they get rid of it. If you held less than 10 000 Billiton shares they would have taken your South32, and will sell them on your behalf into the market. The first couple of days, couple of weeks, we see some pressure on the price, then it could potentially move higher. But this is still to my mind – I own Billiton, but this is not a stock I plan to hold long term. We [may] start to see some strength in the months ahead and I’m going to do what Billiton did – get rid of it.

SIKI MGABADELI:  All right. They’ve got some assets there that have legs.

SIMON BROWN:  They have, but they are kind of the second tiers, and I’m very picky in my resource space. I want the best of the best in terms of assets, what they mine, in terms of geography, in terms of management. And yes, they’ve got some great aluminium assets and I look at it and I shake my head and I think, aluminium, tin cans and your beer cans – unless it’s Consol glass. But to me it’s just not an exciting business.

SIKI MGABADELI:  All right. Let’s look at the other numbers out today. Vodacom – they are really getting hit. On the one hand it’s the mobile termination rate, and of course the competition.

SIMON BROWN:  Absolutely, ja. And the only sort of light on the horizon really is around the increase of people [moving] towards data, smartphones and people who are using data, using more data than we did a year ago and the year before that. The problem with data is the price is coming down. So, even though they are winning customers on that side, about half of their users are now using some level of data on their phones. It’s just not making up for that lost revenue. So they are quite quickly changing into that ex-growth company which we always kind of knew would happen.
    The bigger problem for them perhaps, way bigger problem, is that because of the Vodafone shareholding they are restricted to only operating in southern Africa. They can’t go off as MTN has into Central Africa or into other parts of the world. So there are not a heck lot of growth prospects for them. When everything kind of shakes out they are just going to become a utility in a sense, and a well-paying-dividend one at that. You’ll get a good dividend out of Vodacom.

SIKI MGABADELI:  You’ll still get that. But if you had to pick between the two, Vodacom and MTN?

SIMON BROWN:  Give me MTN. I like the growth prospects, I like Nigeria; they’ve got some quite risky places – Sudan and Iran spring to mind, or certainly Sudan and Syria more recently as well. But certainly I like their growth prospects going forward.

SIKI MGABADELI:  All right, Netcare? We spoke to their Dr Richard Friedland a little earlier. Let’s just hear very quickly first what he had to say about their interims, and then I’ll get your view on the hospital business.

RICHARD FRIEDLAND: I think what you are seeing in our results is less about price increases and tariff increases, and more about operational efficiencies and operating leverage come through, if I may say so.

SIKI MGABADELI:  All right. Looking at the South African market, I may mention that the economy is kind of struggling along. We’ve got load-shedding that is also impacting on businesses – it doesn’t matter what size you are.

RICHARD FRIEDLAND: Sure.

SIKI MGABADELI:  It has some sort of impact on you. How are you countering that?

RICHARD FRIEDLAND: We spent a lot of time today talking about that because we made a very significant commitment to our patients and our staff and doctors that we will try and not suffer any interruptions. And clearly in a hospital environment that could be life-threatening. So we have generators throughout all of our hospitals and uninterrupted power supply. Twenty-one of our hospitals can actually run completely independent of the grid, and another 28 have dual generators, so backup generators above emergency generators. Fortunately we haven’t had any disruptions to date. Obviously we are spending a lot on diesel in keeping these generators going and we’ve probably spent twice as much as we spent in the entire year last year already in these six months. But we are fully prepared for any outages.

SIKI MGABADELI:  And in the local market – have you opened any new hospitals, are you planning more?

RICHARD FRIEDLAND: Siki, we are planning to open two brand-new hospitals. The one flagship hospital is in Polokwane. It’s a 200-bed facility. And another one is on the West Rand in Mogale City or Pinehaven – that’s 100 beds. They’ll open in September. And then we are adding another in total 500 beds to our network, which means that we’ll have just under 10 000 beds by year-end.

SIKI MGABADELI:  Thanks to Dr Richard Friedland. For the full discussion click here.
    Simon – private hospitals?

SIMON BROWN:  I like private hospitals in the one sense, because they are kind of like hotels. There are two stark differences. You don’t voluntarily check in – you just land there. Then hopefully you’ve got a medical aid which pays for you. So it’s a good business.
    But we saw last week the Mediclinic update. The market wasn’t impressed. Life Healthcare – and there are some reasons those numbers weren’t great. Netcare today – those are strong, strong numbers. The cash generation, R1.5bn is a giant number, and they are managing their biggest challenge, which as you noted in the interview, is the load-shedding – and thus far they are managing it seriously, at a cost. But that cost isn’t preventing their ability to turn a profit. So of the three to my mind I think they are the out-and-out winners.

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