Piet Viljoen: Market commentator, RE:CM

MONEYWEB, Belinda Anderson, 22 November 2005

Piet comments on UCS Group and Investec’s dilemma.

MONEYWEB: Piet Viljoen from Regarding Capital Management is our market commentator this evening, as always on a Tuesday. Piet, I don’t know if you had a chance to listen to that interview with UCS. I know you hold some small-cap IT companies in some of your portfolios, ERP.com, Datacentrix among those. Is UCS one that you have had a look at?

PT VILJOEN: We haven’t had a close look at it, Belinda, but I have been looking at the results this afternoon and I must say that the thing we look for in these IT companies is cash flow, because a lot of the time these companies come out with good earnings numbers, but earning is only the opinion of an accountant and at the end of the day a business owner wants cash flow. So that’s the sort of thing we look at before we decide which IT companies to invest in.

MONEYWEB: The Investec odd-lot offer – we spoke to Arthur Buchner just a short while ago. What’s your take on that? It seems a little bit embarrassing for a corporate finance company to get that wrong.

PIET VILJOEN: Yes, I think it’s very similar to what happened with AngloGold a couple of years back, where you could also buy a small amount of shares and make quite a bit of money on buy-back. You know, it’s probably just a bit sloppy.

MONEYWEB: We had an announcement late this afternoon, I think after the market closed, from the JSE to say that it’s definitely going to go ahead with a listing. It things it’s appropriate now and will set the date in the first quarter of next year. It’s also going to do a black economic empowerment deal. Without having had too close a look at the numbers, I suppose it’s difficult for you to say, but would the JSE be something that investors should take a closer look at investing in?

PIET VILJOEN: Well, I can only say that we have had a very good look at it and, on behalf of our clients, we own quite a substantial number of JSE shares.

MONEYWEB: Oh, you do? OK, so that could be a good listing.

PIET VILJOEN: So I hope that answers your question.

MONEYWEB: Yes, it does indeed. Results from Absa yesterday, what did you think of those?

PIET VILJOEN: Yes, you know, the banks are flying. Good results, but to be expected. If you’re growing your book at 25%, which they did – they lent 25% more money to clients this year than they did last year – a bank just can’t help but make money. And I think that’s a similar pattern in all the banks at the moment, and it seems set to continue. We might see interest rate hikes over the next year, but I don’t think anything too dramatic and I think credit is still quite affordable out there, so I think one will expect probably not this level of growth, but I think one would expect growth still going forward from the banking sector as a whole.

MONEYWEB: So as an investor potentially looking at the sector, do you think you can still buy the shares?

PIET VILJOEN: Yes, I think you’re buying fairly good companies on PE ratios of 10. One has to say that profit margins at these companies, not interest margins but profit margins at these banks, are at all-time highs. So I think it’s right that you pay a lowish PE for peak or very high earnings, but I would rather do that in the banking sector right now than in some of the commodity stocks where you are paying PEs for peak earnings.

MONEYWEB: Did you have a chance to look at the Gold Fields deal, the Bolivar deal, paying US$330m?

PIET VILJOEN: Yes, we did have a bit of a look at it, and that seems to be on the expensive side. Now of course one doesn’t know exactly what the costs are of taking the gold out the ground there, but if you express the transaction in terms of value per reserve ounces of gold in the ground, it’s on the high side of various transactions that have been done in the market over the past five or six years, whereas at the moment you can buy stocks like Western Areas at, you know, a tenth or a twentieth of that sort of value.

MONEYWEB: Speaking about Western Areas, what did you read into Gill Marcus’s appointment as chairman there?

PIET VILJOEN: Well, I think one of the reasons Western Areas has been trading so far below what we consider to be its intrinsic value is concerns about corporate governance, and I think the fact that Gill Marcus was appointed and accepted the position as chairman of the company, speaks a lot about the board’s desire to address those questions about corporate governance. And I think as those things normalise, the share price will normalise to levels more closely reflecting the underlying value in the business.

MONEYWEB: What about MTN? We have had a lot of news coming out of this company and news yesterday confirming that it has done the deal in Iran. Also lots of talk about whether it’s a takeover target and whether there is another deal on the cards – and we’re expecting interim results from MTN. It’s closed today, I think it’s R60 – what’s your take, Piet?

PIET VILJOEN: Yes, look, there’s a lot of speculation, one doesn’t know whether it’s a buyer or a seller. Well it’s quite clear that it wants to be a buyer, but it looks almost like it could be becoming embroiled in quite a bit of a tussle in Iran, so I’m not sure if that’s good or bad news. There’s still a cautionary out apart from that – are they buying something? People are paying very high multiples for cellular or wireless assets at the moment. I’m not sure that’s a good thing. Will they be bought? Well, that’s probably a good thing, but that’s speculation. Sorry, what I mean being bought being a good thing – somebody might pay quite a high price for the MTN assets, so for shareholders that might be quite a good thing. So it’s not very clear at the moment and there is a lot of speculation going on and so it’s very difficult to sit here and say, “Well, you know, one should buy or sell”. We don’t think MTN stand alone, as it stands right now, is worth R60 a share. So we would rather not speculate as to what’s going to happen in the future. You might as well go to the casino – I think the odds are better.

MONEYWEB: That tussle that you mentioned, Turkcell coming out to say that it might go to court to challenge the fact that MTN is involved in that deal, because it actually wanted to be. Piet, before we let you go, a couple more sets of results coming out this week. We’ve got Remgro, Nampak, Tiger Brands. Any of those spring out at you as offering good value?

PIET VILJOEN: Yes, I think both Rembrandt and Tiger Brands are still probably on the cheapish side of fair value. Whatever the results are, I don’t think it matters, you know. I do not think that one set of results from a company has very much influence on the underlying intrinsic value of the business. If you look at a business, its value is determined by the cash flows it’s going to generate over the next 10 or 20 years, and whether one set of results is up 10 or 20% or down 10 or 20%, I don’t think it influences that number very much. But, having said that, I think one can expect good results from Tigers. They are exposed to the consumer, the consumers spend quite a bit of money. Rembrandt, you know, I don’t think there will be any surprises there. We have seen the underlying companies, a lot of the numbers from them. Nampak is a difficult one. On the face of it, it looks to be quite cheap, but it could very well be a value trap where a share always stays cheap because it is facing a squeeze from both its suppliers and its customers, and it just doesn’t seem able to get out of that squeeze. So that’s one we would be more careful on.

MONEYWEB: Piet Viljoen from Regarding Capital Management, our market commentator this evening. David, Piet always speaks such sense. He takes the big picture, he steps back and he says, “It doesn’t matter what the results are going to be”.

DAVID SHAPIRO: Well, he’s an intellectual value investor, you know, and you’ve got to respect that. I think his approach is the long term. We always talk about the day-to-day movements which don’t really concern him, and he’s correct. He chooses companies that have got – when he says intrinsic value, what he does is he takes the cash flow that they’re going to generate over years, discounts it to a value today, and compares it with where the share is trading. And if it’s cheaper than where the share is trading, you know, he will buy it. If his intrinsic value is cheaper, yes, and if not, he’ll sell it.

MONEYWEB: A lot of caution on Nampak, though. We have heard from commentators throughout the week there is quite a lot of caution on it.

DAVID SHAPIRO: Yes. You know, they talk about the squeeze, and I think it’s a company that is underperformed or under-delivered over the years and I think circumstances are against you. The rand has been working against the company on both the exporter side, because the exporters are not exporting, therefore not demanding the packaging. On the other hand, a lot of people that they supply to are also importing cheaper and cheaper goods. So they are being squeezed on both sides, which has resulted in pretty flat or pretty poor results. And what they are waiting for is to see if the situation has reversed, if they are able to get a bit of pricing power, if they are able to increase their volumes, because they are in an area where it is easy to import some of the goods.

MONEYWEB: We’ll hear from that company tomorrow when it does release results.

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