David Shapiro: Resources, retail and oil worries in Africa


Nothing’s ever dull with market commentator David Shapiro from Sasfin in the mix, and today was no exception. Joining Gugu in the CNBC studios in Joburg while Alec tuned in from Cape Town, David offers us some insight into  the struggles arising for the everyman in the growing Eskom crisis, the resources market performing appropriately off the back of last years’ strikes, why not to wait out for the bottom line in retail, and the reason he’s worried about mining and construction in the African oil context. – CH

GUGULETHU MFUPHI:  Time now for us to get a more in-depth view of how the markets are trading and more analysis of this with our favourite market commentator, David Shapiro from Sasfin.  Are you still living up to that name, David?

DAVID SHAPIRO:  I thought you asked if I’m still living up here.  I just thought of Alec because trying to get here, in Sandton, where the traffic is horrendous, where they’re building nine buildings or however many, simultaneously.  You have these huge trucks here, spilling sand.  It’s raining – creating mud – and I thought ‘what greater place to be than in the Cape’, so I envy Alec at the moment.  It’s raining and Sandton is a debacle, particularly when the lights go off, the traffic lights don’t work, and everybody just keeps driving.  Alec, if I were you, I’d move down there.  I’d keep my office down there.

GUGULETHU MFUPHI:  Keep your office in Cape Town.

DAVID SHAPIRO:  At least for a couple of years.

GUGULETHU MFUPHI:  Exactly.  Maybe that is something to touch on David, especially given the fact that Eskom has already made those announcements about Stage 1/Stage 2 load shedding.  We’re feeling it here in the heart of Sandton where traffic is our biggest issue (being late for meetings).  On the mining front: will this prove to be a bigger problem for the mining and manufacturers?

DAVID SHAPIRO:  It has to.  I think they’ve adapted to the lower levels of electricity and a number of manufacturers have put in modern machinery as well.  The requirement is that they don’t have to use as much electricity as they used to.  What worries us is more the issues of sentiment on the economy.  People are feeling frustrated.  If you’re going to have outages every day, it’s so hugely disruptive not only to your business life, but to your personal life as well.  There is nothing worse than making you sit in traffic for hours and hours as you try to negotiate and of course, the authorities don’t help it by putting pointsmen on duty etcetera.  I’m more concerned about what that’s going to do to the level of frustration in terms of businessmen saying ‘I can’t do this anymore’ so it is an issue.

  It is an issue.

DAVID SHAPIRO:  I don’t think we can just dismiss it and at the moment, it doesn’t look like it’s going to get better.  It’s going to take some time for it to improve.

GUGULETHU MFUPHI:  Exactly.  Well thankfully, the lights aren’t out when it comes to the Equities Market performance – lots of updates from the resources players.  Let’s perhaps Anglo American down from a platinum perspective: lower production numbers obviously, to be expected on the back of that strike.

DAVID SHAPIRO:  I think so.  Look, their guidance is good.  I think that it’s in line with where the market is expecting it to be.  They have troubles in that area.  I think the platinum price doesn’t help either.  It hasn’t really reached the kind of levels we thought it would be with the mining strikes last year and I think it’s something we must watch out for as well.  Overall, I think, very much in line with where the market was. That doesn’t mean ‘bad’; that means ‘good’.  I think the one that was good, which we haven’t mentioned, is De Beers.


DAVID SHAPIRO:  This is the one area that seems to be driving interest in Anglo American – a view that they may unbundle alternatively, is perhaps going to add more than we expected.  Anglo is up on the back of it, still below 200 (I haven’t seen there) but Khumba Anglo Plats also improving on the better production numbers, coming through.

ALEC HOGG:  Dave, it was interesting to see that Sasol was up by one-and-two-third percent today.  I spoke with David Constable, the CEO, in Davos and he was explaining that issues they’re facing (obviously, the lower oil price) are being addressed.  I see there was something on SENS this morning to say they’re delaying that gas-to-liquid plant in Louisiana but the Cracker is going ahead, as before – the chemicals plant.  David reckoned that he feels that the decisions they mad over the past few years are going to stand them in very good stead: in other words, diversifying away from just being so exposed to the Rand oil price.  Still, if the Rand oil price falls, then Sasol’s not in good shape.

DAVID SHAPIRO:  No, and think that’s the issue.  Alec, if we look at the share price now, it’s forecasting that the oil price will at least go up to $50.00/$60.00/$70.00 per barrel so I think there’s a lot of optimism built in it.  If we stay at these levels, I reckon Sasol’s profits could probably halve from R40.00 per share to about R20.00 per share.  That’s doing to put the share price under pressure and then we’re going to have to debate the dividends.  Remember, they were on a policy of increasing the dividends all the time.  Of course, the oil price has halved since they made that announcement, so it’s going to be very difficult for them to fulfil that.  I’m a bit cautious.  I think it’s been driven by views that ‘the share price is cheap.  It will rebound’ but be cautious, though.  I’m glad that they’ve held back on that gas-to-liquids for the meantime because I think it was worrying the market that this would be a very expensive project, which wouldn’t give them the required returns.

ALEC HOGG:  Dave, the SENS report also suggest that they’re going to take R4bn out of their costs.  Is that a manageable number?

DAVID SHAPIRO:  I can’t remember.  I should have remembered.  They have a certain policy where he’s completely restructuring this group.  Remember, it’s a huge group so he’s taking out lots of levels of management and certainly, trying to address the costs.  R4bn is a big number and I think it’s exceeding where I thought it would be.  I had a much lower number in mind but of course, they have to do this in order to improve margins and keep profits up.

GUGULETHU MFUPHI:  Are you expecting other resource players then David, to respond in a similar fashion?

DAVID SHAPIRO:  They have to.  I think business all along the line…  We got a very good clue yesterday from Caterpillar’s results in the United States.  The results underperformed.  The results misguided.  What they did say, which was worrying, was that they were worried about mining projects and now they’re worried about oil projects.  I would expect that we’re going to see massive reduction in Capex projects.  We heard that from Billiton as well and that’s one of the reasons why analysts are turning (or commentators are turning) positive on Billiton – because by holding back some of that Capex; it gives you more money to pay dividends.  They’re underpinning the dividend yield but if we take that through, it’s a worry for construction companies.  It’s a worry for Bells, Caterpillar, and Barloworld etcetera.  Remember, they’re rather globally exposed as well.  Even our construction companies are doing projects in Australia, which are gas-related/mining-related.  Just do your homework on a lot of construction companies.

ALEC HOGG:  Dave, you mentioned the construction companies.  I see there is a cautionary out today from Basil Reed, renewing the cautionary they had before.  Do you have any thoughts of what it might entail?

DAVID SHAPIRO:  No, I haven’t – not really.  I’m not sure whether they’re expanding or contracting.  I don’t have any clue on that one.  They’ve had a rapid performance.

ALEC HOGG:  It’s not one that you’d follow closely.

GUGULETHU MFUPHI:  I actually want to pick your brain on the back of the sentiments regarding concerns around mining and construction.  What does this mean for that African story?  You shared these sentiments with Lindsay a few weeks ago.

DAVID SHAPIRO:  It worries me.  It worries me in Angola.  They’re raising money.  They’re cutting back on increasing government employment there, and they’re certainly going to cut back on a lot of their investments.  I would imagine the same would apply in Nigeria.  We’ve had a major shock.  This is almost a ‘black swan’ type of current where nobody forecast that this would happen.  We knew that oil prices would come back slightly, but no one thought that they would halve so it’s created total disruption in world markets.  Not only in commodity markets, but in financial markets as well and we haven’t quite thought it through.  I wouldn’t say ‘thought it through’, but rather that we don’t know how it’s going to play through.  We’re still trying to work our way through this, so it’s a very, very difficult time.  These are the kinds of questions we’re raising on construction companies, though.  Will projects be withheld?

We’ve seen it now, pulling out with Sasol.  They’ve made the decision.  We were expecting it, but now it’s confirmed and I would imagine that that would affect a lot of people who were going to benefit from something of that nature.

ALEC HOGG:  It’s quite interesting, Dave.  You talk about the oil price.  There are some who think that it’s going to rebound but again, to give you some input from Davos; we heard that Libya is producing 200,000 barrels of oil per day as against one-point-six million that they did before all the trouble started there.  There was another analyst who said ‘don’t forget that if things settle down in Iran and Iraq, and they come back into the global markets, that’s like adding two new Saudi Arabia’s to the equation’.  There’s all this pent-up oil supply sitting on the outside, which ‘please, God – things settle down in the Middle East’ will come into the market.  I think that black swan you’re speaking about is not just one, but perhaps a whole flotilla.

DAVID SHAPIRO:  You’re not wrong and that’s why I don’t think we should be too quick to call the turnaround.  Those countries are not going to hold back because generally, they’re much lower cost producers than perhaps, some of the frackers etcetera.  In Saudi Arabia, I think they pull the oil out at maybe $3.00 per barrel so it doesn’t matter if they sell it at 50, 60, or 100.  They still have huge margins to be made so I agree with you.  I still think that we should hold back.  Don’t be too quick to call the bottom and to try to take advantage of any quick turnaround.

GUGULETHU MFUPHI:  If we turn our attention onto some of the retail players now, Clicks is a much smaller one, but maybe one that might pop up on your radar – increased turnover as well as increased sales and the share price was responding positively.

DAVID SHAPIRO:  Just be careful.  If we take all these retail results that came out – even Spur, Clicks, etc. – they’ve all been doing it as promotion.  In other words, they’ve been trying to get the sales out there.  What we’re reading is the top line.  What we’re not reading is the bottom line so we don’t know what those margins are going to be.  In other words, what the gross profit on each hamburger or whatever they sell (in Clicks’ case) is.

GUGULETHU MFUPHI:  Do you think the Inflationary Relief Bill didn’t come in, in time for that?

DAVID SHAPIRO:  I don’t think its inflation.  I think its competition and it’s also a need to turn these over, so I think we might be disappointed on the actual bottom line.  They’re giving us the sales side of it as well.  If you look at Spur – very good results – they’re still selling a lot of hamburgers.  Panarotti’s Pizzas etcetera…  The problem is at what margin they’re selling at and I don’t think the bottom line’s going to match the sales.  I think it’s going to be at a lower level.  This market is pumping and I love a lot of green on the screen.  I love to see it but we’re paying a lot more for these shares than we were a few years ago.  In other words, we’re quite prepared to pay up for these businesses that are now, in terms of giving us higher multiples… in other words, less money for our buck or less return for our buck.


ALEC HOGG:  Dave, just to close off with, I don’t know if you picked up that Keith Warburton has left Clicks as the Chief Operating Officer there.  During my brief spell at university in Pietermaritzburg, Keith was one of the people in my year, so I followed his career.  Would you be concerned when you see such a sudden announcement from the chief operating officer of a company, given that we’re talking about Clicks?

DAVID SHAPIRO:  How many times have we discussed it, that you want to know the reasons why?  If we don’t get the reasons why, we go and seek the reasons why.  It’s always a worry when someone does leave rather suddenly.  Maybe there’s a clash over policy.  Maybe he doesn’t like the CEO.  There might be issues but I always believe it’s best to tell us the exact reason why he left – not to pursue his own interests.  That really raises sinister issues.

GUGULETHU MFUPHI:  That is so true.  It’s a common message, which we often get.

DAVID SHAPIRO:  We’ll find out.  The gossip will come.

GUGULETHU MFUPHI:  David, thank you so much for joining us today and sharing your insights with us.  That was David Shapiro from Sasfin.

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