Investing in BBBEE shares Just One Lap July 2018 Craig Gradidge, CFP: Investment and Retirement Planning Specialist at Gradidge-Mahura Investments ...
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Investing in BBBEE shares Just One Lap July 2018 Craig Gradidge, CFP®: Investment and Retirement Planning Specialist at Gradidge-Mahura Investments
Agenda Gradidge-Mahura Investments Context for public BBBEE share offers Revisiting BBBEE historical share performance A quick look at shares available for trade Q&A
Gradidge-Mahura Investments
Incorporated in June 2008, licensed in October 2008
Comprehensive wealth management and financial planning service
offering
Now manage over R870m of client money
Participated in the annual Private Banks & Wealth Managers Survey 2018
Ranked 1st Overall
Ranked 1st in People’s Choice Category (2nd year in a row)
Ranked 1st for Lump Sum Investors
Ranked 1st for Young Professionals
Ranked 4th for Entrepreneurs
31 August 2016 accredited as an Approved Professional Practice™ by the
Financial Planning Institute of Southern Africa
One of 14 practices to be accredited
Only Black-owned practice with this accreditation
Staff compliment: 20 nationally
‘The struggle against racism in our country must
include the objective of creating a black
bourgeoisie...I would like to urge, very strongly, that
we abandon our embarrassment about the
possibility of the emergence of successful and
therefore prosperous black owners of productive
property’
Thabo Mbeki, 1999
BBBEE: Phase I
Phase 1 of BEE characterised by Affirmative Action and deals for the
politically connected
Companies competed for a small pool of qualified, skilled and / or
experienced black staff
Income growth among black employees grew faster as a result
African Asian Coloured White Total
Average annual 9.4% 8.9% 10.1% 6.3% 7.5%
growth 1996 –
2004
Source: South African Journal of Demography. Changing Income
Demographics of South Africa 1996 – 2006 by Prof Carel van AardtBBBEE: Phase II
Broad based BEE
Seven elements of the Codes of Good Practice
Ownership
Employment Equity
Management Control
Preferential Procurement
Enterprise Development
Skills Development
Socio-economic Development
Ownership became a key focusOwnership
Companies undertook ownership deals with one, or
a combination of, four broad groups:
Staff (via an ESOP)
Broad based special interest groups (Women’s Group,
Organisations working with the disabled, etc)
Strategic Partners (connected or influential individuals
typically via a consortium of some sort)
The Black publicChallenges with Public share offers Funding Education Communication Alignment of goals Investor sophistication and experience
The Funding Challenge
When Phuthuma Nathi came to the market in
2007 the MultiChoice SA business was worth
approximately R17bn
To sell 20% of the company to Black
shareholders the company would have to find
partners with R3.4bn capital to invest (roughly
R50 a share)
This challenge not too different to someone
wanting to buy a house.
Most of the time people do not have the capital to buy
the house cashOvercoming the Funding challenge
Buy Phuthuma Nathi
Buy a house shares
• Price: R1,000,000 • Price: R50 a share
• Deposit: R100,000 • Equity (deposit): R10 a
• Home loan: R900,000 share
• Use income to pay loan • Loan: R40 a share
over 20 years • Use dividends from
profits to pay loan
Most public BBBEE shares are funded in this way
The amount and structure of the debt differs
Funding can be in the form of a loan and/or a discountWhat asset are you buying into?
Sasol Inzalo is
invested here
Vodacom
Sasol Ltd
Ltd
Vodacom Vodacom Vodacom
Sasol SA Oil Mining
SA Tanzania Kenya
Yebo Yethu
is invested
herePerformance Review Share Start Date Initial Price Cost for 1,000 shares Dividends Latest Value Capital Return Total Return Sasol Inzalo Nov-08 R 27 R 27 450 R 2 000 R 95 000 246% 253% SOLBE1 Nov-08 R 366 R 366 000 R 140 900 R 375 000 2% 41% MTNZ Sep-10 R 20 R 20 000 R0 R 56 000 180% 180% Vod YY Nov-08 R 25 R 25 000 R 9 000 R 110 000 340% 376% Phuthuma Nathi Dec-06 R 10 R 10 000 R 92 418 R 108 500 985% 1909% Welkom Yizani Dec-06 R 10 R 10 000 R 18 500 R 11 500 15% 200% Eyomhlaba Dec-05 R4 R 4 000 R 600 R0 -100% -85% Hlumisa Dec-08 R8 R 7 500 R 200 R0 -100% -97% Ukhamba Nov-13 R 20 R 20 000 R 2 120 R 27 000 35% 46% Thembeka Capital Sep-07 R 30 R 30 000 R 27 122 R 369 869 1133% 1223% Total R 519 950 R 292 860 R 1 152 869 122% 178% The Top 40 Index has delivered around 147% since June 2008 (including dividends)
Factors to consider when investing in BBBEE shares
Understanding asset types
Geared Returns
Divisibility
Flexibility
Liquidity
Control
Income
Bulky
Costs
Risk
Tax
Asset
Rental Property N N - - - ++ -- + -- -
Business + N - - N ++ N + -- -
Unit Trusts N N ++ ++ ++ - + - N N
Tax Free Savings - ++ - N + - + N ++ N
Retirement savings - ++ - N N - + - N N
Primary Residence - N - - - N - ++ -- N
Share Portfolio N N ++ ++ ++ - + + + -
BBBEE Shares N N N + + ++ + N + -Liquidity: in plain language
Liquidity: in plain language
Definition:
The ability of an asset to be converted into cash quickly
and without any price discount
(InvestorWords.com)Liquidity discount
How big a discount should be applied to the
value of an illiquid asset?
Sasfin (30%)
Cazenove (max 20%)
OMIGSA Alternative Investments (25%)
Avior Research (30%)Market Efficiency
Definition:
The extent to which available information is reflected in
the price of an asset.NAV / Book Value / Intrinsic Value
Book Value Per Share = (Total Assets - Total Liabilities) / No of Shares
in Issue
Book value per share of a company is easy to calculate and helps the
investor determine whether a stock is currently undervalued or
overvalued. It is compared to the share price to determine if it is cheap
or expensive
Book value per share also lets helps the common shareholder
understand what they might claim should the company dissolve.
Source: Stock Research ProA closer look at some BBBEE shares
Phuthuma Nathi
FY 31 March 2018
EPS: R20.83
PE: 5.1 (4.2 before results announcement)
Dividend Yield: +/- 20%
Liquidity event unlikely
Valuation: R160 to R200 per share
Netflix and other OTT applications a major
challenge.
Business model needs to be revampedMTN Zakhele Futhi Funding
Total (R million)
Equity from public offer and MTN Zakhele Re-investment offer 2,468.3 (25%)
Upfront costs and working capital (39.4)
MTN Discount 1,974.6 (20%)
Third party bank funding through MTN ZF Pref Shares 2,418.5 (25%)
Notional Vendor Finance from MTN 3,051.2 (31%)
9,873.2MTN Zakhele Futhi Value MTN Share Price Value of MTN Zakhele Futhi share R100.00 R17.74 R120.00 R30.19 R140.00 R42.64 R160.00 R55.10 R180.00 R67.55
Vodacom Yebo Yethu Sources of Funding R (millions) % Vodacom Group discount 1,951 11.8 Equity contributions - VOD SA BEE Shareholders 3,862 23.4 Equity contribution by VOD Group and employer companies – 750 4.6 Vodacom ESOP Preference Shares from 3rd Party funders 4,623 28.1 Preference Shares from VOD Group 5,285 32.1 Total 16,471 100 Uses of Funding Acquisition of VOD shares 16,407 99.6 Transaction costs 64 0.4 Total 16,471 100
YY: Buy, Sell, Hold?
Currently trading at R109 a share
Deal struck at implied price of R159 a YY share
With VOD trading at R143.35 a share
VOD currently trading at R124 a share
Implies YY price of R130 – R135 a share
Equates to 20% discount
A 15 – 20% discount reasonable
Becomes a geared play on VOD share price
Trickle dividend (min R76m p.a): forward yield
circa 1.7%Sasol BEE Ordinary Shares (SOLBE1)
Sasol’s discounted scheme
Ranks pari passu with Sasol ordinary shares (SOL)
Discount currently around 43%
SOL: R505 ; SOLBE1: R286
Dividend yield approximately 5%
Value to emerge from discount unwinding, but overhang
of stock from Khanyisa restructuring
Discount should be higher for longer; SOLBE1 to
become a perpertual scheme (similar to PN)
Strategy:
Yield play and discount play
Buy > 6%, Hold 4-5%, Sell < 4%...depending on market yields
Buy > 40% discount, Hold 25-40%, sell below 25%Sasol Khanyisa
Sasol’s funded share offer
Currently being restructured
100% debt funded by Sasol
Investing in Sasol South Africa (SSA) not in
Sasol Ltd as per Inzalo
Free share allocation based on number of Sasol
Inzalo (SIPBEE) shares heldImperial Ukhamba
A-shares available to the public
A-shares own 5.3% Imperial
Unlisted deferred ordinary shares convert in 12 equal
tranches of 831 469 listed ordinary shares per year
Deal ends June 2025
NAV (June 2017): R38.52 (IPL @ R161 a share)
Imperial splitting in two; Imperial Logistics and MOTUS
Discount: approx 42%
7 years to maturity
73% upside from discount disappearingBig Picture
Don’t try guess which is ‘the best’ investment opportunity
– diversify
Do not invest money that you cannot afford to lose or
may need at short notice
There are no guarantees!
Gearing means volatility
Understand your current financial positionWhere do public BBBEE shares
trade?
Share Platform Access to platform
Phuthuma Nathi Over the Counter www.phuthuma.co.za
Welkom Yizani Over the Counter www.welkomshares.co.za
Sasol BEE Ordinary (SOLBE1) JSE BEE Board Via your stock broker*
Ukhamba Over the Counter www.eese.co.za
YeboYethu JSE BEE Board Via your stock broker*
MTN Zakhele Futhi Not Trading N/A
Sasol Khanyisa Not Trading N/A
Thembeka Capital Scheme closed N/A
Eyomhlaba / Hlumisa Schemes closed N/A
* Your stock broker must offer the BEE Contract. Not all of them do.A diversified portfolio...
A parting shot (Yale Endowment Fund)
“The heavy allocation to nontraditional asset classes stems from their return
potential and diversifying power…. Alternative assets, by their very
nature, tend to be less efficiently priced than traditional marketable
securities, providing an opportunity to exploit market inefficiencies
through active management. The Endowment’s long time horizon is
well suited to exploiting illiquid, less efficient markets”
Source: Yale Endowment Fund Annual Report, 2009Disclaimer
This presentation does not constitute advice.
While all due care has been taken to ensure accuracy of the content of this
presentation, neither Craig Gradidge, Kagisho Mahura nor Gradidge–Mahura
Investments (Pty) Ltd accept any liability for any loss that may be suffered by
anyone who relied directly or indirectly on all or part of this presentation.
Gradidge-Mahura Investments is an authorised financial services provider.
Our FSB license number is 36327Contact Details Physical Address: Ground Floor, 17 Melrose Boulevard Melrose Arch Postal Address: PO Box 78219, Sandton, 2146 Email: info@gminvestments.co.za Tel: +27 (0)11 448 5113 Fax: +27 (0)86 567 5155 Web: www.gminvestments.co.za Affiliations: Masthead Distribution Services; Financial Planning Institute of South Africa Gradidge-Mahura Investments is an authorised financial services provider. FSB license number: 36327
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