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Sasha Naryshkine of Vestact gives his views on Abil and other companies making the news.
If you like your adrenalin rush best when you are investing in high-risk, potentially high-return stocks, South African money-lender African Bank Investments (Abil) must be on your radar. Abil has delivered shocks to its shareholders, not least of all revelations about the extent of its bad debts. It has warned the market to expect losses of R4.5-bn for the six months to March. This comes after a rights issue to raise R5.5bn. Abil may have to ask for more money. The share price has reacted as you might expect to such unwelcome news. As market commentator Sasha Naryshkine tells Biznews publisher Alec Hogg here, he is not sure he remembers the Abil price being so low. If you believe CEO Leon Kirkinis, the worst is over for the bank. Invest in this one with extreme caution. The picture could get uglier for Abil. – JC
ALEC HOGG: Let’s get a more in-depth view of some of the highlights and lowlights of the market, and how it’s trading today. Here’s Sasha Naryshkine, Director at Vestact. Sunday Times had a full go at Abil over the weekend. We’ve been saying ‘watch out, watch, out, watch out’, and now the share price today down another eight percent.
SASHA NARYSHKINE: Plumbing lows last seen about a decade ago, in fact. I can’t remember it being below nine, even after the rights issue was announced.
ALEC HOGG: If it’s too big to fall – and remember, there’s R60bn of offshore debt, which is being held by… – and we’ve often pointed to this. Sure, the equity on the market is okay for shareholders, but the debt is much, much bigger. It dwarfs the equity. If that were to go belly-up, heaven knows what the impact would be, but if it’s too big to fail, isn’t this the time to maybe start cigar butting?
SASHA NARYSHKINE: That’s what Coronation and the PIC have been doing. Essentially the shareholder register’s changed dramatically and remember, there’s a lot of increased short interest there, so if they were to call those in, bizarrely, for a special vote of sorts, I’d hate to know what the share price reaction would be in the other direction, if one of those big shareholders…Obviously, those people have much wider spread portfolios. Coronation and the PIC…
ALEC HOGG: Do you trade this? Do you ignore it? Is it too scary to get involved in?
SASHA NARYSHKINE: It’s tough. Consumer finance is tough, as you know. Look at City Group, which I think is, over five years, down 80-odd percent, so you can be in the right space, but choose the wrong investment vehicle. As we’ve often chatted about, Capitec has been a ‘tale of two cities’, so Capitec operates in exactly the same space, but yet all their metrics have been pointing in the right direction. Abil, unfortunately, either have it completely wrong, the market has it completely wrong – but I don’t know. From time to time, you see these cycles. Ironically, Abil was a winner in the very last cycle because they managed to pick up Saambou’s book for an absolute song. I don’t think that the business is going to go insolvent.
ALEC HOGG: It can’t. It’s too big to go bust.
SASHA NARYSHKINE: The equity holders will ask to raise some more money, but they probably have to be willing and would be wiling at these very low levels.
ALEC HOGG: Do you know what this reminds me of? Do you remember Super Group? It was also in the same situation, and that’s been massive turnaround. That’s why, sometimes, if you can hold your head when all around you are losing theirs in the investment field, you can make a lot of money.
SASHA NARYSHKINE: Absolutely, but it’s difficult to ignore all the noise when everyone looks at the PnL column on the right and says ‘oh my word, look at how much I’m losing on paper’. If they were to have another rights issue, it would be at another steep discount, probably to where the share price is trading now, but you would think that the two biggest, most recent shareholders would back the business on this one.
ALEC HOGG: Well, forget about them. The R60bn-worth of bondholders make their investment look like its tiddlywinks.
SASHA NARYSHKINE: I guess so. As long as they’ve been able to manage to appease those people for this long, I should think it’s some more hard work for their treasury.
ALEC HOGG: Can you trade in that debt? We know we can buy and sell shares in the JSE, but are Abil bonds easy enough to trade in?
SASHA NARYSHKINE: I’d be speaking out of turn here, so I wouldn’t necessarily know.
ALEC HOGG: They must be trading at a huge discount at the moment.
SASHA NARYSHKINE: Exactly, and there might be more opportunity for fixed-income traders there, as you said, but if there were some sort of debt restructuring again, maybe the market always knows. As you well know, sometimes the debt holders can also be wiped out in these situations, although they always get something back. Even hedge funds for example, that bought some of that Lehman debt, in what is probably the biggest financial industry meltdown that we’ll probably see in our lives: Those people made good money because they were able to buy…
ALEC HOGG: Look at Warren Buffett.
SASHA NARYSHKINE: Well, I suppose he’s an example of someone who probably has the most level head, and he’s probably the best example of anyone who says ‘oh, I don’t have x, y, or z years to invest’. He’s probably the only person, even at the ripe old age of (how old is he now – 83), he’s able to pick investments he thinks has longer term. He read the IBM annual report 48 or 49 times before he invested in the business. There’s an example of someone who’s always paying attention and will choose a moment in time.
ALEC HOGG: I mentioned that because he’s made an independent fortune (well, he made billions of dollars) on both Goldman Sachs and Bank of America, which he invested in at the bottom of the market when everyone else was running for the hills.
SASHA NARYSHKINE: And General Electric.
ALEC HOGG: He put the money in.
SASHA NARYSHKINE: He obviously loaned it to them at preferential interest rates in what was convertible at a later stage, so he didn’t get them all right. I think the Dow chemical company was one of those he suggested that, maybe with the benefit of hindsight, he shouldn’t have done. Regardless, as you’ve pointed out he had the cash pot available at the time. Interestingly, Berkshire has underperformed a little bit since then, but if you were a mom & pop who owned them from the mid-sixties, and you haven’t paid attention, you’ve made personal fortune, yourself.
ALEC HOGG: To say Berkshire has underperformed is…
SASHA NARYSHKINE: But in the very short term…
ALEC HOGG: Yes, it’s a share price and the biggest part of their portfolio is now Unlisted Subsidiaries. If they don’t mark to market…Talking about companies who have underperformed – perennial underperformers – up until a year ago, you would have said the same about Sappi.
SASHA NARYSHKINE: Yes, but if you look at the breakdown in terms of geographies, which they sell into, 67 percent (two-thirds) is in North America and Western Europe, and 62 percent of all sales is fine-coated paper. If you look at the usages for fine-coated paper and the people in those geographies, more and more people are reading not only on tablets and on their notebooks, but they’re also reading more and more on their smartphones. What’s the future for their business whilst they’re trying to ramp up cellulose? As you know, cellulose – they’re the number one producer – there’s about another 50 percent of what’s current production coming on market in the next three to four years for cellulose. They might therefore lose their position as the number one cellulose producer, but whilst there’s this transition shift away from the traditional business to the new and exciting business, it’s still going to be facing lots of headaches.
ALEC HOGG: Those numbers aren’t bad, though. They do confirm, but we’re going to talk to Ralph Boettger about that. What’s your take on Lonmin – interims out this morning?
SASHA NARYSHKINE: You’re seeing a massive fall in terms of production, but sales are about three-quarters of what they were, so again, it echoes the sentiment that the strike whilst bad for the country hasn’t necessarily been bad for the platinum producers.
ALEC HOGG: They took $133m/$1.3bn operating loss in the half-year. That’s bad for the company.
SASHA NARYSHKINE: We would have though that’s completely ugly, and yet the share price hasn’t reacted as much as you would have presumed and the platinum price has been quite stable, meaning that these businesses have used this as an opportunity to be able to get a lot of inventory out the way.
ALEC HOGG: An interesting thing is the way the platinum shares operated. If you go back a year, they were far lower than they are today. It’s almost as though the investors who went in there are hanging on.
SASHA NARYSHKINE: Most of the people who got cleared out…have remained out of the market. The question becomes around supply: how much more in terms of the recycled market will continue to come back into the market. As you can appreciate, with the improved technologies, there’s less platinum in current convertors, but the stuff that’s coming off stream – there’s slightly more. That’s why the sentiment is that this has not been bad for the market, to be able to see not as much production.
ALEC HOGG: At some point in time, it had to happen, so it may as well happen now. Calgro brought results… Incidentally, Sappi’s share price is up three percent, the share price today, so the market’s quite happy with it. Calgro also released results this morning. They were up two percent.
SASHA NARYSHKINE: It’s an interesting part of the market. You could argue that business does business best here in South Africa. Against that backdrop, there should be more work for them because they operate in the housing space, of which we still need over two million formal dwellings in South Africa if you believe the last census numbers. Against that backdrop, there is a lot of work to be done yet, and the cross border stuff, even though it’s small stage into Namibia does represent other opportunities around us again, and for the rest of the continent. It’s not just them. We see numbers from Raubex, too. If they manage to continue along this trajectory, there’s going to be a lot more work around for these business provided they could be nimble enough. You would think that some of the cross border stuff – although more difficult to manage – would be a much higher margin than it is here.
ALEC HOGG: Sasha, just to summarise, the Abil story is the one that’s dominating everything now as far as volumes and share price declines are concerned. What would your play be on Abil, or are you just staying away?
SASHA NARYSHKINE: It’s just way too difficult to call. Sentiment is an exceptionally powerful thing, so if the cost of funding becomes a big problem for the business then that’s very bad, not only in the medium term, but also for the long term. Can there be a rescue-type of situation, where someone can step up and form a capital base which the debt holders are happy?
ALEC HOGG: I like that. Yes. No. If you have your three boxes on your table – yes. No – usually very small…too tough to call.
SASHA NARYSHKINE: I like your analogy. It’s the best way to go.
ALEC HOGG: Good one. That was Sasha Naryshkine, Director at Vestact – very sage advice there. Abil is too tough to call for most people, unless you have some type of crystal ball, insight, have done that annual report, and read that annual report 48 times and fully understand it, I think that his advice to stay away for now, is the best. After the break, we’ll talk to Clive Simpkins to get his view on South Africa’s election results.
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