finweek - november 12, 2015.pdf

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RETIREMENT CEO INTERVIEW MINING

5 SAVING SAGE INTERNATIONAL’S SHANDUKA ONMISTAKES IVAN EPSTEIN LONMIN: ‘WETO AVOID

‘How SMEs can boostbig business’ CHOSE NOT TO PAY’

ENGLISH EDITION FIND US ATfin24.com

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WHY NOLOAD SHEDDING

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from the editorJANA MARAIS

b illionaire investor and philanthropist Warren Buffett likesto say, “Only when the tide goes out do you discover who’sbeen swimming naked.”What he means is that it is easy to make money in

the good times – i t’s during the tough times that management’s realbusiness acumen comes to light.

Well, the tide’s gone out, and there are a whole bunch of peoplerunning for cover. Looking at SA Inc., the obvious example would beLonmin (see pages 13 and 30). The world’s third-largest platinumminer, which sits on some of the richest platinum deposits in theworld, is asking for a shareholder bailout for the third time in just sixyears. Yes, low prices have a role to play, but how much of its troubles– labour, high-cost shafts, BEE ratings – are actually the result of poormanagement over the years?

Here I want to let current boss Ben Magara off the hook – by thetime he, and most of the current team, joined, the damage to Lonminwas already done. It’s all the well-paid CEOs who came before Magara– particularly Ian Farmer and Brad Mills – who should be standingwith their swimming trunks around their ankles.

MTN would be another obvious example. In the good times, noshareholder asked any tough questions about its operations in Nigeria,or its operations anywhere, for that matter. As long as it was printingmoney, nobody cared. That has all changed in the past two weeks afterthe Nigerian regulator imposed a record $5.2bn fine on the operator,a fine roughly equal to a quarter of its (now much diminished) marketcapitalisation at the time finweek went to press. So far, no detailedanswers have been forthcoming.

On a national level, we have also messed up. When the timeswere good – and they were good for all commodity exporters – weshould’ve focused on building other sectors of the economy to reduceour reliance on mining, and putting reserves away for a rainy day. Whathappened instead was a government spending frenzy that’s led ourdebt to nearly double as a proportion of GDP. Well, the tide is out, andthere is no beach towel in sight. ■

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Editorial Editor Jana MaraisDeputy Editor Anneli GroenewaldManaging Editor Ruwaydah HarrisJournalists and Contributors Jinine Botha, Simon Brown, Lucas de Lange, Moxima Gama, Craig Gradidge,Marcia Klein, Schalk Louw, Tony Manning, David McKay, Buhle Ndweni, Lameez Omarjee, Ciaran Ryan, James-Brent Styan, Jaco Visser, Glenda WilliamsSub-Editors Stefanie Muller, Jana JacobsOffice Manager Thato MarolenLayout Artists Beku Mbotoli, Tshebetso Ditabo, Zandri van ZylPublisher & Advertising Sandra [email protected] General Manager Dev NaidooCirculation Manager Armand Kasselman 021-443-9975

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EDITORIAL & SALES ENQUIRIES

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@finweek finweek finweekmagazine

Opinion4 Why no load-shedding is bad news...

The week in brief 6 News in numbers8 Letter from Nigeria: It is what it is10 Telematics a win-win for insurers and drivers11 ‘A lack of political will’ – student leader12 CoAL’s water worries13 Rights issue not a panacea for Lonmin’s woes

Marketplace14 Fund in Focus: Solid performance, consistent

returns15 House View: Calgro M3, Massmart16 Killer Trade: The Foschini Group: Expanding the

fashion footprint17 Simon’s Stock Tips: Glencore, Kumba Iron Ore,

drought, new listings, listing boom18 Invest DIY: Company management: Separating the

zeroes from the heroes19 Pro Pick:The perfect tax-free savings account?20 Money: Three offshore ETFs to consider21 Technical Study: Nampak sticks out like a sore

thumb22 Directors & Dividends:Dealings and payouts

Cover story24 How to fix SA

In depth30 Five years on, Shanduka drops Lonmin32 Trade stocks at a click – Part 336 Retirement mistakes to avoid38 Retirement reforms explained

On the money40 Spotlight: Sage CEO’s entrepreneur tips42 Small Business: What you should know about

suretyship44 Business Strategy: Eight vital steps45 Crossword and Quiz46 Piker

contents


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Eskom’s Grootvlei power station in Mpumalanga

SA ECONOMY

opinion

4 finweek 12 November 2015 www.fin24.com/f inweek

By James-Brent Styan

South Africa’s electricity usage, economic growth and government debt are all interlinked. Drastic changneeded in order to brighten the country’s outlook, which currently looks bleak.

w e have been without load-shedding foraround 80 days now. This is the worstthing to happen in South Africa today.Why? Because it is an indication of

the crisis the economy finds itself in.Between 2014 and 2015, SA’s peak demand for electricity

has shrunk by between 1 500MW and 3 000MW. Peakdemand today is around a level of 30 000MW. In 2014 peakdemand was hitting levels of around 33 000MW. Moreconcerning is when you look back a bit further, in 2011 peakdemand was hitting levels of 36 000MW.

This is not a good story to tell.Looking at the NationalTreasury’s economic growthindicators, the figures bearout what the electricity data isrevealing. In his Medium-TermBudget Policy Statement latelast month, minister of finance Nhlanhla Nene revised thecountry’s 2015 economicgrowth forecast downwardsto 1.5%. Projections for 2016 have also beenrevised downwards.

Bleak outlook on tax revenueNene was at pains to explain how governmentexpenditure is under increasing pressure given thelack of growth in revenue.

In the speech, he said that SA’s gross taxincome will fall by R7.6bn this year. And over thenext three years? It’s projected to decrease byR35bn. So what happens when government’sincome is not increasing but expenses are?It must find money somewhere so it ends upborrowing more – a lot more.

Again, the data is there. Since 2008, SA’s debt-

to-GDP ratio has increased from 27% to 47% inMarch this year. More concerning is the fact thatgovernment plans to add an additional R600bnof debt to the balance sheet over the next threeyears. R600b n. It’s worth repeating.

Some more data on state debt: in Marchof 2015, the country’s debt payments for thenext three years were projected to be R420bn.That’s roughly R387m per day. Paying for debt – almost twoNkandlas per day.

Why am I hammering on economic growth? Becausequite simply, without it, the country cannot deliver on itspromises to lift people out of poverty and create jobs. We willalso get more and more indebted. If government debt stays

Why no load-shedding is bad news…

on the upward trajectory it is, then ratings agencies may startto relook the credit rating of the government.

Any downgrade would add a massive amount ofadditional pressure to the whole mix.

Will the NDP remain relevant?The current economic growth also makes the NationalDevelopment Plan (NDP) a lame duck that is meaningless.The contents of the NDP are meant to transform SA intoa truly global powerhouse. The NDP is meant to eliminateincome poverty by reducing the number of households in

the country earning a monthlyincome of less than R419 perperson (in 2009 prices) from39% to 0%. The implementationof the NDP is also meant toreduce inequality and shrink theGini coefficient from 0.69 to 0.6.

To achieve these two aims,the NDP identified someenabling milestones. Theseinclude increasing employment

from 13m people in 2010 to 24m people in 2030.This is real jobs, not ‘job opportunities’,

by the way. The NDP also notes the need toproduce sufficient energy to support industry atcompetitive prices, ensuring access to electricityfor poor households, while reducing carbonemissions per unit of power by one third.

That is quite a mouthful.For me the NDP stands and falls at one point,

and I quote: “Transforming the economy andcreating sustainable expansion for job creationmeans that the rate of economic growth needs toexceed 5% per year on average.” South Africa iscurrently growing at 1.5%.

We may as well throw the NDP out the

window. Unless we believe the country willsomehow grow at levels of 9% plus in yearsto come?

The only good thing about a slow economyis that it gives Eskom the space to do propermaintenance on its power stations. I sincerelyhope and pray this is what’s happening. If not,we’re going to be in for a turbulent decade

to come. ■ [email protected]

James-Brent Styan has written about Eskom since 2008. His book, Blackout: TheEskom Crisis, is published by Jonathan Ball Publishers. He is an employee of theWestern Cape Government and writes in his personal capacity.

Nhlanhla NeneMinister of finance

Between 2014 and 2015, SA’s peak demand forelectricity has shrunk by between 1 500MW and3 000MW. Peak demand today is around a levelof 30 000MW. In 2014 peak demand was hitting

levels of around 33 000MW.


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The Industrial Development Corporation (IDC) hasidentied the lm sector as one of the viable industriesto drive job creation. Through IDC’s investment in Cape Town Film Studios, over 30 000 jobs have been createdthrough increased international demand for this world-class facility – a major boost for the local economysupporting local communities. It is for this reason that

the IDC will continue to be at the centre of industrialdevelopment to drive economic growth. The IDC, anentity of government, continues to play a critical role incoordinating key industrial sectors across the economyto advance industrial development. The IDC can fundyour business. Call 0860 693 888 or visit idc.co.za foinformation about the sectors that the IDC supports.

SINCE 1940

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6/486 finweek 12 November 2015 www.fin24.com/f inweek

in brief

the week

>>LETTER FROM NIGERIA:Comparing apples and oranges p.8>>IN THE NEWS:Tech meets car insurance p.10>>‘A lack of political will’ – student leader p.11 >>Drought has CoAL management sweating p.12 >>In a beleaguered sector, Lonmin struggles on p.13

NEW CAR SALES

GLENCORE CUTS DEBT

CHINA’S GROWTH TARGET

“We’ve really reachedbreaking point.”AgriSA senior economist Thabi Nkosi , describingthe impact of the worst drought in 23 years onSouth African livestock and maize farmers, in aninterview with Moneyweb. AgriSA says farmers willneed government guarantees for bank loans aheadof the new planting season, or to assist in buyinganimal feed. The main affected areas are the FreeState, the North West and KwaZulu-Natal.

“REGRETS? I DO NOTREGRET. THE ONLYREGRET I HAVE ISTHAT IN MY LIFE INFOOTBALL I AM AVERY GENEROUS MANIN MY THOUGHTS ANDI THINK PEOPLE AREGOOD AND THEN IHAVE REALISED THATMOST OF THE TIMEI WAS, LET’S SAY,TRAPPED BY PEOPLE.”Suspended Fifa president SeppBlatter in an interview withthe Financial Times. Variousinvestigations into corruptionallegations, targeting a number ofcurrent and former Fifa officialsand associates, are currentlyunderway by authorities in the US,Germany, the UK and Switzerland.

“VW isleavingus allspeechless.”Arndt Ellinghorst of banking advisoryfirm Evercore ISI in an interview with

Reuters, after the German carmakerannounced that it had understatedthe fuel consumption of 800 000cars sold in Europe. Volkswagen(VW) is already under fire after itcame to light that the softwareon up to 11m diesel vehicles vastlyunderstated their actual carbondioxide emissions. US environmentalregulators said on 2 November thatsimilar “cheat devices” were installedon engines used in Porsche and Audivehicles, a claim VW has denied,Reuters reported.

“The point I am making is thatthe policies are in place, theconstitution is in place, but ifthose in power can pick andchoose when to adhere, whennot to adhere then we have a

very difcult situation.”Former president Kgalema Motlanthe in aninterview with Business Day. Motlanthe saidthe ruling party was presently made up mostlyof members and leaders devoid of the kind ofpolitical ability and consciousness required tomaintain a united and non-racial society.

New vehicle sales have fallen by8.6% year-on-year to 54 244units in October as governmentcurbed spending, car rentalfirms were hit by a decline in thenumber of tourist arrivals and theincreasing popularity of ride-hailing app Uber affected fleetrenewals, Business Day reported.

-8.6%

$25bn

6.5%

Commodities group Glencoreexpects its net debt to fall fromaround $30bn in September to$25bn (R344bn) by the end of2015, lower than some analystsexpected, through asset sales andbond repurchases, ft.com reported.Glencore, whose share price hasfallen 60% this year because oflower commodity prices and itshigh debt levels, said its marketingarm had a stronger quarter,with improved contributionsfrom metals and minerals, andagricultural products.

The Chinese governmenthas set a 6.5% growth targetfor annual economic growthfrom 2016 to 2020, which willallow the country’s GDP andper capita income in 2020 tobe double what they were in2010, nytimes.com reported.The current development plan,which runs from 2011 to end2015, set an annual growthtarget of about 7%,nytimes.com said.

KgalemaMotlantheFormerpresident


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Online retailer Amazon openedits first bricks-and-mortarbookshop in Seattle, its first-everphysical store. It stocks 6 000books that have been chosenbased on reviews and salesdata from Amazon’s website,Sky News reported. A revival ofphysical book sales is under way,after a decade of decline. E-booksales fell by 10% in the first fivemonths of the year, accordingto the Association of AmericanPublishers.

THEGOOD

THEBAD

THEUGLY

Water supply is SA’s next Eskomcrisis, investment bank Nomurawarned in a report this month.A thirdof South Africa’s municipalities havedysfunctional wastewater treatmentworks, but despite a looming drinkingwater crisis, the department of waterand sanitation has failed to spend amassive R2bn of its budget, according

to City Press. It has also not yet releasedthe Blue and Green Drop reports for2014, which measure the quality ofdrinking water as well as the state ofaffairs at SA’s water-treatment plants.

Struggling platinum miner Lonmin has warned shareholders that it mayhave to stop operations unless itsproposal to raise $400m in equity,its third capital-raising in six years, isapproved. The miner, which is cutting6 000 jobs, placing two shafts oncare and maintenance, is expectedto announce impairments of up to

$2.05bn, or R28bn, when it releases itfinancial results on 9 November. (Alsosee pages 13 and 30.)

DOUBLE TAKE BY RICO

Private education group Advtech –which resisted a takeover offer fromrival Curro Holdings in July – has seenits shares reach a new record afternews that shareholders support anR850m rights offer. Unlike Lonmin,which is begging shareholders forcash to keep operating, Advtechwants to use the money to fund

expansion, make acquisitions, andrestructure some of its debt, whichresulted from substantial acquisitionsmade last year.

the week

6 000

AMAZON’S NEW BOOK BET


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letter from Nigeria

for a rightly proud people, Nigeriansseem to spend lots of time arguingabout what they’re not. Oftenpeople will ask me how it’s possible

that Singapore can be like Singapore, forinstance, but that Nigeria can’t replicate theorder and prosperity of the Southeast Asiancity state. The answer is usually that althoughboth Singapore and Nigeria are former Britishcolonies, this history shouldn’t be used asa reason to explain all the unrest or politicalinstability Nigeria has since experienced.

I am in Singapore thisweek, and while it’s a cityI admire and have hugeaffection for, I can’t seehow on earth you couldtransplant this modelsuccessfully to Africa’sbiggest economy. Fromthe outside looking in, Iknow it seems Singaporehas itself sorted, butit’s always crucial toremember that themodest size of the place makes governinghere closer to being mayor of London orNew York than it does to being presidentof Nigeria.

To give an idea of the relative scales atplay: the population of Singapore (5.5m)is roughly a quarter that of Lagos, thebiggest city in Africa. Try imposing even oneof Singapore’s strict rules on a ci ty wherethe only kind of successful government isincremental, realistic and slow, and peoplewill laugh you out of town. It takes less timeto get from one end of Singapore to theother than it does for many Lagosians to getto work in the morning.

Then there are the ways of doingbusiness. Singapore is a city that workson screens, that deals in instruments tooabstract for many people. Nigeria is an

economy that thrives on the rough andtumble of physical markets, where peoplelove to get stuck into supply and demand,where everything can be bought and soldand every man can be a millionaire if he can

spot the margin. Stick Lagosians in an officeand talk to them about delta hedging?You’ve lost all the hustle that makes thecity great.

Then there’s the atmosphere, themindset: surveys occasionally showSingaporeans to be among the world’s leasthappy people and Nigerians to be amongthe happiest – who would want change thatseems to bring discontent?

For all this difference, there areoccasional commonalities, running from

the legislative (heftycar import tariffs,though Nigerians andSingaporeans respondto that challenge ratherdifferently) to thegastronomic (no one willever leave a Singaporeanor Nigerian homeunderfed) and mostimportantly: the familial.

Nigerian andSingaporean society

are both built on the family structure; theknowledge that every generation will belooked after by the generation precedingor succeeding. Admittedly, though, youraverage Nigerian family is a whole lot biggerthan the regular Singaporean household.

Compared with the individualisticsocieties of, say, Western Europe, this isa huge success factor in both countries’favour. It means women can go out to workmore easily, leaving young children withgrandparents. It means family businessesthrive and grow more easily. It meansolder people don’t erode their savings onretirement homes or healthcare.

Want to succeed in business inSingapore or Nigeria? Get with the familyway of things. Want Nigeria to be more likeSingapore? Forget it, it’ll never happen and

it’ll never work, but instead recognise theways in which they’re already similar andalready working, however hard you haveto look. ■[email protected]

It is what it is

Want to succeed inbusiness in Singapore

or Nigeria? Get withthe family way ofthings. Want Nigeriato be more likeSingapore? Forget it…

on n24.com#trending

Licence disc can’t be keptover e-toll debt – AA

The national department of transponew requirements for vehicle licen

disc renewals cannot be used towithhold a disc for outstanding e-fees, according to the Automobil

Association (AA). The requiremewhich came into effect on 1 Novem

include having to provide proof residence when applying for a mo

vehicle licence disc renewal. 2/11/15 17:36

7 reasons why water crisis isfar worse than Eskom

South Africa’s water crisis could far worse than problems at Eskomaccording to a report by Nomura

The report highlighted seven reasowhy the water crisis could escalatincluding a “serious lack of techn

skills in engineering”, underinvestmin infrastructure, and a potential Rshortfall in spending over the nextyears to address a continued increa

in water supply needs.“The water crisis is not so much aba system that is at every moment in

crisis or deficit, but about a system has structural defects that are exposby weather and ‘unlucky’ events su

as technical problems,” says PeteAttard Montalto, emerging marke

economist at Nomura. 3/11/2015 13:39

PIC ‘concerned’ by MTN fineSA’s Public Investment Corporati

(PIC) was concerned that MTN di

anticipate or take any steps to prevbeing fined $5.2bn in Nigeria for fto deregister cellphone subscriberThe PIC manages most of the asse

held by the South African GovernmEmployee Pension Fund (GEPF

The GEPF holds over 16% of MTshares. According to PIC CEO Da

Matjila, it was in talks with MTNmanagement and would “take all fainto consideration before deciding

its next steps”. 3/11/2015 11:01

the week


The Singapore skyline


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t elematics and vehicle tracking are changingthe ratings of car-insurance premiums. In theUS, 75% to 80% of insurers list telematics intheir ratings to determine premiums. This isaccording to Gari Dhombo, managing director at financialservices and insurance provider Alexander Forbes. Locally,with short-term insurers like Discovery Insure leading theindustry, it is not a question of whether other short-terminsurers will follow suit, but rather, when.

What is telematics?A telematics device, fitted to a car, can provide driverswith a “real-time” view of their vehicle at any given time.This information is useful to give feedback on drivingevents and driving behaviour patterns essential for safety,fuel consumption management and to combat vehicletheft, according to Grant Fraser, product and marketingdirector at MiX Telematics Africa.

From a consumer perspective, personal safety iskey. With crime in South Africa being a serious concern,more consumers are opting for tracking solutions as thetechnology significantly increases the probability of astolen vehicle being recovered. On the other hand, insurersare using telematics to incentivise consumers to look aftertheir vehicles and drive safer to reduce accidents relatedto road and weather conditions, the time of day, vehiclelocation and driver behaviour, says Fraser.

The data collected allows insurers to better assessclaims and allows consumers to provide accurateinformation to insurers in the event of an accident. MiXTelematics works with a number of insurance companiesby assisting in the claims process. Data collected can

identify if the driver was at fault or protect the driver whenan accident occurs as a result of factors beyond theircontrol, explains Fraser.

“It [telematics] gives insurers thegeolocation of where the vehicle is andassists in getting rid of fraudulent claims,”Dhombo adds. Alexander Forbes plansto launch its own behavioural drivingproduct by the end of November.

Although some drivers are averseto the idea of having tracking devicesfitted to their cars, Dhombo says the plan is to incentiviseconsumers by incorporating telematics ratings withtraditional ratings to set premiums and offer other rewards.

Telematics a win-win forinsurers and driversTelematics technology can change your driving behaviour and possibly your insurance premium. As moredrivers opt to use this data-tracking mechanism, insurers have identied a protable opportunity.

Changing the behaviour of driversDiscovery Insure has been making use of telematicssince its launch in 2011. Drivers are encouraged todrive safer with a behavioural change programme thatoffers rewards for points earned. This includes reducedpremiums, discounts for fuel, Uber and Gautrain rides,says Discovery Insure CEO Anton Ossip. In addition,drivers are offered advanced driving courses to improvetheir driving behaviour.

Discovery Insure’s offering also comes with a mobileapp to monitor driving behaviour. By incentivising betterdriving, it also creates a safer environment for others onthe road. SA has a severe problem when it comes to roadaccidents, says Ossip. The 2013 WHO global status onroad safety reported a rate of 31.9 road fatalities per100 000 members of the South African population.In the US, this figure was down to 12.3. Dhombo alsoexplains that if a vehicle is involved in an accident, themonitoring mechanism can detect this. The insureris informed and can then dispatch the necessaryassistance.

The futureTelematics could become a standard fitting withvehicles as it also provides motor manufacturers withinformation regarding road safety, says Dhombo.Telematics ratings will never completely replacetraditional ratings measures such as age, gender,location and car brand – which remain key – he says.“All these factors will still count but will probablycontribute far less than they do now.”

The role of telematics extends beyond insurance

and ensures the vehicle and its owner are“inte rconnecte d”. By creating a “relationship” betweenthe device and the person using it, thedata generated by the person’s use of theservice should garner value, says Fraser.

“There is no doubt that it [telematics]aids the insurance sector in a very bigway… but the need for telematics andtracking devices is far more than this,” heexplains. The introduction of this deviceis aimed at increasing personal safety,

improving efficiencies and making changes to the way thevehicle is driven by analysing the data it generates. ■[email protected]

By Lameez Omarjee


the week in the news

“[Telematics] gives insurers thegeolocation of where the vehicle

is and assists in getting rid offraudulent claims.”

Anton Ossip CEO of Discovery Insure

Gari Dhombo Managing director at

Alexander Forbes

Grant Fraser Product and marketing

director at MiXTelematics Africa


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all blame to the government, forgetting that universitiesrun with almost complete autonomy and have faileddismally at ensuring [they] are accessible and empoweringfor the most marginalised in our society […] As an SRC weencourage students to ‘Protest and Pass’ […] At this pointwe must change tactics and restrategise after exams; wehave managed to get the university to be lenient towardsstudents who were a part of the protest and they haveagreed to an extended exam period as well as no testing of

new material.

fw: UCT has committed to insourcing,

with six outsourced services nowbecoming insourced. How is Witsmeasuring up?SK: The Wits management has been draggingits feet. They have committed in principle toinsourcing – after 15 years of Workers SolidarityProtests by workers and students. Earlier thisyear, the vice-chancellor [Adam Habib] refused

to acknowledge the existence of the Wits Workers SolidarityCommittee (WWSC), which I have been a part of sincemy early years at Wits. Only now is he negotiating withthe WWSC, because of public pressure […] on October 6 aprotest to specifically end outsourcing took place at Wits.We want – amongst a list of other demands that we have

handed over to the university – the university to adopt theWorkers Charter handed over at the 6 October protest; thisstill hasn’t been adopted and a task team has been set upto study how the university will insource.

fw: Wits was admired for the unity of its students.Has that changed as some reports would have thepublic believe? If so, how has this impacted themovement?SK: The movement remains about free and qualityeducation, and the end of outsourcing on our campus. Therehave been disagreements about the tactics going forwardbut our strategic aims remain the same. ■[email protected]

shaeera Kalla, outgoing Wits SRC president, quotesOliver Tambo when asked if she has advice for SA’sleaders: “The children of any nation are its future.A country, a movement, a person that does not

value its youth and children does not deserve its future.” Thenationwide protests certainly arrested SA’s attention. Butwhat is the way forward?

finweek: Government has now committed toaddressing the long-term issues and demands. Doyou think they will or do you feel that the 2016 fee-freeze is a band aid?Shaeera Kalla: This addresses the symptom and notthe problem. Until government adequately funds highereducation, you will see that these protests become perpetualin nature; they already are at some campuses. TUT [TshwaneUniversity of Technology], for example, protests annually,but because it is a historically black university and Wits isa historically white university, they are not taken seriously,which shows how university managements and governmentprioritise issues in a classist and racist way.

fw: With the 0% for 2016, how do you think theshortfall is going to be funded?SK: There are two ways: Firstly, government canuse its R1.3tr budget more efficiently to free upthe relatively small amount that this would require.Secondly, universities need to be more efficientand transparent with financial statements.Expenditure needs to be itemised and the auditor-general should perhaps audit state universities.

fw: Do you think that those calling for freeeducation understand that it won’t happenovernight, or has patience been exhaustedand do people want answers immediately?SK: In 1994 a commitment was made towards free andquality education. The problem is not financial resources, butrather a lack of political will. We want it now.

fw: Do you believe that the long-term commitments

made by government and universities will behonoured? What is the level of trust at this point?SK: If the commitments are not made, we will go back andshut down the university. We have shown the power of activestudents and this should not be treated lightly or with disdain.

fw: Some think the goal of a 0% increase wasreached and the matter is over. But it has beenindicated that there are more issues that will beaddressed. How would you encourage students toachieve both their academic goals and still ensurethe movement stays strong?SK: Zero percent does not address any of the structural andsystemic problems around how our university is run. It shifts

By Jana Jacobs

‘A lack of political will’ – student leader#FeesMustFall rocked our nation and proved the power of SA’s youth.nweek interviewed outgoing Wits SRCpresident, Shaeera Kalla, to nd out how the movement continues to march forward.

“Until government

adequately funds highereducation, you will see that

these protests becomeperpetual in nature.”

F e

l i x D l a n g a m a n

d l a

/ F o

t o 2 4

/ G a

l l o

I m a g e s /

G e

t t y

I m a g e s

Firstly, governmentcan use its

R1.3trbudget more efficientlyto free up the relativelysmall amount required tofund the 2016 shortfall.

Shaeera Kalla (far right),former Wits SRC president,and other universityleaders lead a protest overthe increase of tuitionfees on 19 October inJohannesburg.


finweek 12 November 2015 11 @finweek finweek finweekmagazine


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c oAL, a R1.1bn coaldevelopment firm,is sweating ongovernment renewingits application for a water-use licence for the Vele – thecontroversial Limpopo collierypositioned a short drive from theMapungubwe national heritage site.

David Brown, CEO of CoAL, saidin the first half of this year that heexpected its application would beviewed favourably before the end of theyear. Realistically, he has about six-and-a-halfweeks left if that deadline is to be met.

Shares in the company had staged animpressive turnaround, up some 68% thisyear-to-date. However, concerns over thethermal coal market, and the possibility thatthe asset closest to generating cash for CoAL,Vele, may be postponed are reflected in a 29%slide market value in the last 30 days.

Environmental permitting has been vexedfor Vele since the beginning of its developmentmore than five years ago. Lobbyists managedto have work on the site postponed for halfa year and are now agitating the courts tohave production from the mine, where plantre-engineering is underway, halted again.

What’s not helpful is the noise created bythe country’s drought, the worst since 1992

CoAL’s water worriesAs Coal of Africa (CoAL) urgently awaits approval on a water-use licence forits Vele project in Limpopo, concerns about the rm’s share price grow. Add

the country’s drought to the mix and things get somewhat sticky…

By David McKay



A report by Macquarie Research recentlyconcluded that in the face of what is believedto be the third-most-potent El Niño weathersystem in history this summer (or winter,hemisphere depending), some 54% of 100company shares analysed by the bank wouldbe positively impacted.

Interestingly, some mining companies, suchas First Quantum Minerals, could be positivelyaffected as higher than normal rainfall in parts oZambia, where it operates, could help rechargethe Kariba dam, improving the hydro powersituation in the country, where electricityshortages have hampered the economy.

Generally speaking, however, El Niño isexpected to bring drier conditions to SouthernAfrica, as well as swathes of Australasia andSoutheast Asia. Parts of South America, such asArgentina, are expected to become wetter.

In this context, there are some very specificoutcomes. For instance, in Australia, insurancestocks do better owing to the higher likelihoodof bush fires, which is the least costly type ofinsurance event compared to hail or earthquakesThe loss severity is therefore lower.

In SA, however, the threat of dryconditions to business focuses on agricultureand industry, particularly because of thesignificant amounts of water used by thecountry’s mining businesses.

Water usage is increasingly becoming a hotpotato in places such as the Waterberg in the

Limpopo, as well as in the North West, wheremany of the platinum and chrome mines operateand the iron ore mines of the Northern Cape.

According to Matthew Burnell, an attorneywith Fasken Martineau, there is specific risk tomining companies because – in terms of theNational Water Act – the department of waterand sanitation (DWS) has the ability to restrictwater usage even within the confines of anIntegrated Water Use Licence, the permit allmining companies must own in order to mine.

Says Burnell: “In these instances, it is up tothe [DWS] to make sure that water resourcesare not significantly compromised. It can do this

by decreasing the water allocation permitted bywater users.“Although a water-use licence permits a

water user to consume a certain quantity ofwater, the licence does not guarantee that thatquantity of water will be available and generallypermits the [DWS] to reduce the amount ofwater available to the water user.”

Although this is “a worrying factor” for minifirms, Burnell believes it will encourage miningcompanies to seek out sustainable water usepractices that would exert less strain on thesystem, lowering consumption costs.

El Niño return bad news for SA

(see sidebar). This, and the factthat coal markets may not

be supportive of productionfrom Vele are creatinguncertainty for CoAL eventhough the firm’s balancesheet problems have been

largely solved.Brown sold a slug of

shares in CoAL to the Chinesecompany, Beijing Haohua Energy,raising $70m and has followedthat up by selling shares in

CoAL’s underlying project, Makhado – also inLimpopo – to Singapore’s Yishun BrightriseInvestments for a total of $24m in cash anddebt. Yishun also has the right to finance the$400m project and manage its construction.

There’s also an attempt to block theenvironmental permitting for Makhado,although Brown said the company wasconfident it would have the court interdictagainst it set aside.

“CoAL does not anticipate that the processwill affect Makhado’s construction timetable,”said Brown recently in CoAL’s third-quarteroperating results. “CoAL has engagedconstructively with the department of waterand sanitation and anticipates that we will begranted a licence in due course,” he added.

“We are still pressing hard to get it as soonas possible but the main focus is on Makhadorather than Vele. Vele would not restart priorto July 2016 so while it is important, it’s notvital,” Brown said in response to finweek ’squestions. He declined to comment onwhether drier weather this summer mightcomplicate the applications.

Makhado’s 26-month construction

phase is expected to begin in the secondhalf of 2016 with 5.5m metric tons per year(MMt/y) of saleable hard coking and thermalcoal due to be produced by the end of 2016.

Vele, which was due to be commissionednext year, is slated to produce 2.7MMt/yrun-of-mine thermal and soft coking exportcoal. There are also plans afoot to increasethe colliery’s life of mine to 21 years from thecurrent expected life of 16 years. Vele wasmothballed around 2011 while critical upgradesof the plant to include production of thermalcoal were assessed. ■[email protected]

100

80

60

40

20Nov ‘15Dec ‘14

Cents

Jun ‘15

COAL OF AFRICA LTD

52-week range: R0.22 - R1.50

Price/earnings ratio: -

1-year total return: +14.29%

Market capitalisation: R1.175bn

Earnings per share: -

Dividend yield: -

Average volume over 30 days: 95 204 SOURCE: Blo omberg.com

David Brown CEO of CoAL


13/48

e ven if Lonmin gets shareholderapproval for its $400m rights issueon 9 November, analysts believe theUK platinum company is not outof the woods, especially if PGM prices don’trevive over the next two to three years.

Lonmin announced on 21 Octoberthat it intended to issue shares which, ifsuccessfully achieved, would open the door toa $370m refinancing of debt by banks – justenough to keep the company afloat while itset about cutting production to about700 000 platinum ounces (oz) and reducingstaff by 6 000 (also see page 30).

This announcement was followed up bya production update on2 November in whichLonmin said it wouldimpair its assets by up to$2.05bn. This is a movethat, according to CIBCCapital Markets analyst,Leon Esterhuizen, is anindication that the rightsissue is already “in the bag”.

“I have a hunch thiscould become PIC Platsshortly,” says Esterhuizen,referring to the possibilitythe state-owned PublicInvestment Corporation,currently a 9% shareholder in Lonmin, wouldunderwrite a good part of the rights issue.

One of the questions being thrown up byLonmin’s impairment, however, is whetherthere are more write-downs to come from the

South African platinum sector.One market commentator says that as ofend June (by which time many companieshad reported interim or full-year figures), onlyAnglo American Platinum had a market valueabove the book-value of its assets. “Yet therewere no write-downs despite there being anindicator of impairments,” he adds.

The market commentator believesplatinum miners had retained a beliefthat PGM prices would improve over theremainder of the year, even if only in rand-denominated terms. “If you add back another$200/oz to the platinum price, then maybe

By David McKay

Rights issue not a panaceafor Lonmin’s woesIn the face of depressed prices and signicant oversupply, the platinum group metal (PGM) sector a dark period. Lonmin plans to restructure its debt and is asking shareholders for a $400m bailout, enough to save the struggling miner?

generate $231m of negative free cash flowover the next three years in a ‘best-casescenario’,” says Byrne. “More realistically, weexpect the company to consume $575m andneed to raise further capital in 2018 in orderto remain solvent.”

It’s a view that has the support ofEsterhuizen.

“Unless the metal price picks up a lotfrom here – and that has to happen withinthe next three years – Lonmin is back in thehole with a much bigger problem,” he says.“The rights issue only keeps the lights on andmanagement paid. There are very clear anddeeply negative returns on this capital.” ■[email protected]

Lonmin standsat the centre of adebate that runsto the heart of theentire SA PGMsector: essentially,whether the sectoris “investible”...

“If you add back another

$200/ozto the platinum price, then maybe no write-downs

would be required.”

no write-downs would be required.”The PGM market in dollar terms continues

to indicate, however, that there’s significantoversupply.

Andrew Byrne, an analyst at BarclaysCapital, says the announcement by Lonminof a 50% plus write-down of its assets was“a major step in addressing the underlyingissues, and hopefully will spur peers intomaking similar announcements through 2016in order to allow an improvement assumptionenvironment for decision-making over thenext decade”.

“Yes, there’s much more to come from therest still,” says Esterhuizen of the likelihood

of more write-downs.Commenting specifically onLonmin, he added: “They haveclearly adjusted to much morerealistic prices, but their pricesare still well above spot.”

Analysts think thatmanagement of platinum-producing companies inparticular have been toooptimistic about the recoveryof the PGM market withBarclays forecasting a surplusin the market through to 2020.

So with its write-down outof the way, and with a rights

issue most likely to be under control, whatdoes the future hold for Lonmin?

“I would hope management delineates along-term – beyond three years – businessprofile since most of the remaining equity

value in Lonmin would be based on long-termPGM prices, not today’s,” comments MarcElliott, an analyst for Investec Securities.

According to Byrne, Lonmin stands atthe centre of a debate that runs to the heartof the entire SA PGM sector: essentially,whether the sector is “investible” or if, infact, some participants in the sector such asLonmin, should be allowed to fail in order torevive the fortunes of the survivors.

“Despite announcing major cost-cuttingand ore reserve harvesting plans, and capexdeferrals, we calculate that without increasesto the ZAR [rand] PGM basket, Lonmin will




14/48

Annualised, as at 30 September 2015: ■ Baobab BCI Flexible Opportunity Fund■ Benchmark% RETURNS

0

5

20

10

15

25

30

23.68%26.76% 25.1%

10.87%11.82% 11.61%

Latest1 year

Latest3 years

Since inception inApril 2013

marketplace

Don’tmiss: Thefinweek Money

Matters show everyFriday at 1PM on CNBCAfrica, channel 410. Inthe show, we talk to

experts about the nextissue’s top stories.

FUND IN FOCUS: BAOBAB BCI FLEXIBLE OPPORTUNITY FUND

Solid performance, consistent returnsBy Jaco Visser

Fund manager insightsThe fund hasn’t favoured South African companies recently, says Darryl Hannington,manager of the Baobab BCI Flexible Opportunity Fund.

He is, however, optimistic about the outlook for Brait SE, the fund’s largest holding.The fund held Brait for its largest investment, namely Pepkor, he says. After Pepkor wassold to Steinhoff, the stock effectively became a cash sell, Hannington says, with a “goodmanagement team”. Subsequently the fund started buying Brait aggressively, he explains.

This was done “on the back of what we believed was a very strong private-equitymanagement team going to do good deals with the cash that they had”, according to

Hannington. “Subsequently we were proven correct. They [managed]fantastic deals, which the market has clearly loved, in Virgin Activeand, more particularly, New Look.”

The fact that Brait sold its remaining Steinhoff shares back to thelatter boosted its cash holdings, giving it the opportunity for moredeals in future, he said.

The fund has used its full offshore allowance and Hannington isbanking on the strong American consumer for returns.

“The US consumer is in good shape,” he says and adds thatcorporates in the world’s largest economy are sitting on swollen

balance sheets as they shy away from investing in new capacity.Locally, the fund has steered clear of resource stocks as commodity prices

plummeted on the back of a cooling Chinese economy. The fund has also avoided

construction stocks whose earnings dropped, even as they are trading in the “high singledigits” on price-earnings valuations, according to Hannington.

Benchmark: CPI + 6% per year

Minimum lump sum/subsequent investment:

R10 000 lump sum or R500/month

Fund manager: Darryl HanningtonTotal Expense Ratio (TER):1.9%Fund size: R406.5mContact details: [email protected] or 011 475 1981

Whyfinweek would consider adding itThe fund is one of the top performers in its category, according to MorningstarResearch SA’s rankings. It consistently yields a real return, although it is still young.

The fund counts Brait SE, a solid investment holding vehicle, as its top share. It alsobanks on growing smaller stocks such as Pinnacle Holdings and investment companyAnchor to drive returns. With about a quarter of its value invested offshore, the fundhas a built-in hedge against rand weakness. With Naspers*, Steinhoff, Investec andNetcare as some of its top 10 holdings, the fund is exposed to growing consumermarkets offshore as the local economy bites into domestic buyers’ wallets. ■[email protected]*finweek is a publication of Media24, which is a subsidiary of Naspers.

The fund investspredominantly inSouth African andoffshore equitiesand holds about

5%local property stocks.

as at 31 August 2015: % of fund1 Brait SE 5.9%2 Anchor Group 5.8%3 Investec plc 4.8%4 Naspers* 4.7%5 Discovery Holdings 4.7%6 Aspen Pharmacare Holdings 3.8%7 Pinnacle Technology Holdings 3.8%8 Steinhoff Investment Holdings 3.8%9 Netcare 3.7%10 MICROmega Holdings 3.5%

TOTAL: 44.5%

PORTFOLIO COMPOSITION

FUND INFORMATION


The fund invests predominantly in South African and offshore equities and holds about 5% local property stocka medium to high risk rating and, typically, an investment horizon of between three and ve years. Since incepti

than two years ago, the fund has outperformed its steep benchmark, yielding real returns for investors. The top 1comprises less than half the fund’s value and is diversied between consumer, nancial, technological and healthThe fund is managed by Anchor Capital.


15/48

house view

MASSMART

CALGRO M3*

Solid foundation for 2016

Wal-Mart Stores’ announcement in November2010 that it plans to acquire 51% of discountretailer Massmart, whose brands includeBuilders Warehouse, Game, Makro andDionWired, caused quite a stir.

Despite opposition from unions andthree government departments, whichfeared that Wal-Mart’s global supplychain would hurt Massmart’s localsuppliers, the deal was approved by thecompetition authorities. Strict conditionswere imposed, including honouringexisting collective bargainingagreements, and setting up a R100mfund to help develop local suppliers.

With much hype around thepotentially massive synergies and growthprospects flowing from a Massmart/Wal-Mart tie-up, the share pricewas driven to new highs, peaking

at 20 800c/share in May 2013. Itproceeded to lose nearly half of itsvalue in the following nine months. Theshare price is currently trading at around12 065c/share as investors have beenlosing patience with the retailer’slacklustre performance.

Its latest financial results, for the 26weeks ended 28 June, show that whileit managed to grow sales by 9.1%, headlineearnings per share was down a massive 26%(124.2c), partly due to foreign exchange lossesand an increase in interest payments.

While some segments, such as Builders

With the recent listing of Balwin*and the fact that I nowown shares in both thesecompanies, people havebeen asking if I will sellCalgro as it is very similarto Balwin and is priced on amuch higher valuation.The answer is simple: I amnot selling and will continue tohold Calgro. Here’s why: Calgrooperates in the lower LSM marketswhereas Balwin is in the middle and uppermarkets. As such, Calgro is lower risk as mostof its clients are using government grants.

Furthermore, 2016 is an electionyear and we typically see a

ramp-up in low-incomehousing demand asgovernment tries to lookgood for the voters. Over andabove this, Calgro has builta lot of base infrastructure;

while important, this isn’tdirectly revenue generating. The

next stage is the top structures(houses) and this is the profit.

So I expect a good 2016 from Calgro andcontinue to hold the stock. ■*The writer owns shares in Calgro M3 and Balwin.

By Simon Brown

By Moxima Gama

HOLD

HOLD

SELL

SELL

BUY

BUY

Last trade ideas

MTN

Balwin

Rolfes

Phumelela

Last trade ideas

EOH Holdings

Adapt IT Holdings

Tsogo Sun Holdings

Brait SE

Warehouse, have performed well, the group’sfood business has been struggling to winsubstantial market share. Analysts are also

concerned that much of the businesstargets either low- and middle-incomeconsumers who are under pressure dueto the weak economic environmentand rising job losses, or are dependent

on discretionary spending.One of its biggest hindrances is the

lease exclusivity clauses held by rivalsPick n Pay, Shoprite and Spar, whichprevent Game’s fresh food division,FoodCo, from operating within thesame shopping malls as them. But if

the Competition Commission’s inquiryinto this tenancy arrangement in shopping

malls is favourable, Massmart shouldgain further market share.

Massmart’s share

price has declined thisyear, making it the industryunderperformer. However,

it made a comeback inSeptember, potentiallysignalling an aggressiveinterest. A move above12 665c/share would end a near-term

downward consolidation, and gainstowards its 15 650c/share prior highs could

follow. A tight stop loss must be maintained,particularly when Massmart reaches the13 500c/share level. ■[email protected]

SELL

SELL

BUY

BUY

Fighting back

BUY

BUY

BUY

SELL

Strict conditions were imposed, including honouring existingcollective bargaining agreements, and setting up a

R100m fundto help develop local suppliers.

The Pennyville developmentsouthwest of Johannesburg

marketplace



16/48

THE FOSCHINI GROUP

SOURCE: MetaStock Pro (Reuters)

Expanding the fashion footprint

Moxima Gama has been rated as one of the top fivtechnical analysts in South Africa and outperfothe market during the recent recession. She haa technical analyst for 10 years, working for BJFinancial Innovation and for Standard Bank asResearch Team in the Treasury Division of CIB

Moxima Gama on finweek Money Matterson CNBC Africa every Friday at 1pm.

Don’tmiss!

THE FOSCHINI GROUP (DAILY CHART)

With the launch of new brands to reach new market segments and the acquisition of UK fashion, the retail chain spositioned to achieve its ambitious 2020 growth targets. Is it time to buy into management’s growth story?

By Moxima Gama

marketplace killer trade


What next?Possible scenario: TFG has beenconsolidating in the form of asymmetrical triangle since August.It has recently bounced on the lowerslope of the pattern and could beheaded towards the upper slope. Apositive breakout would be confirme

above 15 070c/share, with theshort-term upside target situated at17 325c/share.Alternative scenario: A negativebreakout of the pattern would besignalled below 13 670c/share, andthe downside target would be at11 415c/share.■[email protected]

d espite increasedcompetitionfrom foreignclothing retailers

– such as Spain-headquarteredZara, Australia’s Cotton On andBritish clothing brand Top Shop– fashion retailer The FoschiniGroup (TFG) is up nearly 22%over the past year, outperformingthe JSE’s All-Share Index butlagging rival Truworths.

Following its acquisition ofan 85% stake in UK fashionretailer Phase Eight for R2.6bn inJanuary, TFG now has 2 724 out-lets in 27 countries globally. It hasalso expanded into children’s wear,opening its first Soda Bloc storein Cape Town in August. Otherbrands include clothing retailersFoschini, DonnaClaire, Exact and

Critics of TFG point out to thegroup’s reliance on credit sales,which represent more than halfof total sales for the group. TFGhas seen a 9.4% increase innet bad debt to R1.02bn in theyear to end March, a significantslowdown compared with theprevious financial year, when baddebts jumped by nearly 40%.

Another downside, followingthe acquisition of Phase Eight,

Markham; sportswear brandsTotalsports, Sportscene andDuesouth; and jewellery brandsAmerican Swiss and Sterns.

Further expansion into therest of Africa, where it currentlyowns 148 stores in sevencountries, mainly Namibia,Botswana, Swaziland andZambia, is a key focus area forTFG. The group plans to operate375 stores in the rest of Africa by2020. In the past financial year,it opened 29 new stores in theregion, including five in Ghana.

Its entry into Nigeria, however,has been challenging due to ashortage of prime retail space.Congestion in ports and poorsupply chain infrastructure, suchas roads and warehouses, are alsohindering faster store roll-outs.

52-week range: R144.01 - R151.15

Price/earnings ratio: 16.51

1-year total return: +25.48%Market capitalisation: R31.59bn

Earnings per share: R8.98

Dividend yield: 3.97%

Average volume over 30 days:857 861

SOURCE: Blo omberg.com

is the increase in its outstandingdebt by about R3.6bn, with itsdebt-to-equity ratio increasing to76.8% (56.6% excluding PhaseEight) at the end of March. Theintention is to bring gearingcloser to a medium-term targetof 40%. TFG also retains theoption to buy the remaining 15%in Phase Eight, which is currentlyowned by management.

The UK retailer, whichtargets women aged 35 to 55,has achieved sales growth ata compound annual growthrate of 18.2% over the past10 years, totalling R2.88bn inthe 2015 financial year. It istargeting 770 stores by 2020,up from the 444 at the end ofMarch. It is also seeing potentialin expanding its internationalfootprint, with standalone storesalready successfully trialledin Switzerland, Germany andHong Kong, and growing itse-commerce offerings.


17/48

NEW LISTINGS

DROUGHT

GLENCORE

Simon’sstock tipsSimon’s

stock tipsFounder and director of investmentwebsite JustOneLap.com, Simon

Brown isnweek ’s resident expert onthe stock markets. In this column, heprovides insight into the week’s main

market news.

Foodproducershardest hit

Not everyonecan hit the jackpot

A useful list

South Africa is experiencing a seriousdrought and unless we get some heavyrains soon it’s only going to get worse. Theimpact of this is going to be felt by a numberof listed companies, most obviously thosethat have maize as an input. In this case,food producers are involved – especiallythose in the bread and poultry sectors. Onthe chicken side, Astral won’t suffer as muchbecause it also sells chicken feed, which willmake margins, but i t won’t offset the costincreases on the chicken production side.One option for the poultry companies is toslaughter a few days earlier to save on feedcosts, but this reduces bird size so while itmay help, it doesn’t solve the problem. Othersthat will be hit are the food retailers. Whatwe often see in this case is that retailersabsorb some of the upward price pressureand by doing so they reduce their margins. Soretailers will be hurt a bit, but food producerswill suffer the most, as maize is a significantinput in their businesses.

Glencore has published what i t calls “materialdates for investors for 2016”. I like this verymuch – in short, we have been given thedates for next year when we can expectproduction updates, results, AGMs and thelike. Very handy.

No reprievein sightKumba shares continue to slide on the JSE.After an all-time high of over R600 in early2013, the miner is now trading 90% lowerat under R60 at the time of writing. In timethe company’s fortunes will turn and whilesome are suggesting that the miner may gobust, I think that is unlikely. However, withiron ore prices continuing to fall and expectedprices at under $50 a ton for 2016 and 2017,the tough times are here to stay for a while.For the half-year to June, it made headlineearnings per share (HEPS) of R7.85 andif Kumba can do that again in the second

half, then there will be no dividend. But itdoes put the stock on a price-to-earningsratio (P/E) of around 4 times. Even a dropin HEPS would see a P/E of maybe 6 times.This is seemingly very cheap, but with a verytough couple of years still ahead I wouldnot be rushing in to buy the stock. Iron oreproduction is still being increased globallywhile demand remains very weak. If the pricegoes below $40 a ton, things will start to getvery messy at Kumba. ■[email protected] *The writer owns shares in Balwin.

LISTING BOOM

Nothing’s setin stoneWith the current listing boom we’re seeingmany comments that this is a classicmarket-top indication and that is true. Bearmarkets are pretty much always precededby a glut of new listings, but what’simportant is to understand the timeline.This listing boom could continue for anotheryear or more, or we could be moving intobear territory as you read this. This is nota linear process – a listing boom may notimmediately be followed by a bear market.The listing boom is just another signal thatmarkets are generally expensive. As always,my advice remains to hold onto qualitystocks and use these warning signals to exitthe lower quality holdings you may have.

After the huge success of the Sygnia listing,two other listings really haven’t performed.Trellidor has been trading around the R6listing price and looks set to move lower, whileBalwin* is at a listing price of R9.88. I gotBalwin at the listing of R9.88 so am slightlyunderwater and disappointed. That said, Icontinue to hold the stock as I do like the

company and expect good results over thenext couple of years.

finweek 12 November 2015 17

By Simon Brown

marketplace Simon says

@finweek finweek finweekmagazine

KUMBA IRON ORE

With a very tough couple of years still ahead Iwould not be rushing in to buy the stock. Iron oreproduction is still being increased globally while

demand remains very weak. If the price goes below

$40a ton, things will start to get very messy at Kumba.


18/48

XXXXXX

l ast week I wrote how I hadsold my MTN shares afterthe company allowed price-sensitive information (the$5.2bn Nigerian fine, amountingto about R71.3bn) to be in thepublic domain for hours beforeissuing a Sens announcement.In this case I saw the story onTwitter early on the morning of26 October, a Monday, and theoriginating article had been onlinesince Sunday afternoon. Yet MTNonly issued a Sens after 2pmon Monday.

Many have accused meof responding in a knee-jerkway while others say it was anemotional response. They maybe right, but I have a simplerule: I want to own outstandingcompanies and as a matterof course they must haveoutstanding management thatalways acts ethically. Issuing aSens announcement five hoursafter the market opened isneither outstanding nor ethical.

To my mind, selling MTNwas an easy decision, butspotting less-than-outstandingmanagement is usually muchharder. Profits may be growingand the company seems to bedoing well, which certainly pointsto competent management. But

it does not indicate outstandingmanagement.

So I have a few tricks I useto check the quality ofmanagement:Firstly, I will go back fiveyears and read every CEO orchairperson commentary fromthe company’s results andannual reports. In this case I willespecially look at their commentsabout the period ahead.


marketplace invest DIY

COMPANY MANAGEMENT

Separating the zeroes from the heroes

By Simon Brown

When investing in a stock, it is vital to ensure that the company’s management is doing its job properly and inethical manner. This week,nweek gives you some tips on how to gauge a management team’s performance.

What are they expecting,what challenges and whatsuccesses? Then as youcontinue to read forward yousee if they were largely correctin their assessment. They arenever going to be 100% spoton. But do they havean understandingof what willhappen in thecompany’simmediatefuture and dothey have agood plan fordealing with it?An outstandingmanagementteam should haveat least five yearsof operationsmapped out, so thechallenges for thenext year should bepretty much knownto them. Thosecompanies thatcommunicate franklywith shareholdersabout the challenges,and are mostly rightabout them, showsigns of outstandingmanagement.

When evaluating

a company’smanagement,something else to look out foris unexpected problems thatnegatively impact profit but seemto crop up constantly. Exampleswould be currency loss, inventoryissues, insurance problems, majortheft or even fires at the plant/offices. In short, a litany of issuesthat always seem to bedevil thecompany and hit profits. This isnot bad luck – it shows a lack of

To my mind,selling MTN

was an easydecision,but spottingless-than-outstandingmanagementis usuallymuch harder.

52-week range: R142.50 -R250

Price/earnings ratio: 11.16

1-year total return: -28.71%

Market capitalisation: R300.9bn

Earnings per share: R14.61

Dividend yield: 7.85%

Average volume over 30 days:9 321 724

SOURCE: Bloomberg.com

outstanding management.Lastly are deals that are simply

just dodgy. A few years back,a listed company reported aproperty deal a year after theevent. In this deal, the companyhad bought properties for its

operations, except everyproperty had been

bought from one ofthe directors. Whythe year-long wait?Managementthen went on tosay that it didn’t

know the companyhad to issue a Sens

announcement. Asidefrom that beingnonsense, it wassuspect that somesix properties werebought across thecountry and everyone from a director!Make no mistake, thecompany identifiedthe properties,the directors thenbought them, addeda markup andsold them to thecompany.

I sold the stockimmediately and itthen proceeded to

increase in value some five-foldover the next few years beforecollapsing to a third of my exitprice. This is important: justbecause a company has less-than-outstanding managementdoesn’t mean the stock can’tmove higher. However, it doesput the long-term sustainabilityof the stock’s rise at risk and,more importantly, I don’t wantsecond-rate managers or crooksrunning the companies I own,regardless of whether they makemoney or not.

A final and important point:know what matters to you andyour investments and stick toyour guns. Investing is not onlyabout profits; it is also aboutdoing it ethically. ■ [email protected]

G a

l l o

I m a g e s

/ i S t o c

k

SOURCE: Bloomberg.com

MTN

22 000

20 000

18 000

16 000

Dec ’14 Feb ’15 Apr ’15 Jun ’15 Aug ‘15 Oct ‘15

Cents


19/48

The perfect tax-free

savings account?This year, there was a great deal of excitement among retail investors with the launch of tax-free savings acin the market. nweek looks at the advantages of one such savings account.

By Craig Gradidge

In order to getthe maximumbenefit fromthis product,investors willhave to beinvested for thelong term (at

least 10 years).One could combine an active

manager like Prudential with apassive manager like Satrix andget a moderate risk portfolio at

a total cost of less than

0.4%per annum.

STANLIB

w hen tax-free savings accounts(TFSAs) were launched bygovernment earlier this year,there was a flurry of activity inthe market, with the banks and certain lifeinsurers bringing their products to marketquite quickly. These were launched as partof government’s ongoing reforms in thefinancial services sector, with the aim ofincentivising more people to save for theirfuture. It remains our firm belief that a bankTFSA product is not a worthwhile investmentfor anyone with an investment horizon longerthan three years. TFSAs have a naturallong-term horizon associated with them asthere are contribution limits and a lifetimelimit associated with them. In order to getthe maximum benefit from this product,investors will have to be invested for the longterm (at least 10 years).

Choosing the right productWe were also cautious not to simply offerthese initial products to our clients. Investorshave until February 2016 to decide whatproduct to choose in order to use this year’scontribution allowance.

Our main concern was that an incorrectchoice of product could result in investorschanging products, thereby losing out interms of their lifetime contribution limit.

For example, if an investor investedR10 000 into a bank TFSA product, andsubsequently moved those funds to a moresuitable growth-orientated product, it would

be counted as a R20 000 contribution for thecurrent tax year.

There is also a broad enough rangeof funds available for investors

with differing risk profiles.So a very conservative

investor would beable to access

cash as well asenhanced cashfunds, whichhave deliveredbetter thancash returnswith minimaladditional

risk. High-riskinvestors, on the

other hand, canaccess offshore index

trackers in addition toother asset classes such as

equities and listed property.

Broadly accessibleStanlib’s product is also morebroadly accessible as theminimum monthly investmentis R500 and the minimum lumpsum is R10 000. Given that thegroup of people who will benefitthe most from TFSA investmentsis investors below the age of30, the lower minimum is asignificant positive for the Stanlibproduct.

In the final analysis, the

Stanlib-linked investmentstax-free savings plan ticks all theright boxes from the perspective

of a long-term investor who is seriousabout taking advantage of the considerablebenefits TFSAs offer. The market is waitingto see what industry gorillas Allan Gray andCoronation bring to the market, if and whenthey launch a TFSA, but the bar has been setvery high. ■[email protected]

Craig Gradidge is a co-founder of Gradidge-Mahura Investments.

An ideal TFSA is one that is wellpriced and offers clients accessto a wide range of funds,which allows them toimplement a suitablestrategy over time.We were pleasedwhen Stanlibannouncedthe launchof its linkedinvestmentTFSA product.The productis costed at anadmin fee of 0.2%per annum plus VAT.The product also allowsthe investor access to awide range of funds from topasset managers, includingCoronation, Foord, Prudential,Satrix and Investec in additionto Stanlib’s own range of funds.

Bigger optionAn important feature of theStanlib product is that it allowsinvestors to combine activeand passive investments intheir portfolio to help mitigateasset management fees.One could combine an activemanager like Prudential witha passive manager like Satrix

and get a moderate riskportfolio at a total cost of lessthan 0.4% per annum. Many ofthe existing product offerings force investorsto choose between active and passivemanagement, which is not ideal.

Unlike many others, the Stanlib productdoes not offer preferential pricing for theuse of internal funds. This is an importantfeature as the product is not complicated bydifferentiated pricing strategies. Investors arethen able to hold their manager accountablewithout worrying about cost implications.

@finweek finweek finweekmagazine finweek 12 November 2015 19

marketplace pro pick


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EXCHANGE-TRADED FUNDS

Three offshore ETFs to considerOffshore investment is no longer the risky business it used to be and when considering your options,ETFs cannot be ignored. To pique your interest, here are three that are in the top 100.

By Schalk Louw

i nvestors have a tendency to choosesides when it comes to the investmentworld and in many cases, simply out ofgreed, also then tend to make the wronginvestment choices. Globally, investors havethousands of funds to choose from, each withits own colourful brochure arguing why it’slikely to outperform this stock market or thatbenchmark.

The reality, however, is that only a fewof them actually manage to outperformunderlying indexes consistently. By using ourDomestic General Equity Unit Trust sector’sperformance over the past 12 months as anexample – most of which use the FTSE/JSE

ISHARES MSCI ALL-COUNTRY

WORLD INDEX FUND

ISHARES CHINA LARGE-CAP ETF

For those looking for an investment thatprimarily represents shares around the world,this ETF certainly deserves consideration. At0.33% per year, this ETF’s total expense ratio(TER) only amounts to a fraction of whatyou would have to pay for a similar actively-managed fund. In the year to end September,this ETF has grown by 13.4% in rand terms,versus locally managed offshore funds’average of 12.7%; it offered a three-yeargrowth of 102.5% versus 95.6%

THE MAIN CRITERION FOR CHOOSING THESE FUNDS IS THATTHEY HAD TO BE INCLUDED IN THE TOP 100 ETF FUNDS:

■ iShares MSCI All-Country World Index■ Global General Equity sector

This ETF can be considered by those whowould like to buy into the strongest growingmajor global economy, and who also feel thatthe Chinese market decline is somewhatexaggerated. This ETF gives investorsexposure to the largest Chinese companiesand has a historical TER of 0.74%.

VANGUARD TOTAL

STOCK MARKET ETF

This ETF consists of roughly 4 000 listedcompanies in the USA, therefore giving youexcellent exposure to the largest economyin the world. A TER of only 0.05% per yearmakes it one of the cheapest investmentsglobally. Growth in the year to end Septemberamounted to 22.7%, versus locally managedoffshore USA funds’ average of 14.95% (bothpercentages calculated in rand terms) and athree-year growth offering of 140.3% versus106.2%.

■ Vanguard Total Stock Market ETF■ USA All-Share Index sector

■ iShares China Large-Cap ETF■ Global All-Share Index sector

SOURCE: Financial E

All-Share Index as a benchmark – like manyother years, only 30% of all the funds in thissector managed to outperform this index inthe last year (up to 26 October).

I don’t want to take up the debatebetween active versus passive managementagain. In fact, I would like to move awayfrom local investments completely this weekand rather turn readers’ attentions towardsoffshore ETFs and more importantly, toalternative investment options.

I’ve mentioned before that offshoreinvestment isn’t nearly as dangerous orarduous a task as it used to be. An individualmay invest up to R1m on a one-off basis,

without tax clearance, or up to R10m percalendar year with Sars tax clearance. Theopening and management of offshore equity– and ETF portfolios – has been simplifiedto such an extent that it certainly can’t beignored as an investment option any longer.

ETFs are highly tradable funds listed onthe stock exchange with the goal of yielding100% of the returns of a specific index, suchas the MSCI World Index, for example. Aswith shares, these ETFs can be bought orsold on any global exchange. With such anabundance of options available, however, I willonly discuss three of these funds this week.

As passive as ETFs may sound, it hasbecome the fastest growing investment fieldworldwide, definitely making it an investmentoption worth considering in your portfolio. ■[email protected]

Schalk Louw is a portfolio manager at PSG Wealth.

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marketplace investment


21/48

PICKING WINNERS

By Lucas de Lange

Nampak sticks out like a sore thumb

m ost of thetop 100companieson theJSE are once again lying abovetheir 200-day exponential movingaverages (EMAs) after most ofthem – 54% – found themselvesbelow their EMAs last month forthe first time in quite some time(finweek , 15 October). Some 55%of the top 100 are once again inpositive territory, which indicatesthat investors used the market’spullback to buy more shares.

Of the strongest shares, PSGGroup is head and shouldersabove the rest, followed byits offshoot, Capitec, despiteanalysts’ fears regarding theunusual phenomenon that it’strading at a substantial premiumto the valuation of its underlyinginvestments.

Corporate action is thereason why SABMiller andAquarius fill the third andfourth places respectively. Aninteresting fact, evident from thetable of the strongest shares, isthat the longstanding stepchildamong the major shares, Sappi,is still experiencing firm buyingpressure; to such an extent thatnot only did it reach a new high,but in fact its highest level since2009. There’s much truth in thebelief that once a heavyweight

has started reaching new highs,it will continue doing so becauselarge investors have decided ona rerating.

Among the weakest shares,commodity stocks are stillsuffering the most.Lonmin, Kumba andArcelorMittal are all threelying 50% or more belowtheir EMAs. In fact, withone exception, the 12weakest of the weak wereresources shares. The

Investors have apparently used the earlier weakness on the JSE as a buying opportunity. To support this, the share pricesof the 100 largest companies on the exchange are now once again lying above their 200-day exponential moving averag

COMPANY% BELOW 200-DAY

EXPONENTIAL MA

LONMIN -66.3

KUMBA IRON ORE -56.9

ARCELORMITTAL -50

GLENCORE -39.9

ARM -38.5

HARMONY -37.3

RB PLATINUM -32.6

NAMPAK -32.4

IMPLATS -32.3ANGLO AMERICAN -31.7

ASSORE -29.96

EXXARO -29.5

M&R HOLDINGS -26.1

MTN GROUP -22.3

AMPLATS -19

NORTHAM -18.5

PPC -18.2

LEWIS -16.8

SUN INTERNATIONAL -13.7

MASSMART -13.5

GOLD FIELDS -12.2

BARLOWORLD -11.6

CORONATION -11.5

MMI HOLDINGS -11.3

ASPEN -10.8

SHOPRITE -10

BHP BILLITON -8.9

TONGAAT -8.4

DATATEC -7.9

GRINDROD -7.3

ILLOVO -7.2

SANLAM -6.2

WEAKEST SHARES*

COMPANY% ABOVE 200-DAY

EXPONENTIAL MA

PSG 40.3

CAPITEC 27.9

SABMILLER 25.5

AQUARIUS 24.96

KAP 24.9

BLUETEL 23.5

SAPPI 21.7

MONDI PLC 20.1

HOLDSPORT 19.2

RESILIENT 19.1

BAT 16.9

NASPERS-N 16.6

DISCOVERY 15.9

WBHO 15.2

RICHEMONT 14.8

STEINHOFF 13.2

CLICKS 13.2

PICK N PAY 12.9

OLD MUTUAL 12.6

BIDVEST 11.8MEDICLINIC 11.55

SIBANYE 11.2

CAPITAL PROPERTY FUND 10.3

TRUWORTHS 10

WOOLIES 9.99

TELKOM 9.9

DISTELL 9.9

MPACT 9.7

PIONEER FOODS 9.4

SPAR 9.2

A-V-I 8.9

VODACOM 8.5

REMGRO 7.99CITY LODGE 7.3

SA CORP REAL ESTATE 7. 2

HYPROP 7.2

NEPI 7.1

STRONGEST SHARES*

COMPANY% ABOVE 200-DAY

EXPONENTIAL MA

REUNERT 5.8

OCEANA 5.8

VUKILE 4.3

NETCARE 3.5

ADCOCK INGRAM 2.8

PAN AFRICAN 2.78

REBOSIS 1.9

BREAKING THROUGH

*Based on 100 largest market caps

exception, which sticksout like a sore thumb, isNampak, Africa’s largestdiversified packaging group,which is being heavily punishedbecause of its disappointingresults for the six months toMarch. It’s at levels last seenin 2012 and judging by theconsistently new lows reached,large investors did not holdout much hope that matterswould improve in the half-yearto end September. Nampakis facing a number of majorproblems, such as its glassdivision, which suffered a lossof R70m. And then there istalk of a price war with Consol,the country’s largest supplierof glassware. A positive is thatthe rest of Africa’s contributionto Nampak’s profits is growingwell. In the half-year to March,it contributed 38% (2014 half-year: 27%) to trading profit.

Another share that has

been heavily punished –landingup among the resources andbuilding and constructionstepchildren – is MTN. It findsitself in this position because ofthe enormous fine it has to payin Nigeria, while the market isalso averse to the fact that theJSE wants to investigate it.

Among the shares that havebroken out and appear interesting,Adcock Ingram, Vukile and Rebosisseem to be the most promising. ■ [email protected]

Some

55%of the top 100 are once again in positiveterritory, which indicates that investors usedthe market’s pullback to buy more shares.

marketplace technical study



22/48

DIRECTORS DEALINGS BEST AND WORSTPERFORMINGSHARES

P/E RANKING

SHARE FORECAST

BASIL READ 4.33

KUMBA 4.68

MERAFE 5.46

AVENG 5.71

M&R HOLDINGS 6.06

LEWIS 6.38

RAUBEX 7.15

OCTODEC 7.63

ASTRAL 8.90

EXXARO 8.92

DIVIDEND RANKING

SHARE F’CASTDPS (C)F’CASTDY (%)

DRDGOLD 37 16.3

REBOSIS 119 10.1

ANGLO 1058 9.0

MTN GROUP 1345 8.7

LEWIS 517 8.2

ACCPROP 54 8.1

FORTRESSA 129 8.0

EMIRA 146 7.9

VUKILE 148 7.8

OCTODEC 192 7.5

INDICES

INDEX WEEKVALUECHANGE

(%)

JSE ALL SHARE 54 076.06 0.60

JSE FINANCIAL 15 16 990.32 -0.25

JSE INDUSTRIAL 25 73 077.51 1.27

JSE RESOURCE 10 33 618.28 -1.47

JSE SA LISTEDPROPERTY 660.26 -0.99

JSE TOP 40 48548.20 0.75

SHARE WEEKPRICE (c)CHANG

(%)

BEST 650 172

Beige 2 100.00Hwange 49 88.46

Oando 85 19.72

BSi Steel 45 18.42

Rare Holdings 260 18.18

WORST

Masonite 2453 -28.88

Transhex 225 -21.60

Chrometco 11 -21.43

Sable Metals 24 -17.24

Wearne 12 -14.29

CAC 40 493 618 0.93

DAXX 1 095 067 2.42

FTSE 100 638 361 -0.84

HANG SENG 2 256 843 -1.69NASDAQCOMPOSITE 514 512 0.97

NIKKEI 225 1 868 324 -1.16

S&P 500 210 979 0.93

All data as at 4 November at 17:00. Supplied by INET BFA.

COMPANY DIRECTOR TRANS. DATE TRANSACTION TYPE VOLUME PRICE (C) VALUE (R) DATE MODIFIED

ANCHOR PG Armitage 29 October Sell 308,533 1450 4,473,728 30 October

ANCHOR TE Kaplan 29 October Sell 77,133 1450 1,118,428 30 October

CITYLDG C Ross 28 October Sell 5,371 15003 805,811 3 November

CLICKS DM Nurek 27 October Sell 18,000 10283 1,850,940 30 OctoberDELPROP PD Simpson 30 October Purchase 50,000 839 419,500 3 November

DISTELL VC de Vries 28 October Purchase 1,672 9335 156,081 30 October

DISTELL CLC Snyman 28 October Sell 1,687 17499 295,208 30 October

HULAMIN F Bradford 23 October Sell 35,874 712 255,422 30 October

HULAMIN F Bradford 22 October Sell 51,191 705 360,896 30 October

HULAMIN W Fitchat 25 October Sell 4,813 705 33,931 30 October

HULAMIN W Fitchat 22 October Sell 7,722 705 54,440 30 October

HULAMIN MZ Mkhize 23 October Sell 51,515 717 369,362 30 October

HULAMIN MZ Mkhize 30 October Purchase 35,126 716 251,502 30 October

IMPERIAL MV Moosa 3 November Purchase 8,126 2100 170,646 4 November

IMPERIAL M Swanepoel 29 October Sell 4,050 18000 729,000 3 November

MONEYWEB MJ Ashton 26 October Purchase 7,500 38 2,850 30 October

RESILIENT JJ Kriek 27 October Sell 205,375 12201 25,057,803 30 OctoberSANTAM MJ Reyneke 28 October Sell 15,000 21977 3,296,550 3 November

SHOPRITE CH Wiese 27 October Purchase 13,400 14869 1,992,446 30 October

SHOPRITE CH Wiese 28 October Purchase 13,600 14756 2,006,816 30 October

TASTE DJ Crosson 27 October Sell 105,771 16 16,923 30 October

TASTE DJ Crosson 28 October Sell 277,242 15 41,586 30 October

TASTE DJ Crosson 23 October Exercise Options 103,219 340 350,944 30 October

marketplace directors & dividends

EPS RANKING

SHARE F’CAST(C)F’CASTAS %*

NASPERS-N- 4,367 2.1

BAT 4,139 4.8

SASOL 3,955 8.6

SABMILLER 2,952 3.6

CAPITEC 2,688 4.5

NEDBANK 2,265 9.9

BIDVEST 2,100 5.8

MONDI LTD 1,947 9.2

ASTRAL 1,900 11.3

TIGER BRANDS 1,770 5.6

*Forecast EPS as a percentage of current share price

*Percentage reflects the week-on-week change.


Johan EnslinChief Executive Officerand executive director ofLewis Group


23/48

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O FIBy Ciaran RyanA

With SA’s ofcial unemployment rate increasing to 25.5% in the third quarter, the InternationalMonetary Fund cutting its growth forecast to 1.4% this year and just 1.3% in 2016, and businessondence at its lowest levels in 22 years, there is much work to be done.nweek asked aumber of experts across the economic spectrum what they would do to x SA.


cover story political economy


25/48

Chairman of the Free Market Foundation, CEO and founder of Leswike

Minerals & Energy, and founder of cosmetics rm Black Like Me

1 What are the top three policy issues that aredepressing SA’s growth rate?■ Section 32 of the Labour Relations Act (LRA). The sec-

tion allows the minister of labour to extend collectiveagreements concluded by bargaining councils in a sec-tor to businesses that are not party to the agreement,and which many believe violates freedom of associa-tion rights enshrined in the constitution.

■ All race-based legislation.■ There is too much government involvement in the

economy. We should substantially reduce state-ownedenterprises (SOEs) and their influence on the economy.

2 What are the positives? Can we strengthen andimprove on these?SA has a developed and modern infrastructure that caneasily be exploited to improve and steer our economyto the next level, also not ignoring our level of businessstanding.

3 What can we do in the short term to boost growth?Removing race-based legislation will immediately allow allSouth Africans to play meaningful roles in the economy,providing employment to millions. We also need to relaxsome aspects of the LRA, which currently makes it diffi-cult for small businesses to operate.

4 SA has slid a further four places to 73 out of 189countrie

finweek - november 12, 2015.pdf

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