Sasfin - Home - The bank by entrepreneurs, for entrepreneurs

Posted: 2010-03-03 23:50

Giulietta Talevi: The JSE enjoyed another strong day on Wednesday. The resources jumped 2.2%, the financials advanced 0.9% and the industrials ended up 0.3% lifting the all share index 1.1%. Nesi, that Kumba ArcelorMittal dispute - ArcelorMittal put out a statement and as we expected the shares fell - I’m sure there must have been some arguments as to where the shares would open, but eventually they did open around 0.25% lower - is that what you were expecting?

Nesi Chetty: Certainly. A lot of investors were anxiously awaiting the announcement - bear in mind trading in ArcelorMittal shares was suspended on Friday. If one looks at the announcement on Wednesday I think there’s three aspects that are key - first is that they’ve entered into a resolution dispute agreement between the two companies that will eventually lead to arbitration. The second part is both companies realise the process needs to expedited - you can’t have a situation where iron ore is not supplied to ArcelorMittal. The last point is that in the shorter term both companies want to ensure that the supply agreement stands as it is. From the Sishen mine they supply about 6.75 million tons - over time that should be disputed - but I think the drop in the share price after closing at R115 on Friday and closing just over R90 on Wednesday the loss in market value of R12billion is what the market was probably expecting.

Giulietta Talevi: In fact I think it’s better than what the market was expecting because some people were expecting it to go down to R84 or R85. I thought the announcement wasn’t that negative - an arbitration as you say - and they’re getting iron ore in the meantime so it’ not quite as bad as one had expected. Moving on to the parent company of Kumba Iron Ore Anglo American shares were very strong up over 3% on Wednesday putting out a statement that it’s opened the Chilean copper mines - do you think that’s one of the reasons why the stock rallied as much as it did?

Nesi Chetty: If you look at the Anglo basket of iron ore and coking coal copper is also a big component. I think a lot of investors are taking a view. The copper market doesn’t look too bad. If you look at BHP Billiton’s results in their production although it was slightly down that’s a business when the cycle does recover you can make decent profits. That economy should over time recover. I think with the Anglo results the share was up about 3% - I think it’s pricing in a bit of that news.

Giulietta Talevi: On the resources stocks in general - any particular reason behind the strength there? Was it the fact that the dollar is a little bit weak at the moment and that’s helping commodity prices?

Nesi Chetty: Within the resources you saw both gold and platinum going up - platinum slightly higher than gold. The thesis on platinum has been that given a global recovery you should see automotive demand pick up and that’s added to the increase in the platinum price. Also, within platinum there’s been an increase in exchange traded funds over the period so that would have given a spurt to the platinum price. I think a lot of investors are looking to gold as an inflation hedge and that pushed the gold sector up about 1% - but bear in mind that even at current spot gold prices our gold companies don’t make very attractive returns.

Giulietta Talevi: Moving to the financial sector Santam came out with full-year numbers helped by a vastly improved performance on the equities markets - but I’m just wondering whether the underlying business is actually doing that well because they said underwriting margins are still under pressure - what did you make of the Santam results?

Nesi Chetty: It’s a tale of two halves with Santam. You would have had a very weak first half courtesy of low underwriting margins. Bear in mind the increase in headline earnings they showed of 55% would have been a function of three things. Firstly underwriting margins would have been at 3.5% - so within their commercial and property book although they would have taken pain in terms of higher frequencies and claims in other areas of the business like engineering and liability there would have been a slight improvement. But over time this is a business where underwriting margins have fluctuated at the lowest point about 2% back in 1994 up to about 14% in 2004. Over time a sustainable basis is closer to 4%. Given that the equity markets have improved over the period they would have had some equity market stabilisation in their shareholders’ funds bearing in mind that at the half year Santam would have gone in and hedged about R2billion of equity. The other area that would have given them a slight jolt would have been on their float where they would have had additional income but bear in mind that interest rates have fallen and average balances are lower.

Giulietta Talevi: What is your expectation for Santam in the year ahead then? If equity markets might be a bit more muted this year given the performance we’ve seen to date on the JSE really hasn’t gone anywhere - and the economy is still under pressure - is this a share that’s likely to disappoint?

Nesi Chetty: If you look at where the share is trading now relative to its book value it’s almost at 2.5 times book value. I think a lot of the recovery in the underwriting margin is structured in the price. This is a business historically over time where a lot of investors have taken a view firstly on what they think margins will be. I think in areas like property and even in the commercial book things are still tough with bad claims and industrial fires they’ve taken this year. I think as the operating environment improves you get some stability in terms of pricing - they can price the risk better - and I think over time when the cash flow has been good this is a business that has paid not only ordinary dividends but special dividends as well. My feel for the company is that over time Sanlam is still a big shareholder in Santam - ultimately they’d look to their shareholding to try and take out minorities at some stage which would give them the potential to release capital.

Giulietta Talevi: Sasfin also a financial company came out with results - they are geared towards the SMME sector. Impairments really hurt the first half - I suppose that was to be expected…

Nesi Chetty: Sasfin’s results were not too dissimilar from the banks - their earnings were down 27%, and they’ve been hurt by bad debts and impairments where the charge would have been close to 2%. This is a business across segments like personal banking where I think if the environment improves and we see a normalisation in bad debt you will get volume growth. In their other businesses like trade and debtors finance you definitely have activity levels improving - and if you get improving manufacturing and export activity this is a business that could give you profit growth - but remember it’s in an environment that’s in the eye of the storm. I think into next year if they could give 15% to 20% in earnings that would be a good recovery off this base bearing in mind it’s not very geared.

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