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Sappi: a clear pattern is perhaps starting to emerge now

Chris Gilmour discusses markets, UK food prices, Moody’s, US jobs, gold, safe haven status and Sappi.

SIKI MGABADELI: Let’s check those markets. Resources weighed [on the market] today. You’ve got gold miners down over 7%, resources down 4.2%. So the all-share is down 0.1% at 51 348. The rand is at R15.18/dollar, R21.84/pound and R17.31/euro.

Someone who has just experienced the lack of power in the rand coming back is Chris Gilmour. Were you able to buy coffee over there in Scotland, at least?

CHRIS GILMOUR:  You know, going out for a meal or coffee is hideously expensive. But, strangely enough, if you go into supermarkets and buy things other than meat and booze I can still fill a trolley for half what it costs here. I’m serious, absolutely serious, because you’ve got house brands that are generics and you’ve got a huge range of them that trade at 30, 40, 50% discount to the price of national [brands]. And you don’t really get that here.

SIKI MGABADELI:  Why do you think that is? Is it a drought factor?

CHRIS GILMOUR:  No.

SIKI MGABADELI:  Is it a pricing factor, is it a structural issue?

CHRIS GILMOUR:  It’s a capacity constraint. We don’t want to dwell on this too long, but I think you’ll find when it comes to generics here, in other words house brands, Woolies has pretty much tied up the whole thing. There is not much capacity left for any of the other majors to actually do this, which is why if you go into a Pick n Pay or a Shoprite or a Spar you’ll find the house brands, generally speaking, don’t trade at much of a discount. And, in fact, I have seen with my own eyes certain items – no names, no pack drill – that trade at a slight premium to the house brand, whereas in the UK, as a good example, you will get anywhere between 30 and 50% discount to the national brand price. And you are spoilt for choice – five or six different varieties. That is another topic for another day.

SIKI MGABADELI:  We are going to be talking about it a little later with Kevin Lings. We dodged a bullet with Moody’s, but we still have Fitch and Standard & Poor’s, so we can’t be complacent, can we?

CHRIS GILMOUR:  Precisely – -and you put your finger on it there, Siki. This was a surprise and a very pleasant surprise and basically I think what Moody’s is saying is they’ve given a bit of a stay of execution. The risk here is implementation risk, and what I mean by that is there are a lot of good intentions out there and I think a lot of this is down to the Herculean efforts of Pravin Gordhan, who does a fantastic job of going out and selling South Africa and saying, guys, we are back on track and we are really trying very, very hard indeed. But the implementation risk is what’s here.

If those good intentions can’t be monetised, can’t be made tangible, then unfortunately in a few months’ time we might see all of that unraveling. As you rightly say, S&P, June 3, may come and deliberate and we are already at one notch above junk status, We are Bbb‑, with a negative outlook, by the way. So there is really no latitude for complacency at all.

And that is why, if you look at Reuters today, you see Pravin being quoted as saying he’s going to be talking to Fitch and S&P. Hopefully he can pull this thing kind of rabbit out of the hat, as he appears to have done with Moody’s.

SIKI MGABADELI:  Well, there is that meeting today between business leaders, labour and government with the president – and we’ll see what comes out of that tonight. That’s kind of a feedback session that’s taking place at the moment.

It’s been quite busy. We had the gold price today down close to 2% on the day. It’s interesting when we look at what’s happened since Friday, when we had those jobs numbers out of the US, and then coming through to today with the drop. How do you read it?

CHRIS GILMOUR:  Those jobs figures coming out of the States – 160 000 as against the 200 000 expected – were a profound disappointment. A lot of people would be jumping on the bandwagon and saying aha, here we go, this is the US economy starting to stutter. Bear in mind, they are down below 5% unemployment, are as close to residual unemployment as makes no difference. So it’s difficult to see how you can make really big inroads from here on in.

But, nevertheless, coming back to your question about gold, gold has had a fantastic ride in the past, it’s been phenomenal.

SIKI MGABADELI:  20% for this year so far.

CHRIS GILMOUR:  And not for the normal reasons, either Siki. In other words we haven’t see a resurgence in inflation. Quite the opposite. Have we seen this move away to fiat currencies? No, not yet. That’s another issue for perhaps a decade or two away. I think it’s more from its sort of safe-haven attraction and the fact that there is so much uncertainty around the world. It’s had a fantastic run. Will it continue? Maybe not.

SIKI MGABADELI:  Let’s unpack a bit of that safe-haven status. What is it? Is it global economic weakness that people are worried about or why are people rushing to gold?

CHRIS GILMOUR:  I think if you look at what’s come out of the IMF recently in the past few weeks and months, thespring meeting a few weeks ago, Madame Lagarde, who has been very, very insightful for a long, long time about what’s going on there, gradually reducing the outlook for global growth. So if you look at this as dispassionately as you possibly can, since the end of the financial global crisis in March 2009 the global recovery has been kind of grudging. It really hasn’t been fantastic. And yet global markets have reacted completely differently. Markets have risen way, way above what the fundamentals should have done in the first place. So I think that’s where a lot of that nervousness comes from, Siki, and it’s perhaps natural that people are looking for this kind of safe haven. Look, I’ve never adhered to this one. I’ve always regarded gold as being a bit of a “barbarous relic” as JM Keynes used to say.

SIKI MGABADELI:  Sappi? I don’t think we’ve talked about Sappi for a long time. But it’s doing very well. It saw profits more than doubling but sales have fallen. But I think a lot of the sales come through from Europe and North America.

CHRIS GILMOUR:  Ja. If you look at where the earnings are coming from these days, 51% comes out of Europe these days. South Africa is I think accounting for only a shade over 20% these days.

SIKI MGABADELI:  About 24%.

CHRIS GILMOUR:  So the dissolving pulp market is looking perhaps a little bit better. Sappi is an extremely difficult company to get your mind around. Normally you buy companies when the PE is low and you sell it when the PE is high. And yet with Sappi you do precisely the opposite. You buy when the PE is high, because the fact of the matter is you are probably going to see improved earnings coming through. But it’s good to see this. It’s been a difficult one for a long, long time and a clear pattern is perhaps starting to emerge now with Sappi.

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