SIKI MGABADELI: Well it’s 2015 so we’re doing our annual stock pick session. Looking at the stocks you should be watching for this year, as told to us by our commentator. Simon Brown is with JustOneLap and joins us now. Simon thanks so much for your time today. Firstly, before you tell us what your stock picks are, what were your criteria for picking them?
Simon Brown: Evening Siki … I’m looking for a couple of things and first disclaimer is obviously I hold all of them otherwise I wouldn’t be recommending them. I’m looking for companies that have strong track records, that have proved they know what they’re doing and how they plan to do it, but also that, I think, have something in the future in 2015 which is going to really spur them on and give them an extra kicker in terms of moving the share price. I’ve got a list of three; two of them definitely fall into it and then the other one’s sort of my high-risk flier, which is either going to embarrass me or make me slightly famous.
SIKI MGABADELI: We must all have a bit of a high flier on the side that we can watch throughout the year. Alright so let’s start with number one, and you’ve picked Calgro M3?
Simon Brown: Yes, so Calgro M3 is run by a guy called Ben Pierre Malherbe. What they do is they build low cost houses. Now it’s not always low cost – they can build mid LSM and can even go to high LSM, but they build entire townships – in other words they lay the services, they’ll build the police stations, the clinics, the schools, and everything that goes with it. And the beauty of it is this is not those horrible 4X4 RDP houses, which sprung up in the 1990s, these are proper houses, they’re the real McCoy and they’re different to each other so they’re building proper communities. The houses are well-priced, and their two key kickers is that they don’t build the house until the buyer has secured funding, whether that be via the state, whether that be via a bank loan – they don’t do a thing in terms of building the house until the buyers confirmed.
SIKI MGABADELI: Okay what do you think is going to be in their favour though because we’ve got, for example, on the financing side, banks that are a little bit more reticent about giving it out and a government that’s low on cash at the moment? Simon Brown: Government is low on cash, banks are lending to a degree in this space. The two key kickers is – they’ve done a lot of what you call the bottom structure, in other words laying the infrastructure and that’s cost them some money and the like. They’ve now got all of their roads and their pipes and everything else in place. They’ve got an order book because in some cases, for example a project they’re doing in Namibia, the government has called them in. They’re doing a project with ESOR which they’re partnering there as well. In essence they’re now selling the easy money part of the equation and what they have found is humungous demand. They’re certainly, even notwithstanding banks are a little bit more reticent, there are still enough people qualifying for loans. Numbers out of Barclays a year or two ago suggesting that there’s easily a million homes that need to be built in this country for people who are not living in traditional houses at this point. So the demand is definitely there, they’ve got an order book which is in the region of R15bn and they typically only do about in the past couple of years R1bn or R2bn of revenue. So they are well-positioned to start leveraging on having put all that infrastructure in place.
SIKI MGABADELI: Now your second pick is Steinhoff which of course in 2014 did its biggest deal ever.
Simon Brown: Yes, and I have to be honest…five years ago I would have laughed at anyone who picked Steinhoff, I didn’t understand it, they had too much debt, it was murky, but they’ve really cleaned themselves up. They’ve got rid of debt by that accelerated book build and a rights issue a couple of months ago, the Pepkor deal really works. What are they doing, they are saying, we’re targeting low LSM to a degree in Western Europe but also in Eastern Europe. Pepkor’s got stores already in places such as Poland. Obviously it’s a huge footprint in South Africa, I’m not convinced they want to keep the South African assets. I can’t help thinking that they might actually in time spin off South Africa which would include the KAP brand, which would include the JD Group brands as well which they have. But certainly we now see what their strategy is, and that is saying, we’re going to sell stuff to the lower LSM’s whether it be clothing, whether it be airtime, whether it be furniture, that is going to be their focus. The Frankfurt listing coming probably March or April, that’s going to give them a good boost in that regard. They’ve got a really good under-pinning of solid property and the stock has done well. It has certainly moved. I said even now at these sort of high R50s, low R60s, I think it’s a stock that’s still got a lot of potential for the New Year.
SIKI MGABADELI: So your black swan, can I call it that – may just be Sasol, why?
Simon Brown: It’s going to be Sasol because the short answer is this planet runs on oil. That’s it, end of story, we need oil, we have to have it. Their earnings are going to take a massive dive, they’re going to do R30…maybe R35 a share for the next financial year, depending where oil goes. …I’m not saying I know where oil goes, I just understand, I sense what the game that OPEC is playing. OPEC is saying, what we’re going for is market share, so the reason they didn’t cut production which would have pushed the price was, they want the price lower because that shakes out what we would call the weak hand. The guys who are producing at $100, even $110 even $130 – $140 a barrel, in other words remove capacity that way. That’s the longer term game, that’s not going to happen in a hurry, that’s going to happen over the next one, two or three years. As we see the American economy continue to grow, and that’s doing fairly well, that will increase demand, so the oil price is going to have a tough 2015 but I think we’re going to look back at these prices of around R400 and who knows how low Sasol goes. Might go to R350 might even go to R300. Touch wood it doesn’t but I think we’re going to look back at these prices in years to come and think there was a brilliant opportunity, a great story to tell your grandchildren…’when I bought Sasol in the R300s’.
SIKI MGABADELI: You know I’m going to hold you to this? Simon Brown: I know you are…
