Ryk de Klerk
THE RECENT listing of SAB Zenzele Kabili was an outstanding success, but be aware of the potholes and cliffs.
The market in JSE-listed black economic empowerment (BEE) shares is very illiquid, as only black South Africans are eligible to hold them. Over the past year, the average monthly volume in BEE-Sasol was about 7 000 shares, while MTN Zakhele Futhi averaged about 111 000 shares, and YeboYethu 57 000 shares. In all three cases, the average monthly volume was a mere 0.1 percent of the respective shares in issue.
The weak liquidity in listed BEE shares can expose new and current investors to unwarranted risk through possible market manipulation and market intervention by the parent companies.
The unwinding of Sasol Inzalo, Sasol’s initial BEE, and the establishment of Sasol Khanyisa, Sasol’s new broad-based BEE ownership structure, in 2018 stand out like a sore thumb. Sasol’s BEE establishment in 2008 involved, inter alia, the subscription by private black investors for 2.8 million BEE-Sasol Limited or SOLBE1 shares at a price of R366 per share, paid in full. SOLBE1 shareholders receive the same dividends and voting rights as Sasol ordinary shareholders. SOLBE1 was listed in 2011. The discount at which SOLBE1 traded to Sasol steadily narrowed to 17 percent, before the unwinding of Inzalo from 35 percent in 2012.
The unwinding of Sasol Inzalo resulted in the increase in the listed number of Sasol BEE (SOLBE1) shares on the JSE to 6.3 million from 2.8 million. Existing SOLBE1 shareholders got one bonus share at no cost for every four shares held, while shareholders in Sasol Inzalo got one SOLBE1 for every 10 Inzalo held, also at no cost. In both instances, the new shares were immediately tradable.
Shortly after the transaction was completed in June/July 2018, the discount jumped to more than 50 percent, as the new shares created a massive overhang of shares in the market. In February 2019, Sasol appointed Ngonyama Capital, a BEE investment company, as a market maker to improve liquidity in SOLBE1 shares on the JSE and to unlock value for investors by narrowing the discount at which the share was trading against ordinary Sasol shares. A market maker has to be continually available to buy or sell when an investor wants to enter or exit the market.
In terms of the agreement, Ngonyama Capital had to buy 100 000 SOLBE1 shares over six months after signing the contract, and the market-making contract was valid for three years. According to JSE data sourced from iress, 100 037 shares traded in the six months (February to July 2018) after the announcement of the appointment of Ngonyama Capital. The discount of SOLBE1 to Sasol ordinary shares narrowed to 12 percent at the end of July from 53 percent at the end of January that year.
SOLBE1 traded at a premium of up to 24 percent to Sasol ordinary shares in the first quarter of last year, but changed course since then as the discount opened up again. At Friday’s close, SOLBE1’s discount to Sasol was 45 percent after peaking at 53 percent in March.
The outlook for SOLBE1 is therefore dependent on two factors only, namely the outlook for Sasol’s share price and the widening or narrowing of SOLBE1 discount to Sasol.
While the net asset value (NAV) of SOLBE1 is Sasol’s share price, the NAVs of other BEEs are not always readably available, as financing and the structuring thereof play a major role. The actual NAVs can be calculated only half-yearly when financial statements become available. Furthermore, in some instances, certain covenants are in place and could have a major impact on the NAVs and therefore investor sentiment that could impact on the BEE’s share price relative to its NAV or underlying value.
MTN Zakhele Futhi (MTNZF) is a perfect example.
MTNZF’s investments in MTN consist of 51.114 million MTN Group shares and a derivative instrument.
The derivative arises from the implementation of the MTN Group B-BBEE scheme, where, as part of the scheme, MTNZF obtained notional vendor finance (NVF) to facilitate the purchase of MTN Group shares. It is straightforward to calculate the value of MTNZF’s direct holding in MTN shares.
MTNZF raised third-party finance through issuing preference shares (maturing in 2022) and was subject to certain covenants.
The impact of the coronavirus led to certain covenants being triggered and had MTN exercising the call option on the preference shares that were mandatory redeemable to the holders.
MTNZF was in a precarious position as MTN passed dividends, but the parent stepped in and provided the necessary funding and extended the life of the scheme by another year.
The value of the derivative instrument is the most difficult to ascertain, as it is based on a valuation model.
To simplify the calculation, I used the NAVs of MTNZF per the available financial reports at the interim and final stages, and used the relationship between the MTNZF’s NAV and MTN’s share price at the end of the financial reporting periods.
My analysis indicates that, at Friday’s closing prices, MTNZF at R15.08 could be trading at a 38 percent discount to its NAV based on MTN’s price of R103.73.
YeboYethu holds 114.4 million Vodacom shares, financed by financial institutions and Vodacom. As in the case of MTNZF, I used the relationship between YeboYethu’s NAV and Vodacom’s share price at the end of the financial reporting periods to get an indication of the NAV of YeboYethu, given Vodacom’s share price at the close on Friday. My analysis indicates that, at Friday’s closing prices, YeboYethu’s NAV could be about R82 per share based on Vodacom’s price of R133.21. That means that YeboYethu at R43.30 could be trading at a 47 percent discount to its NAV.
In sharp contrast, the recently listed SAB Zenzele Kabili (SZK) on Friday closed at R175, 2.87 times its underlying NAV of about R60 based on its holding of 5.1 million AB InBev shares and liabilities of about R3 billion. The massive premium to the NAV is absolutely absurd. If I assume that AB InBev will grow its dividend by 20 percent per year, an exit dividend yield of 1.5 percent for AB InBev and servicing SZK’s debt by the dividends received from AB InBev, SZK’s NAV will reach the current share price by 2025.
SAB Zenzele Kabili – beware the buyer at current prices! I must commend the company where they, in a voluntary update to shareholders, effectively warned the market about the absurd levels at which the share was trading. Better value can be found in other listed BEEs.
Ryk de Klerk is an analyst at large. Contact [email protected]. He is not a registered financial adviser and the views expressed above are his own. You should consult your broker and/or investment advisor for advice. Past performance is no guarantee of future results.
*The views expressed here are not necessarily those of IOL or of title sites
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