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Today, Afrox announced that it has secured a R25 milion a year equipment supply contract, and although Afrox currently plays a lesser role in a field where it used to be quite dominant, it is very well positioned to take advantage of cheaper energy solutions that are on the South African horizon. Fracking especially is bound to be a game-changing part of the energy landscape in the future and David Shapiro reckons that the company will see substantial benefits as the sector develops. Along with Afrox, David gives his views on some other hot stocks in the markets, and ones that he would personally stay clear of. With a certain set of views based on the fundamentals and years of experience, David Shapiro can always be guaranteed to give sound insights into the ups and downs without being swept away by sentiment. – LF
ALEC HOGG: …the markets today…
DAVID SHAPIRO: I haven’t had a deep look at them at all. Generally markets…. I’m quite happy in broad terms.
ALEC HOGG: I want to ask you about the Stock that Gugu says is a very little company – Afrox.
GUGULETHU MFUPHI: The reason why I say that… Let me clarify this, Alec. We speak to many individuals like yourself David, and they say it’s a small company.
DAVID SHAPIRO: It used to be a big company. Alec, what’s interesting is that if we go back 10 or 15 years ago, remember that Afrox were number one, used to win all the prizes in terms of reporting, and corporate governance. It was a leading industrial company and I think over the last decade or so, many of those industrial companies just haven’t kept pace with (1) the foreign companies that have come as well as the financial companies, which have just run ahead.
ALEC HOGG: Why I ask about Afrox is the whole fracking boom around the corner, with Afrox being a gas company would they be a beneficiary there?
DAVID SHAPIRO: Of course, because what the fracking boom does…we consume propane and methane, which is the basis, which is what they do and what they sell.
ALEC HOGG: Do they get it cheaper?
DAVID SHAPIRO: They get it cheaper. We convert from electricity to using gas. In addition, if they do get it cheaper they can supply some of the power stations as well. You get a conversion from coal to gas as well. They must be beneficiaries.
ALEC HOGG: I was thinking who would the beneficiaries be of the fracking. In America, you were saying that Sasol, and Sasol’s an obvious one – but maybe looking off the radar, taking a long-term bet, Afrox might not be a bad idea.
DAVID SHAPIRO: If gas is cheaper than coal…if that’s going to be a source of energy and they’re suppliers of it, we would convert our houses for it. It would be a cheap way to heat our houses and to cook etcetera. It depends on how they use it, but that was their business. Industry as well…industry beings to use gas as a means of powering the engines.
ALEC HOGG: Another ‘right brain’ or off-the-wall kind of idea: I see today, RECM has pushed up its stake in Astrapak. Now we know that Coronation’s in Astrapak as well. Is that a stock, which we, as the great unwashed, should be thinking of as well?
DAVID SHAPIRO: I think there are many issues ahead of Astrapak. I know it from the old days and I watch it very carefully. I still think there’s a lot more restructuring that has to take place for Astrapak. The last set of results were awful. I know it’s in a turnaround situation, but why look for something like that when you can go buy a Nampak or an Impact, which are companies that are doing well. They know exactly where they are. I know RECM love to buy those deep discount businesses that they feel they can turn around. Didn’t they look at…?
ALEC HOGG: ArcelorMittal was the other one we were talking about earlier.
GUGULETHU MFUPHI: Just before that.
DAVID SHAPIRO: I don’t have that kind of courage to wait that long. I like operating companies that are making profits. They might not be making the kind of profits we like (double digits), but they’re still compounding along and doing well.
ALEC HOGG: We have two nice share tips already.
GUGULETHU MFUPHI: Share tips, indeed. You’ve changed my view on Afrox, so I’ll look at that one closely, maybe in the long-term. Looking at Sibanye, they came up with the trading update. Earnings down, but production looking on the upside there.
DAVID SHAPIRO: They’ve surprised on their upside. I have to say, we know Neal Froneman from a long time ago, and I’m absolutely surprised at how he’s managed to turn this one around. In fact, it’s becoming a bigger cap than maybe… It’s starting to catch Harmony, which is unusual. We thought of this as a throwaway company that’s going to provide us with high dividend yields and yet, he’s sticking to his strategy.
ALEC HOGG: He’s a gutsy guy. He’ll actually grasp the mettle where other executives of mining companies – with respect – kind of don’t want to be involved. Well, not Chris Griffiths, but certainly, he’s one of those. If you can remember when the Kebbles were ruling the roost, Froneman was the only one who stood up against them – well, not the only one – but he was vocal in his criticism at the time. He’s a man with a backbone.
DAVID SHAPIRO: I think so and he surprised us, in a positive way. He’s also starting with uranium now, which I never liked.
GUGULETHU MFUPHI: Why not?
DAVID SHAPIRO: Ever since the 90’s…I have a long memory about uranium. My bar mitzvah money went into a uranium company. I’m still looking for it.
GUGULETHU MFUPHI: Well, that was a long time ago.
DAVID SHAPIRO: It was, so I’m always fearful of uranium particularly at a time where gas is becoming a much cheaper energy source. I think it’s going to take a lot away from other energy sources.
ALEC HOGG: Help me out with Telkom. Gugu has been raising her eyebrows every time I think Telkom’s a good purchase. Are you raising your eyebrows too, despite the fact that the market it…?
DAVID SHAPIRO: They’re at R40.00 now. They’re up 170 percent over the last year.
ALEC HOGG: What’s the market cap, Dave? It’s still very low.
DAVID SHAPIRO: It’s R18bn or R20bn maybe, which is half of the market cap it was when it released Vodacom. I can’t remember the exact numbers. I think it was about R75bn and then it was made up of Vodacom and itself, and it’s halved since then. I still think there’s a lot of work and I think we’re building too much good news into it. In other words, too much of the turnaround story. I think the new CEO is going to start facing government when he wants to start laying off people and that’s the next phase. You start cutting costs and now you have to start cutting staff. It’s going to be more difficult.
ALEC HOGG: It’s one-tenth the value of Vodacom. Would you rather have ten Telkoms or one Vodacom?
DAVID SHAPIRO: Vodacom gives me a seven to eight percent dividend yield. It’s generating huge amounts of cash. It sells air and at the moment, we consume a lot more air than fixed line.
ALEC HOGG: That was David Shapiro from Sasfin Securities, giving Gugu a couple of stocks to put into her long-term portfolio.
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