There has been a lot of excitement around the recent listing of SAB Zenzele Kabili (SZK) on the BEE board of the JSE.
SA Breweries, now Anheuser-Busch InBev (ANH), launched its broad-based scheme SAB Zenzele in 2010 and invited staff, retailers and the SAB Foundation to be part of that deal.
It was a 10-year deal, which ended in April 2020. Due to the impact of Covid-19 on global and local markets it was decided to postpone the unwinding of Zenzele and the launch of the new scheme. SZK was finally listed on Friday, May 28, SZK.
How should one value SZK?
This table summarises a valuation of SZK, with an explanation below
|Number of ANH shares in SZK||5 105 685|
|Share price of ANH (at close on June 8, 2021)||R1 071.68|
|Value of ANH shares in SZK||R5 471 660 500|
|Debt in SZK||R2 973 000 000|
|Net asset value of SZK||R2 498 660 500|
|Number of SZK shares||40 550 000|
|Net asset value per SZK share||R61.62|
|Liquidity and risk discount||30%|
|Fair value per SZK share||R43.13|
SZK owns 5 105 685 AB InBev (ANH) shares, and has debt of R2.973 billion.
This debt will be settled from dividends received by SZK from their ANH shares. There are 40 550 000 SZK shares in issue. At the closing price of R1 071.68 per ANH share, the value of the shares owned by SZK is just over R5.4 billion.
After deducting the value of the debt, and dividing by the number of SZK shares in issue, one gets a net asset value of R61.62 a share for SZK.
So why is SZK trading at R180.00 a share at the time of writing this article?
I can think of a few reasons …
Firstly, there was a lot of media coverage around the pending listing of SZK, which created a fair amount of excitement in the market. The last time we saw excitement at similar levels was with the launch of Sasol Inzalo. This excitement has created a lot of investor interest, and by implication a lot of demand for SZK shares.
The difference between Sasol Inzalo and SZK is that SZK is trading, so price discovery is left up to market forces of supply and demand.
With Sasol Inzalo the demand resulted in that scheme being significantly oversubscribed.
However, this demand alone does not fully explain the excessive share price though.
In the build-up to the listing, there was media coverage around the fact that investors in the original Zenzele deal experienced incredible returns.
The headline of one article read ‘SAB’s first empowerment scheme turned R100 into R77 518 …’.
While this is accurate, the article failed to explain the full context for this enormous return.
The original deal was deliberately structured to give smaller investors a higher return.
The table below shows the return experience for other investment amounts. The unwind date in the table was April 2020, hence the discrepancy in value.
|Amount invested in 2010||Number of shares acquired in 2010||Value at unwind date|
|R 100||317||R 76 738|
|R 2 500||634||R 153 476|
|R 5 000||951||R 230 214|
|R 7 500||1 268||R 306 952|
|R 10 000||1 585||R 383 690|
|R 12 500||1 902||R 460 428|
|R 14 306||2 131||R 515 863|
The expectations created by focusing solely on the return experience of smallest investors could result in investors overpaying for their shares.
For R100 to grow to over R77 000 over 10 years, returns would have to average over 90% per annum.
The return experience for those who invested R14 306 was just under 50% per annum, which is an awesome return, but unlikely to create the hype of a plus-90% per annum return.
Investors need to understand that SZK is an entirely new scheme.
Returns delivered by Zenzele do not matter, and they are not an indication of expected returns from SZK.
Zenzele had a lot more vendor funding, which means that investors put in less equity (R100 to R14 306) and hence received a higher return on their equity.
SZK requires investors to put in more equity (45%) and there is less debt than Zenzele.
These are very different deals so the return experience is likely to be very different too.
A common misconception
Another potential reason the share is trading at three times its value could be due to the common misconception that one SZK share will be worth one ANH share once the debt is settled.
I’ve had several calls from potential buyers justifying a higher valuation on this basis.
This misconception has been prevalent in other previous public schemes, not helped by the fact that one of the earlier schemes was structured in such a way that one share of the BEE vehicle would equal one share of the underlying empowering company once the debt was settled.
There are just over 5.1 million ANH shares owned by SZK, but there are over 40 million SZK shares in issue. Ignoring the debt, there is effectively 0.125 ANH shares for every SZK share.
One more reason
Finally, a slightly more sophisticated argument I’ve heard recently is the opinion that ANH is undervalued, and that SZK offers a geared exposure to ANH.
This argument makes sense because a 60% increase in the value of ANH results in a 100% increase in the net asset value (NAV) of SZK.
However, with SZK now trading at around R180 a share, even if ANH doubled to around R2 020 a share, the NAV of SZK would be R180 a share – its current price.
So investors are effectively paying now for expected growth (however misplaced that expectation may be), so even if the ANH share price gets there, there will be no return for those investors paying R180 a share.
So investors are taking on the risk associated with investing in a geared entity, and then into a complex business like ANH, but are not going to be rewarded.
We are currently in greater fool territory with SZK (or ‘beercoin’ as I now call it) because too much needs to go right before new investors can earn any kind of return.
Alternatively, investors will need to sell their stock to a great fool to make a return for themselves. SZK is a well-structured deal with great long term potential, but only at the right price.
Craig Gradidge, CFP® Investment and Retirement Planning Specialist
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