Analysis & Profiles 7.6.2016 04:09 pm

Banks are ‘exceedingly cheap’ right now

Picture: Thinkstock

Picture: Thinkstock

Simon Brown on the rand, Fitch, banks, valuations, SAB, Richemont, Naspers, Walmart/Massmart, Pick n Pay, Woolies and Sasol.

SIKI MGABADELI:  Let’s talk about markets now. Let’s have a look. Not a great start of the week. The all-share index is down 0.5%, the same with the Top 40 today. The all-share ended at 53 990.

The rand is at R14.95/dollar – how nice to say 14 for anything related to the dollar – and R21.59/pound and R16.98/euro.

Let’s chat to Simon Brown, who is a founder of JustOneLap. Simon, thanks for your time today.

SIMON BROWN:  Good evening, Siki. I do like R14. It was so long ago we liked R12 and R10, but right now we’ll take the R14.

SIKI MGABADELI:  Exactly. So let’s talk a bit about this rand. Is it S&P?

SIMON BROWN:  What we saw coming into Friday was a strong market last week, and it’s weird how it shifted. Just two weeks ago the view was we were getting a downgrade. Then it moved to we are not sure. Then it was kind of like it’s not going to happen, we are safe. We saw a massively strong rally into it. The rand was helped by the jobs data out of the US, so a lot of that initially was about US dollar weakness. But post the S&P announcement just before six o’clock on Friday evening we did see the rand strengthen further. We saw it strengthening today as well, and today we weren’t seeing the dollar weakness. The US market had forgotten about the jobs data and moved on from that sense. So I think we certainly can attribute it. Of course, for how long and what does Fitch say on Wednesday? But for now we are taking it.

SIKI MGABADELI:  But what pulled the overall market then?

SIMON BROWN:  The overall market – it was a classic buy the rumour, sell the fact. In other words, we are not going to get downgraded, let’s buy it, everything’s lovely, we didn’t get downgraded, brilliant. So really coming in this morning was about the selling.

At one point the banks were being totally slaughtered. They were the one bit of green in our market, a very little bit of green. But our market is trading around those all-time highs, which are the highs we hit in May last year, the highs we hit the May before. We’ve been at this level now within a wide-ish range for two years and we just can’t seem to get through it. We get to that level, the high 48 000s, and then it’s like, no, too scared to move through. The reality is our valuations are lower, because the price is the same. But over the last two years we’ve had a 20%-odd increase in valuations, so our market is 20% cheaper. You could make an argument that economically we are in a worse position. If you look at us in US dollars, our market is way down.

SIKI MGABADELI:  And where were the highest valuations? I remember all the time we were talking about the overpriced retailers, for example, and how people were putting such a premium on banks as well.

SIMON BROWN:  It’s not banks. Banks are exceedingly cheap right now. I still won’t touch them. The valuations remain in industrials – SABMiller. Well, Richemont pulled back quite markedly. It remains just Naspers, British American Tobacco. It’s still that industrial story, which has been the story since the crisis of 2008. It’s getting boring, I know.

SIKI MGABADELI:  And yet some of those stocks are trillion-rand companies. And we were welcoming Naspers to the trillion-rand club last week.

SIMON BROWN:  They are trillion-rand stocks, they are defensive stocks, which are typically low valuation. But in an environment where interest rates globally are pretty much at or near zero, in some cases negative, remember all of those stocks I mentioned they are the big, if not all of, the money beyond our borders.

So if we go back to our rand which was R8/dollar and now let’s call it R15, that’s an 87% increase in their earnings just on currency moves, whereas the same can’t be said for resources, because they’ve seen the commodity prices come down. Banks don’t get the currency exposure, so it remains an industrial story.

SIKI MGABADELI:  Let’s talk about some of the news today. Did you see the speculation about Walmart/Massmart? What do you think of it?

SIMON BROWN:  Yes. I want to bet if it happens. I’ve always said it was a bad deal. One thing Walmart is good at is cutting and running. I mean that respectfully. If you do something and it doesn’t work, get out. Frankly the sooner you get out – Discovery did it in America; it cost them a billion, as opposed to Pick n Pay who went to Australia and spent a fortune because they kept on saying we can make it work.

The problem they have – as the speculation was suggesting in the papers yesterday – who buys it? Who wants 51% of Massmart? And the short answer: nobody. Of the retailers in South Africa they just bought the wrong one. And I get that Massmart and Walmart are the same sort of big-box [overtalking]. You don’t just buy a tin of sardines. You buy a ton of sardines, the biggest thing you ever did see. Massmart has never been a company or a brand – I go there to buy a desk occasionally.

SIKI MGABADELI:  Ja, me too. So if you were going to buy a retailer in South Africa today, which would it be?

SIMON BROWN:  It would be Shoprite or Woolies – and as a good disclaimer, I own both of them. So Shoprite for your middle-lower income. Whitey Basson has got it completely sewn up on every angle. He is still taking market share from Pick n Pay. They’ve got such a long way to come back.

Woolies for the slightly higher-end consumer, for their clothing brand. And I think Ian Moir will make Australia work. I think it will take five years, it’s not going to be a walk in the park. But to me they are the two eminent retailers in this country.

SIKI MGABADELI:  A profit warning from Sasol.

SIMON BROWN:  I’ll tell you what surprised me the most – it’s that it surprised the market.

SIKI MGABADELI:  What I will say, they’ve been very consistent about saying we are not okay, we are not okay.

SIMON BROWN:  And there was a surprise there, which is the Louisiana ethane cracker plant. Let’s put that aside for the moment. Things are a little bit ugly there. Yes, oil is hurting, rand helping, but rand not helping enough. And Sasol, as you say, are very transparent on what the impact is in terms of rand and dollar and oil price moves on their bottom line.

The ethane cracker plant in Louisiana, which was planned when oil was at $115/barrel, and the executives who think commodity prices don’t move. They are doing a review of it and basically at this point the review says we are not sure but it’s going to cost US$3 billion more, which is approximately 15% of their market cap. That’s going to hurt. Which big project didn’t cost more than it was meant to?

SIKI MGABADELI:  We know this.

SIMON BROWN:  Unfortunately they are going into a lower oil-price environment and the theory seems to be lower for longer. Certainly oil at $100-plus never made sense to me. Oil at $40, $50 – that kind of makes sense for the output we’ve got and the global demand that we are seeing.

 

 

 

 

 

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