MONEYWEB, Byron Kennedy, 01 November 2004
Whether executive salary cuts make a share attractive, the merits of the Harmony/Gold Fields bid, the new gold product on the JSE tomorrow, and the US election.
MONEYWEB: Let’s move on to our regular Monday night investment strategist, John Biccard of Investec Asset Management. He’s regarded as one of the country’s leading gurus. With the JSE in boom mode, it’s not often that we hear of a chief executive’s salary being cut – but that’s exactly what happened to Sasol’s Pieter Cox, it was reported on Friday that he’s taken a 32% cut. Is that music to a value investor’s ears John?
JOHN BICCARD: I think it’s a good thing. Sasol had a difficult year last year, mainly because of the stronger rand, and I guess it’s fair enough that a chief executive takes a bit less in tough years and a bit more in good years. So I think that’s a good thing and it certainly seems to be more the exception than the rule.
MONEYWEB: But is it the type of move that makes it an even more attractive investment – that top management is capable of making bold moves like that?
JOHN BICCARD: I think it makes it marginally more attractive. I mean, certainly if you’ve got two similar valued companies with similar prospects and one shows that sort of restraint, you’d pick that over the other one. But it certainly isn’t enough reason to buy the share on its own. The most important thing is the valuation of the share and what the medium-term outlook is, rather than what the chief executive is being paid. But if there were two companies with similar attributes and the one was showing some restraint like Sasol, we would probably choose the one with more restraint.
MONEYWEB: All right. What’s your reading on Sasol then? It closed today at R121.20 – where do you think it’s headed?
JOHN BICCARD: I think it’s fairly valued. In the resources space we like it – we certainly liked it more than the average resource company, but we still prefer the domestic financial industrial stocks over Sasol. But it certainly is one of the more attractive resource stocks. It’s not expensive, and obviously the oil price is helping it this year quite considerably, and a lot of the rand pain is out the way. So on a forward PE of about 9, probably it’s not bad value. But you could argue this year’s earnings are pretty near the top of the cycle, given where the oil price is – so let’s say we moderately like it.
MONEYWEB: You moderately like it? Fair enough. I heard that Investec is involved in Harmony’s bid for Gold Fields, but you are in a position to talk because of the Chinese walls that exist within your company. Do you still think that Harmony’s bid is cheeky?
JOHN BICCARD: We still think so, but as we said before we really don’t have any shares so what we think is pretty much irrelevant. We are really just interested bystanders and it will be interesting to see how it works out.
MONEYWEB: But it does put you as an independent then, John – that’s why we like to ask you these questions. What would you regard as a fair price? What sort of premium would you like to see Harmony pay over what it has tabled?
JOHN BICCARD: Well I think the really difficult thing with the gold ….
MONEYWEB: Well it looks like we’ve lost John Biccard and we’ll ask our producer to get him back on the line. He did give us a view on Sasol, saying that he moderately likes it at R120.20 a share. Arthur?
ARTHUR BUCHNER: I wouldn’t be a buyer at R122 or R120 a share. I think that a lot of the good news has been factored in with the oil price. It was oversold down at R78 – I think there’s better value in, as John said, the industrial sector. I think there’s a couple of better stocks there.
MONEYWEB: So where does it need to get to, Sasol, before it’s a buy in your book?
ARTHUR BUCHNER: I think it can get down to R110, about an 8-10% drop. No one knows where oil is going, and Sasol have gone and hedged quite a large amount of their oil forward, so it can only be down. If the oil price goes to R60 Sasol’s hedged around $32, and if it goes to R45, they’re in the same boat. So there’s no real upside for owning it for oil, whether it goes stronger or weaker and I think it has had a big run from R78 up to R127, and now back to R120. I think it can get to R110 and I think flat line for six months, then I’d look at it.
MONEYWEB: All right, let’s pick up with John Biccard again from Investec Asset Management. Let’s just pick up where we left off – the sort of premium you’d expect for Gold Fields, so it’s not a cheeky bid for Harmony?
JOHN BICCARD: I think it’s really hard to say, because to value gold shares is such a difficult thing, especially where the rand gold price is here, because basically domestic producers are just close to break-even. The PEs are very, very high, and they’re all such marginal producers, so that the other valuation techniques like the enterprise value per ounce, etc, comes into play, which are very difficult valuations to follow. So I think if you step back from the whole thing, the fact that there is a potential merger between two such big companies shows that there is a lot of uncertainty about the valuation, which often results in these sort of bids. If you think back to the tech boom, there were a lot of companies buying each other at near the top, three, four years ago, because no one really had a good value for what the companies were worth. And I think gold shares are a little bit like that now, because it’s such an inflection point in terms of the rand gold price that it’s really hard to say that Harmony is worth this and Gold Fields is worth that. And it’s given Harmony an opportunity to bid for its bigger rival, let’s say. And really the water is very muddy here because the PE s are 50 times earnings, because earnings are so low, and it’s really difficult to value. So I can’t say, I can’t really tell you what I think the relative value between the two is, but the fact that the smaller company is using its paper to buy the larger company – it’s interesting, and certainly Harmony is a much newer company. And I think the very difficult valuations have given it an opportunity. But whether 1.28 is the right ratio I couldn’t really answer, and I think the fact that some players think they’re underpaying, and some players think they’re overpaying, and no one really knows, shows how difficult it is to value these companies at this stage.
MONEYWEB: We heard from AngloGold’s chief executive Bobby Godsell on Friday – he says he’s got too much on his plate, in other words bedding down that Ashanti transaction, so he’s ruled himself out of launching a bid for Gold Fields. He says he’s an interested observer. Do you think there’s any chance at all in your mind of AngloGold, or say anyone else for that matter, getting involved in the Gold Fields, in a bid for Gold Fields?
JOHN BICCARD: I think there’s very little chance of AngloGold getting involved, because they really do have a lot of work still to do on Ashanti. I guess there’s always a chance of a rival bid from other North American producers which trade on even higher multiples, or similar to slightly higher multiples. But I guess we would have seen it by now because we’re getting pretty much to the sharp end of the deal, so I think we would have seen a rival bid. And probably that we haven’t so far means it’s not coming. But there’s probably a small chance of that.
MONEYWEB: How do you see it panning out? Bernard Swanepoel – he’s pretty confident that he’s got this one pretty much in the bag for Harmony.
JOHN BICCARD: I think it’s pretty much like the US elections, I really …
MONEYWEB: Delicately poised.
JOHN BICCARD: … don’t know and it looks 50:50:50 from here, but I think the North American holders of the stock will decide, and how they think about gold shares is very different to how we value shares and very different to how we think. So I really wouldn’t say, but it’s obviously going to be very, very close.
MONEYWEB: Now on Friday your colleague Leon Esterhuizen said he was generally happy with AngloGold’s quarterly results. We’ve had numbers out of all of the major South African gold producers now. Has your take on the sector changed at all, or is it still the right time to have those stocks on the avoid list?
JOHN BICCARD: We think so still. Leon works in securities, which again is a separate division to us …
MONEYWEB: Chinese walls and all that, yes.
JOHN BICCARD: …but our view at Asset Management is that, generally, gold stocks, we’d still be out of them, and largely we are, although AngloGold looks marginally the best play of the three at the moment with a slightly higher dividend yield and not all the concerns and price movements of the potential merger of the other two. So it looks sort of the safer place to be at the moment.
MONEYWEB: Later on in the programme we’ll be taking in the new gold product that Absa’s listing on the JSE tomorrow. They say the plan is to target institutions and perhaps encourage them to invest in new gold, rather than in gold equities. Is it a product, assuming that the price was right, that you would support instead of buying into gold shares?
JOHN BICCARD: Yes, it’s an interesting thing. We’ve had a close look at it because, certainly on a risk-adjusted basis it’s a better way to play gold, especially where gold shares are at the moment. Where gold shares look a little bit high relative to the rand gold price, with these new instruments really you’re just buying the straight rand gold price, so there’s much less volatility. There’s also much less upside, but much less downside and, given that gold shares are a bit expensive here, if people are bullish on the rand gold price that’s probably a good thing to buy. But it’s more of, let’s say, a widows and orphans type of product in that the volatility will be much less and it’s more likely to trade in a 20% band over a year, compared to gold shares which can halve or double.
MONEYWEB: Let’s finish off with tomorrow’s US election. You’ve already intimated that it’s a 50:50 either way. Will the outcome affect your investment strategy at all?
JOHN BICCARD: I don’t think so. To us there’s not a huge difference in the policy between the two and, as we say, we really don’t have a clue who’s going to win and we really pick the stocks from a bottom-up basis more than that. So, given that the policies are quite similar and we have very little chance of predicting actually who is going to win, we don’t think it will affect our market.
MONEYWEB: John Biccard is from Investec Asset Management. Arthur, during that interview he did say to us that Harmony’s bid – and it’s something he has said before – is cheeky, the one for Gold Fields, but he’s also said that some people think that the bid is too good. Where do you stand on the issue?
ARTHUR BUCHNER: Well, they’re paying for it with paper, and at the end of the day that is going to be where Harmony falls over. I don’t think if I was a Gold Fields shareholder that I would want to be in Harmony and take Harmony stock. I bought Gold Fields for the reason that it has the better reserves, and therefore I wouldn’t accept the Harmony bid. The American companies coming in – if you look at Durban Roodepoort Deep, it survived for four or five years without making a profit, so these gold companies can. And until we see PE s of 180, which we saw in the IT sector, I don’t think I’d necessarily be short of them.
MONEYWEB: But he said the South African gold stocks are on his avoid list – sounds like you don’t quite agree with that?
ARTHUR BUCHNER: No, I’m not a buyer of golds, but the free-floating gold is becoming very, very small. There’re only so many gold shares out there. If people start to revalue and say they want to be in gold and they think the dollar is going to weaken, they’re going to chase the gold stocks. So it’s not a stock I would be shorting, but at the same time to be long of them is too dangerous. These things are not making money at the moment.