MONEYWEB, Alec Hogg, 05 September 2006

Sasol share price under pressure, futures selling, and MTN, JD Group, Acc-Ross and DigiCore highlighted.

MONEYWEB: Good evening. I am Alec Hogg, with you for the next 60 minutes on the Moneyweb Power Hour. Our production editor, Hilton Tarrant, is in the studio.

HILTON TARRANT: Alec, in tomorrow’s Moneyweb Business in The Citizen, why the big four banks are taking on African Bank. Get OMAM’s view. A look at a new product that lets you finance your retirement by using your house, after chatting to the best in fund management, David Carte still thinks DIY is best, and of course the best news and insight from the world’s leading business publication, the Wall Street Journal. All that and more in Moneyweb Business tomorrow.

MONEYWEB: I didn’t know David was much of a do-it-yourselfer. As far as investment are concerned, Arthur Bucher is a do-it-yourselfer. Good to have you in the studio. David Shapiro away, Wayne McCurrie in London, and we had to drag you out of retirement to come and be our market watcher tonight. Arthur is with Nedbank Securities. It was an interesting day. We had the Sasol share price coming under a lot of pressure after the write-off of Condea, and what is interesting is when they did the transaction, Condea, the big chemicals group, there was a lot of criticism by South African analysts and it seems like that may have been justified.

ARTHUR BUCHNER: Well, correct, you know. The criticism was “stick to your knitting”. You manufacture oil – why do you want to get into plastics? And they then validated it by saying, well, oil is used in the manufacture of plastics and we understand that game, and it’s come back to bite them a little bit.

MONEYWEB: A big write-off, nearly R3bn write-off, and the investors didn’t like it, knocking back the share price 3.5%.

ARTHUR BUCHNER: Well, funnily enough, since Friday of last week, with the rand weakness, even the oil price coming back, the rand price of oil wasn’t coming back and our market has been incredibly strong. Sasol hasn’t been following through on the last three to four days. So, I think, someone got a little bit of a whisper.

MONEYWEB: It seems to happen, that. One won’t call it insider trading but maybe just a hint?

ARTHUR BUCHNER: Yes, sort of. I don’t think you should be long of the stock yet and that’s enough to make someone decide to liquidate your [indistinct] portfolio.

MONEYWEB: Also a decline today for MTN, JD Group. I suppose we’ve seen so much volatility in those shares recently.

ARTHUR BUCHNER: Well, we saw quite a lot of futures selling, and some reverse arbitrage activity, which actually brought a lot of those index stocks under pressure.

MONEYWEB: Explain what that means.

ARTHUR BUCHNER: Basically, someone who wants to put a hedge in place on the all-share will sell a whole lot of futures into the market. An arbitrageur has to buy that. They buy those futures and in return sell the physical stock against it.

MONEYWEB: I don’t know any more, but it’s a technical thing that happens every day in the market in big volumes.

ARTHUR BUCHNER: Correct. We’ve seen arbitrage activity and for the first day we’ve basically seen reverse arbitrage, which means selling of the stock. And if a stock was under any pressure or had a selling order it would just exacerbate it.

MONEYWEB: Aha. Now, we did see an improvement today in the share price of Acc-Ross. We spoke on Friday to the new chief executive of that company, Wilf Robertson. He was very upbeat. The share price moved yesterday, moved again today, 12m shares today. Not the kind of share, though, that I guess you’d be investing in?

ARTHUR BUCHNER: No, its not something that we’d look at because it falls outside of the top 65 by market capitalisation. But it is relatively tightly held now. You know, when they first listed it, they listed it and sold it and quite a lot of people bought in the hope of this whole property boom. Now, the guys that have taken off that stock, off the let’s call them the rats and mice, all the IPO guys …

MONEYWEB: We prefer to call them “week holders”.

ARTHUR BUCHNER: OK, the week holders, that’s right. They got all the weak holders out. They now only have the fundamental holders in – and maybe positive news for them.

MONEYWEB: Twelve million shares. It’s quite big volume in an AltX-listed company. And then DigiCore’s results out today, the share price up by 5%. The dividend there raised for the year from 6c to 10c.

ARTHUR BUCHNER: Well, an amazing success story. I think a year and a half ago or so at 70c. The stock has had a fantastic return to investors and one to watch out for in the future.

MONEYWEB, Alec Hogg, 28 June 2006

Explaining the meaning of Sasol’s “hedging” of 45 000 barrels a day of its South African production.

MONEYWEB: Arthur Bucher joins us now. Arthur was with Nedbank Securities, the last time I looked. Still there, Arthur?

ARTHUR BUCHNER: That’s it, they can’t get rid of me, Alec.

MONEYWEB: Well, I don’t know if they’d like to. But we don’t want to get rid of you either, because when it comes to looking at these collars and cuffs and hedges and forwards and futures, you’re our man. Sasol today decided to hedge out 45 000 barrels of its South African [daily] production, which is about a third of the South African production by Sasol of its fuel. Now what exactly has it done? Could you explain it in real basic layman’s terms?

ARTHUR BUCHNER: Well what it’s basically done is that it said that if the oil price had to fall from current levels of $72 down to $63, they feel that anything below $63 would impact their earnings significantly, so what they would rather do is have protection that, should the oil price fall below $63, they would still return earnings to their shareholders. However, if you go out into the market and you go and purchase yourself a put option, which basically enables you to sell oil at $63 should it be lower than $63, that’s quite an expensive exercise. So what they do is they sell a call option. Now what a call option is, is the right to buy oil at $83. So now let’s put it into layman’s terms – if the oil price is at $90 in March 2007, Sasol will have to sell their oil to the person who has bought this call option at $83, so they are forced seller if the price is above $90.

MONEYWEB: They will lose if the oil price goes above $83?

ARTHUR BUCHNER: Well technically they won’t lose, they will lose the opportunity of making money from $83 to $90, but they won’t really lose money because they produce, and they are producing at $20 a barrel. They then take that money for that call option which they have now sold, and they then go and buy themselves a put option, and what that basically means is should oil fall to $50, Sasol will have the right to sell oil to someone else at $63. Now it’s a fantastic transaction for someone who is a producer and we find a lot of the producers getting involved in these types of transactions because it provides certainty. And if you look at what Sasol has done, they haven’t gone out and sold 100% of their future production, they’ve gone and sold 30% of their production. And if they are producing, if I understand it correctly, a barrel of oil at around $25, they have really gone and they have locked in all their costs for their total production by selling 30% at $63. So I’m just basically taking 30% at $63, divided by 3, comes to $20 – so they have really just locked in all their costs, and they now have only upside attached to the production that’s going to come to the fore.

MONEYWEB: Arthur, it makes a lot of sense, but why do people in this country, investors in this country – let’s just say they own Sasol shares and they’re sitting at R275 a share – why don’t people in South Africa sell or have a put option on those same shares at, say, R250 and then have a call option at R300? Because if a producer can do it, surely an individual can do it as well and also make money?

ARTHUR BUCHNER: An individual can do it, but there’s only one issue there – that an individual is not a producer of the share. They buy the share and they want the upside attached to it. However, what happens with Sasol is that they go and they actually take something out of the ground, it costs them a little bit of money to take it out of the ground, they are a natural producer and therefore they take no risk should there be major moves in the price. If you remember, SAA – they did all these hedgings on the rand, but they weren’t a producer of rands, and they got taken to the cleaners. And it’s very, very important for an individual out there – they can get involved in options, but they must get involved in options from the perspective of they would be happy to sell at a level or they would be happy to buy at a level, because they’re not producers or natural producers.

MONEYWEB: Arthur Buchner is from Nedbank Securities.

MONEYWEB, Alec Hogg, 28 June 2006

As the rand improves slightly, the spotlight falls on Anglos, BHP Billiton and Richemont.

MONEYWEB: Well, on the stock market today, well, more of the same, more of the same – share prices down slightly, not terribly seriously, but I don’t know how many losing days in a row it is.

DAVID SHAPIRO: The fourth day in a row.

MONEYWEB: The fourth in a row? …

DAVID SHAPIRO: I think most emerging markets have been battling. We had a slightly better day. We were up for most of the morning and it was only in the afternoon that we came down. I think the stronger rand, there was a slightly improved rand, may have had something to do with that. But a few buyers came in, particularly for financials and industrials and some of the shares that had been marked down quite sharply I think recovered – a lot of the retailers and a few of the banks.

MONEYWEB: Why is the rand getting better now, David, let’s just get the stats quickly?

DAVID SHAPIRO: Yes, OK.

MONEYWEB: We’re at R7.24 to the US dollar, that’s 10c on the last couple of days. We’re just about R9.00 to the euro, and we got to I think R9.50 at one point, and we are R13.11 to the pound, which is also an improvement. So all three of those doing quite a lot better on a day when the gold price is, well, not doing a whole lot – $580.

DAVID SHAPIRO: I wouldn’t get too carried away with the currency. I think we’ve come from a very weak level. I think if you go back two/three weeks ago, we were about round about the R6/dollar level, probably over the month, so we’ve depreciated about 16% so there is always a pullback. Just simple Dow theory and our market will move and fall back to a certain extent. So a lot of the people who were short on the rand, are probably covering in and …

MONEYWEB: What does that mean?

DAVID SHAPIRO: Well, you know, if you had bought dollars and sold rand, what you are doing now is you are selling the dollars and buying back the rand – so I think that’s given the market support. I also have to say, there was quite a bit of comment about Mr Mboweni’s address in London yesterday, where he came out and said that South Africa’s growth prospects are still sound. And also on inflation he was fairly benign, he said that the action that central banks are taking will get on top of inflation. So I think that also gave comfort to people who were invested in South Africa and brought a few buyers back in. So we have certainly seen [that], but there wasn’t much conviction in the demand that we saw today for markets. You know, it’s all right for it to bounce after three days of losses, but I think what you have to see in the market, you know, is buyers coming quite aggressively. And I don’t think anybody is going to take major action until we know where US interest rates are headed, and we will know tomorrow. I don’t think we’ll get the full answer tomorrow night, but it’s going to be one step closer towards that.

MONEYWEB: Steinhoff, there’s a stock that, well, you remember we had – on Friday I think it was – Markus Jooste, the chief executive, saying to us the R19.00 a share that the price had dropped down to is normal when you have bond issues like this. It will rise again – man, you could have made R2 a share if you’d listened to him. Up to 21 today.

DAVID SHAPIRO: Yes, I think it’s also a company which is very well placed to take advantage of a weaker rand. They manufacture in developing countries and sell their products to developed countries. And I still think the global economy is on track, it’s still positive.

MONEYWEB: You know you’re in trouble.

DAVID SHAPIRO: Why?

MONEYWEB: Because yesterday you said that the foreigners were selling South African shares. Now stand by, because Kevin Lings from Stanlib has done some research and Kevin, according to your information and the stats that you have looked at – in fact it’s not the foreigners who are selling South African shares, it’s the locals.

KEVIN LINGS: Yes, I think that’s right, you know, foreigners obviously were huge – I think everybody is aware that foreigners were huge buyers actually over the last couple of years, and certainly the course of this year. And year to date, if you look at it, foreigners have bought R54bn, almost R55bn, which is huge. The debate, I guess, is this weakness that we have had in the market and the weakness we have had in the currency is that due to foreigners selling. And if you look at the data from the JSE for June to date, and that’s up until yesterday, foreigners have bought R481m net, which is not huge and it’s way less than they have been buying – in fact it’s something like only 10% of their regular monthly purchase that they have been doing. But still, it’s a net positive and foreigners haven’t really been big sellers of South African equities.

DAVID SHAPIRO: Kevin, I think we need to look at the foreign buying. You see, if you look at where the foreigners are buying, and I’m putting “foreigners” in inverted commas, you’ve got heavy shares like Anglos, Billiton, SABMiller, Old Mutual, where we are sellers. Those shares are emigrating, never to come back here again. So yes, there are inflows but we’re actually selling our assets. So what you need to do is differentiate between those big shares which have their primary listings on foreign markets and those which are local shares – you know, the banks, etc, which only have a local flavour. And that’s where a lot of these statistics are distorted, because there is a massive demand for Anglos in a resource market. So if there’s huge demand in Anglos in London, yes, they will come to our market and try and pick that up. So I think the statistics are distorted by these kinds of movements. We have to differentiate between the various classes of our shares.

MONEYWEB: What do you think, Kevin, what do you think about it?

KEVIN LINGS: Yes, look, I think that for me the way the data is measured is it’s measured fairly consistently over a long period of time now, and we definitely saw huge inflows from 2004 on, and that’s reflected certainly in various things. It reflected in share prices, it reflected in currency, and it reflected in what emerging market fund managers were telling us about their holdings in SA equities broadly – whether its resources or whether its domestic plays.

MONEYWEB: So are they selling, the foreigners, or is the selling coming from South African institutions, Kevin?

KEVIN LINGS: Well, for me a lot of the big institutions locally were very overweight or had a lot of equity content leading up to this weakness. They had done very well out of it, and then when nervousness started to come through, which was really sparked by the US Federal Fund’s rate going up and the subsequent weakness around the globe emerging markets, then we found certainly local institutions were lightening equity. So I would say that local institutions selling or lowering the equity content was a big component of what we have seen in the markets.

MONEYWEB: Our thanks to Kevin Lings. David Shapiro doesn’t exactly agree with him, but I think …

DAVID SHAPIRO: You see if we’re lowering, those shares go, you know, Anglos and that, they will never come back again – that’s the sad thing. And the foreign content or the foreign ownership of our big companies, you know, Anglos and that, are emigrating and making our market actually smaller.

MONEYWEB: David, on to the big five today, and the JSE overall index was down just a little bit. Of the big five, four of them were lower – Anglo American, BHP Billiton down 2%, each had big moves again. Richemont 1.75%, and then SABMiller was only slightly down and then Sasol – what a big move for Sasol in the right direction.

DAVID SHAPIRO: Yes, up. Look, the oil price over $72 a barrel – I think there has been some very positive views for …

MONEYWEB: How’s your Mini looking – I suppose pretty good, hey?

DAVID SHAPIRO: Yes, I can get 700 km on a tank there. I put 55 litres in the Mini – can you believe it? Great car!

MONEYWEB: And you do 700 kilometres?

DAVID SHAPIRO: And I do 700 kilometres.

MONEYWEB: OK, so you’ve just done your advert for Mini. [Laughter.] Not by mini me. But Dave, are you expecting then that we’re going to see a hefty increase in the petrol price, because the rand is weaker and all of this?

DAVID SHAPIRO: You’ve got oil at $72, you’ve got the rand at, call it R7.30 now – there has to be an increase in price. I think the other sad thing is that the maize price has also been creeping, which wasn’t in the inflation numbers today. So, yes, there are a few obstacles ahead of us, you know, in the months ahead.

MONEYWEB: But there was some good news – Sasol up 2.5%. Barry Sergeant told us later that in New York it was 6% higher on the hedging. We’re going to talk to Arthur Buchner about that, exactly how it works, a little later in the show. Then we saw Steinhoff, as mentioned earlier – that went from R19 on Friday. If you’d listened to what the chief executive, Markus Jooste, had to say, you would have been able to predict the 10% increase – R21 it trades at today. And then in the banks we saw Standard Bank, FirstRand improving. Naspers, a muted response to some pretty good financial results yesterday. And then Edcon up 3.5%. So just to close off with, Dave, that company, AfroCentric, you mentioned it briefly yesterday – Brian Joffe being the shareholder – it’s a shell, somebody likes it, Dave, and it went up another 31% today to R11 – and that must be pure speculation.

DAVID SHAPIRO: It’s crazy, of course it is, because they haven’t announced what they’re going to do. There is no strategic or business plan out, but it has three heavyweights – you know Motty Sacks, who was behind Netcare and was also behind Clinic Holdings, as well as Meyer Kahn, who we all know very well. I think Brian has been Johnny-come-lately but big, big heavy hitters there. So if they’re going to do something and I think it’s going to be South Africa’s equivalent of the Gates and Warren Buffett Association – it’s big, big things.

MONEYWEB, Julius Cobbett, 15 March 2006

“Opinions are divided on where the market could go on Thursday.”

Andisa Securities predicts a neutral or negative bias for the JSE at tomorrow’s futures closeout. However, Arthur Buchner of Nedcor Securities says the market could trade higher. The futures closeout is a volatile time for stock markets as billions of rands worth of positions are unwound.

The closeout happens on the third Thursday of every quarter, and is the date on which futures contracts expire. Futures closeouts present opportunities for sophisticated traders who have the opportunity to make “risk-free” money by exploiting market mispricing in the Alsi 40 future, which is a contract over the 40 most valuable shares on the JSE.

Mark Kalil of Andisa Securities explains that the theoretical price of a future is easily calculated, and is dependent on the price of the underlying shares, the interest rate and administration costs. However, the Alsi 40 future sometimes trades slightly above or below its theoretical value. This presents an opportunity for arbitrageurs, who will sell (short) the future and buy the underlying shares simultaneously or vice versa. As the future draws closer to expiry, its price will converge on the value of the underlying shares, and the arbitrageur will collect his or her profit.

Market swings matter not to the arbitrageur, whose net exposure is zero. However, volatile movements in the market can create good buying or selling opportunities for other players. A rough measure of the volume of shares that will be traded at closeout is the total number of “open interest” positions. On Monday open interest positions on the Alsi 40 future were worth R17,7bn.

At futures closeout, the JSE also adjusts its indices. As the values of certain companies change, they could fall into and out of indices. These movements are important because funds that track indices (Satrix, for example) may be obliged to either sell out of or buy into particular companies. This quarter, African Bank, the micro lender, looks likely to oust packaging company Nampak for a place in the Alsi 40 index. Onetime junior gold miner SXR Uranium One is also likely to be included in the Resources 20 index.

MONEYWEB, Belinda Anderson, 22 November 2005

Investec’s odd-lot offer – an oops?

MONEYWEB: Also in the studio though is Arthur Buchner from Nedbank Equity Capital. Arthur, thanks so much for coming into the studio. We wanted to speak about the Investec odd-lot offer. On the 20^th of October it said it’s trying to reduce its administrative costs, but it seems to have miscalculated a bit. Just firstly, what is an odd-lot offer?

ARTHUR BUCHNER: Well, first of all, most companies nowadays find it quite onerous to send out results, packages, to every single shareholder that’s invested in the company, and there are a large number of shareholders who own between one and a hundred shares. So what the companies have tried to do is they have actually tried to take those shareholders out of the share register, saving them on administration and administration costs – and they do that by an odd-lot offer. And we have had about 30 or 40 of the top hundred companies actually come out and announce odd-lot offers. The first one in fact was AngloGold about four years ago, then over time we have had a number that have come out. The funny thing with the Investec one is, as David says, you know, it’s “Let’s square up our books and let’s go home”. Everyone is looking for value at the moment in the market, and it just so happens that the punters spotted value in Investec. And what Investec have gone and done is, they have offered – they have got the two shares listed, they’ve got the INLs and the INPs, the INLs being the South African-listed stock and the INPs being the London-listed. They offered R284 for every share that you own under 100 for the INPs, and then for INLs they offered R277. However, the share price was trading at R268 and R270 respectively, hence the offer was at a premium to the market. So let’s say you are a portfolio manager managing 40 or 50 clients, you say to yourself, well, I’m going to buy 99 shares of Investec Ls and Investec Ps. At the end of the day I’m going to buy them at R268, I’m going to sell them at R277 or R284 respectively, and I’m going to make myself R10 on 99 shares. And that’s what has effectively happened and it hasn’t only been 40 individuals, we calculated 800 to 900 individuals have bought 99 shares in the company.

MONEYWEB: So there are a lot of clever people out there who saw the opportunity and have made some cash.

ARTHUR BUCHNER: Well, they haven’t made cash yet – and that’s the announcement that came out this morning. But as with anything on the market, the market is a fantastic web where everyone finds out what’s going on, and I think a lot of people have put this trade on. Investec have looked at it and they have said, “Well, how much is it going to cost us?” At the end of the day if you have 800 people buying stock, 99 shares at a R10 discount, you’ve got R1 000 profit effectively or R1 000 that Investec is going to have to pay out, multiplied by the 800 people, you’re looking at R800 000 – it can even be more, because this offer still extends till Friday. So they have now come out and said, “Hold on a second, if there is any more untoward trading in our share, we may reconsider and we may actually withdraw it”. So they haven’t said they’re going to withdraw it – they basically said that they may withdraw it.

MONEYWEB: And was there anymore untoward trade after the cautionary?

ARTHUR BUCHNER: There were of course people trading today in the stock. There is one issue that Investec haven’t broached – and that is for me to go an buy 99 shares, I’ve had to pay brokerage first of all, and it’s about a R25 000 purchase, I’ve had to pay UST of 25 basis points, and at the end of the day that could have cost R150 per person that’s buying. So the person’s not making R1 000, he’s actually making R850. Now if Investec withdraw the offer, those people have effectively lost R150. They, I think, have recourse to the fact that you announce the deal, then suddenly you say, “Well, hold on a second, we have made an error, we’re going to withdraw it at no cost to ourselves” – and I think that’s where Investec may come a little bit unstuck.

MONEYWEB: What should it have done to prevent this?

ARTHUR BUCHNER: Well, first of all they shouldn’t have offered that large a premium. They offered 5% above the market. The second thing is they could have done it and said, “We are making the odd-lot offer on Thursday and everyone who is registered by Friday would get their purchase price at R277”. But what Investec have done is they have given almost two weeks for people to trade in it. Another way of doing it is to say everyone who was registered as of last week Friday will be eligible for it – they could have backdated it. The other thing is that this is a classic historical example, because AngloGold did exactly the same thing.

MONEYWEB: So it’s happened before and we didn’t learn from our mistakes?

ARTHUR BUCHNER: Correct. The only difference with AngloGold is that you only had to buy one share, and AngloGold gave you 99 shares at a discount. So they haven’t learnt from history, and I don’t think they’re going to be able to step out of it.

MONEYWEB: What does this say? Surely this is embarrassing for Investec? They are corporate financiers, they’re good at what they do and they make a mistake like this!

ARTHUR BUCHNER: Well, I think Merrill Lynch are advising them. It could be bad for Merrill Lynch, not necessarily for Investec. I think they were trying to do a good thing, they were trying to give the odd-lot holders – and I believe that there are about 12 000 of those odd-lot holders holding between 100 and 500 shares, you can’t see who holds the other 100 – but they tried to give them a better offer so that everyone accepted it, and at the end of the day they just miscalculated the ability of the little portfolio manager out there trying to make money.

MONEYWEB: Indeed. Arthur Buchner, the head of proprietary trading at Nedbank Equity Capital. David, you have got a grin on your face.

DAVID SHAPIRO: Well, I have to, because I think the market is so smart. They never miss a trick and every time you think you’re going to beat them, there’s always some smart-ass trader there who is going to take you. I remember so well the AngloGold deal which Arthur alluded to, where you could up your odd-lot to 100 and boy, did it cost them money. But that’s the market – and that’s how clever the market is.

MONEYWEB: I think in the AngloGold issue, it cost them over R10m in fact, because there was a huge discount. This we don’t think is going to cost more than R1m to Investec.

DAVID SHAPIRO: Yes, I just want to say one thing about that, that in the past – when I say “in the past”, on an open-cry market – when you used to buy under 100 shares, you used to buy them at a premium or sell them a discount. It was an odd-lot deal. But today the screen allows you to buy threes and fours and five shares, so you are never going to eradicate those shares, and where Investec is quite an expensive share to buy – it’s over R267 a share – yes, there are going to be people who are quite happy to buy 50s and 30s and 40s. So you might take them out for a bit, but I think they will start to come back again in the expensive shares.