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Big payday for Sasol Inzalo investors

Appreciation in the Sasol share price allows empowerment scheme to end on a high note.

Black investors in Sasol Inzalo – the R34 billion empowerment structure launched by the oil and chemicals group in 2008 to hold 10% of its shares – will probably breathe a collective sigh of relief on hearing that they will receive cash dividends totalling R1.3 billion.

These investors faced the prospect of not receiving a dividend payout at the end of the 10-year scheme if Sasol group shares hadn’t appreciated by 25% in the past three months.

The scheme ended on September 7, and Sasol announced on Tuesday that Inzalo investors will receive a R1.3 billion cash payout on September 17. This translates to a cash dividend of R85.63 per Inzalo share held or R68.50 per share after a 20% dividends-withholding-tax is factored in for individual investors.

“This [the dividend] was way off my expectations and I’m not complaining,” says Craig Gradidge, an independent financial planner at Gradidge Mahura Investments, who is also an Inzalo investor.

When the empowerment scheme commenced in September 2008, investors were invited to purchase the first 100 shares at R18.30 per share and R36.60 per share for more than 100 shares – with an investment period of 10 years. Inzalo investors would receive R11 443 (see table below) in returns from the purchase of 100 Inzalo shares at R1 830 in 2008. This is an effective return of 20% per annum for the investment period, which Gradidge says is “an excellent return” for investors.

Return on 100 Inzalo shares acquired in 2008 @ R18.30 per share

 

Cash dividends on 100 shares @ R85.63 per Inzalo

R8 563

Plus 10 Sasol BEE ordinary shares @ R268 each

R2 680

Plus R200 dividends received some years ago

R200

Total

R11 443

Soria Hay, head of corporate finance at Bravura, says excluding dividends, the Inzalo investment still yielded a 10% return. “This is a good and decent return considering that the dividend outcome is now different from what Sasol management initially predicted [it] would be.”

Most of the 270 000 Inzalo investors ­– among them members of the public as well as Sasol customers, suppliers and employees, and an educational foundation – did not buy shares using their own money, but were funded by debt. The scheme was designed to pay the debt from the appreciation of the Sasol group shares and dividends paid.

Share price appreciation

Inzalo was launched at a Sasol share price of R366 in 2008 with debt of about R7.4 billion. But from mid-2016 until 2017, Sasol’s share price, which tracks international oil prices and the rand, barely traded above the R370 level. This rendered the scheme underwater as it couldn’t pay off debt and at the same time reward investors with dividends.

In order for Inzalo to repay the debt, the Sasol share price needed to be above R460.

By September 2017, Sasol management calculated that Inzalo’s participants had earned R2.5 billion of R7.6 billion paid in dividends over 10 years, while R5.1 billion went to servicing the debt. This underscored the dangers of having empowerment schemes that call for investors to participate through debt funding while investing in assets that rely on volatile commodities to create value.

However, the recently elevated international oil prices and a weaker rand have worked in favour of Sasol’s share price, which has traded in a narrow range of R502 to R548 since June – well above the R460 level required to benefit Inzalo investors.

In fact, Sasol used a 30-day volume weighted average share price of R542.11 as at September 6 in its calculations, arriving at the figure of R1.3 billion after allowing for repayment of the outstanding debt, taxes and costs.

Sasol share graph

The Inzalo scheme will be replaced by Sasol Khanyisa, a new R21 billion empowerment scheme that will run for 10 years. Khanyisa will provide black investors with 25% equity ownership of Sasol’s South African operations.

Inzalo investors were offered the option to convert into Khanyisa shares, where they would receive 100 free Khanyisa shares. They also received 10 bonus Sasol BEE ordinary shares (known as SOLBE1, which has no debt), which are tradeable on the black segment of the JSE, worth R2 680 at the time of writing. 

“There will be value in Khanyisa but it is hard to say now what that value will be,” says Gradidge. “I’m positive about prospects for Khanyisa. Shareholders must not let their disappointment throughout the Inzalo scheme cloud their judgement around Khanyisa.”

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BEE shareholders: 19-20% return p/a (no capital gains tax)

Ordinary shareholders:
12/9/2008 Close: 360
12/9/2018 Close: 564
Annual return: ~4.6% p/a (exc. dividends and capital gains tax)

Return difference: 15%

Ordinary shareholders shafted.
ZA = uninvestable.

This sums it up and the other part is that SASOL (IMHO) remains subsidised by high oil prices and by virtue of essentially having a monopoly in may areas (gas, fertiliser, plastic feedstock etc). All this results in a “good” investment in theory but an overall drain for the SA economy. Like the “car industry”, sugar “farming” and paper “production” protection and subsidies. Not so clevva.

I can’t see how anyone can misconstrue share price growth, or capital appreciation (which is always volitile) as an annual return. Not unless the shareholder is selling out of position, other than that, the calculation is nonsensical.

And even if the holder was selling out of position, I don’t see how that suddenly means ZA is uninvestable. Shares by their very nature are risky investments this is widely known and accepted by those who invest in shares. If you don’t like one company or its business model or management, or product or whatever else, its a free market, you can vote with your feet. Your are not forced to invest in it or in SA for that matter, you can try penny stocks in Canada or US where your return will be superduper bigly (losses).

In South Africa the objective of the firm is to maximize returns for the stakeholders (via King code, BEE requirements, mining charter, high tax rates, ect) – while the the ordinary shareholder (provider of capital), is treated with disdain. This results in an ever decreasing portion of the value created by the firm left over for the shareholder, and structurally lower returns.
South Africans need to realize that they are not special and capital moves to where the best returns are made. Low GDP growth and poor returns on the ZA equity markets over the last 10 years are evidence of this.
The Sasol BEE deal is just one example of where a particular stakeholder gets a slice of the pie before the ordinary shareholder.
ZA = uninvestable.

No doubt Shell BP and chevron will replicate this for their shareholders as huge value is created. No reason to invest here when their are jurisdictions where theft is not legalised. You have choices.

What kind of uncommercial rubbish is this? Share goes up the beneficiaries gain…It goes down the existing shareholders take the loss.

Avoid all Sa shares.

SAM The Taxman: Spoken like a truth previously extremely advantage.

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