The announcement that SAB Zenzele Kabili (SZK) will be listing on the JSE BEE Board this week has shone the spotlight back on the relatively quiet public Broad-Based Black Economic Empowerment (B-BBEE) share space.
The last public scheme to come to market was the property-backed Barloworld Khula Sizwe scheme in May 2019. So SZK presents an opportunity to revisit the opportunity set in the public B-BBEE share space.
SAB Zenzele Kabili
SZK will list on May 28. The indicative listing price is R40 a share.
According to the rough calculations below, this is small discount to the fair value of SZK.
|Value of AB InBev shares in SZK||R5 406 000 000|
|Debt||R2 973 000 000|
|Net asset value of SABZK||R2 433 000 000|
|Number of SABZK shares||40 550 000|
|Net asset value per SZK share||R60|
|Liquidity and risk discount||30%|
|Fair value per SZK share||R42|
SZK is a well-structured deal with 55% gearing via a vendor-funded arrangement.
The cost of debt comes in at 70% of the prime lending rate of 7% (4.9% currently). It will be possible to do a more refined valuation once the number of AB InBev (ANH) shares owned by SZK is known. ANH would have to yield approximately 2.7% to service the interest on the debt. That is quite a bit higher than the current historical yield of below 0.90%.
However, ANH remains a key beneficiary of a post-Covid world. The prime rate could however also start increasing post-Covid, pushing that target yield a lot higher than 2.7%.
It is also important to note that 25% of ANH dividends received by SZK will be paid out to SZK shareholders, so the debt levels are likely to remain elevated for an extended period.
We believe that a 30% discount rate is appropriate given the amount of risk inherent in this deal.
It is important that investors know that one SZK share is not equal to one ANH share. So the discount to the ANH share price is irrelevant.
Vodacom Yebo Yethu
Yebo Yethu (YY) is almost three years into its new and improved structure. It now owns 6.2% of a listed Vodacom Ltd (VOD) as opposed to Vodacom SA in the initial deal structure. With VOD trading at around R127 a share, the asset is worth approximately R14.5 billion. Deduct debt of R10.9 billion and you get a NAV of R3.6 billion or R68 per YY share.
YY currently trades at around R41 a share, a discount of almost 40%. We think a fair discount rate should be 30% reflecting the high gearing (roughly 75%) and the single asset exposure. So fair value is closer to R47 a share than the spot price of R40.90 a share, which implies potential upside of 14.6% in the short to medium term. Vodacom recently reported results for FY21 declaring a final dividend of R4.10 a share. Much of this will go to servicing debt, with a portion going to YY shareholders in the form of a dividend.
VOD is a solid and well managed business, if not an exciting one. It is expected to deliver mid to high single-digit growth, excluding its recent success as part of the consortium that won the licence bid in Ethiopia. It also remains the largest fintech player on the continent with over 58 million customers. Any corporate activity on that front could result in a meaningful value uplift for both VOD and YY.
There is medium term risk in YY given that the A preference shares mature in September 2023. That accounts for roughly 44% of YY’s debt, which is significant. That debt will need to be refinanced, presenting something of a reinvestment risk if it is refinanced at a higher interest rate. YY should present a less risky proposition than when it raised the initial funding, so hopefully the rate stays unchanged at worst.
SOLBE1 is Sasol’s discounted scheme. SOLBE1 shares rank parri passu with Sasol (SOL) ordinary shares and are entitled to the same dividend and voting rights. Unfortunately there are no dividends at the moment. This goes a long way to explaining the massive discount at which SOLBE1 trades – approximately 47% – relative to SOL.
SOLBE1 does offer black shareholders a second bite at the proverbial cherry if SOL’s share price were to continue its strong run, and especially if SOL were to reinstate the dividend. There is no gearing in SOLBE1, so investors really have to focus on the fundamentals around Sasol. Any improvement in the outlook for SOL should result in a narrowing of the discount and an increase in the share price of Sasol. This could result in an enhanced return for early SOLBE1 investors.
If SOL were to reintroduce dividends at FY18 level, then SOLBE1 would be on a forward yield of 10.9%. Dividend flows from SOL are unlikely in the coming three years, so the current discount is probably warranted.
MCSA Phuthuma Nathi
Phuthuma Nathi (PN) is the granddaddy of public B-BBEE shares, delivering yields of over 220% on the initial share offer price of R10 per PN share in 2006.
The historical dividend yield of 16.5% is still attractive give the current low interest rate environment. The underlying investment – MultiChoice South Africa – is largely ex-growth, but still highly cash-generative.
This is supportive of dividend flow going forward, as MultiChoice Group demands cash to fund its African expansion drive.
The bulk of new investors’ return will come from dividends, unless there is some corporate activity. A yield of 16.5% pre-tax works out to an after-tax yield of 13.2%, which is similar to the long term return from listed equities. This is attractive for yield-seeking investors who are earning below 4% from most notice deposits, and around 7% from a fixed deposit.
MTN Zakhele Futhi
MTN Zakhele Futhi (MTNZF) is MTN’s second attempt at a public deal.
The initial MTN Zakhele did well for investors, delivering more than 150% return over a period in which the MTN share price was flat. This is an example of how the funding structure can add value even if the underlying investment provides no return.
The current MTNZF deal however has had to deal with the fallout from a deteriorating regulatory environment in Nigeria, MTN’s biggest market, and Covid. Telcos have also come under pressure in SA to lower data costs, and from the drawn-out process to get more spectrum.
MTN suspended dividend payments in 2020, leaving MTNZF in a precarious position as its sole income source is dividend flow from MTN. This resulted in MTN having to subsequently step in to offer financial assistance to MTNZF to ensure its going concern status.
Fortunately MTN has started to recover from the depths of the Covid crash, and the market is excited after the recent results with dividends potentially coming back at the next set of results, and the prospect of value unlock from corporate activity around fintech and towers.
MTN is trading above R82 a share, the price at which MTNZF breaks even. However, investors need to pay careful attention to the potential restructuring of the MTNZF debt in light of the pause in dividend payments, and the preference share maturing at the end of 2021.
One issue I have had with the public B-BBEE share space is the administrative burden that is required to build a diversified portfolio of shares.
This is because some of the shares are listed on the JSE BEE Board (YY, MTNZF, SOLBE1 and soon SZK), while others are listed on Equity Express (PN, Ukhamba 1, Ukhamba 2). This requires that investors also need to have a relatively large amount of funds available to invest to ensure that trading costs do not crowd out the prospect of decent returns.
In the past investors had the option of investing into a diversified Thembeka Capital (TC), PSG’s public B-BBEE share scheme. With TC having been converted into PSG ordinary shares for investors, there has been no diversified option with broad exposure.
This changed with the introduction of the Tip One (Transformational Investment Portfolio One) in October 2019.
Tip One invests in a portfolio of listed and unlisted B-BBEE shares. The company offers investors in employee share options (ESOPs) and other private schemes an opportunity to swap their shares for Tip One shares. This means that investors in Tip One will get exposure to shares not ordinarily available to the public. Tip One will also be able to do some structuring to enhance the return from certain shares. Again, this is an opportunity not available to investors in their personal capacities. Investors can access Tip One via the Stokfella app, or directly via an account with alternative trading platform, ZAR-X.
The downside with Tip One is the additional layer of costs as Tip One charges a management fee. The additional value from enhanced structures and exposure to ESOP and other BEE shares could more than compensate for this additional cost.
The opportunities in the public B-BBEE share space remain attractive overall, with some potential land mines.
The emergence of Tip One provides some much needed innovation in a space that has been lacking any real innovation. Giving smaller investors access to a broad range of B-BBEE shares can go some way to providing the liquidity this market so desperately craves.
Craig Gradidge, CFP® is co-founder of Gradidge-Mahura Investments. He owns shares in YY, PN, Ukhamba and SOLBE1 indirectly, and in MTNZF directly.
Kagisho Mahura, CFP® is an independent non-executive director of Tip One and had no input into this article.