Craig Graddige of Gradidge Mahura Investments takes a look at some of the more popular broad based black economic empowerment (BBBEE) shares that black investors are now able to purchase in the secondary market.

Sasol Inzalo: Not (yet)

There is a common misconception in the market that this share has not done well for shareholders who bought them in the 2008 offer. The fact that the shares were purchased at between R18.30 and R36.60 a share, and they are now trading at R52 a share, does not support that view. However, the real question is whether or not these shares are actually worth R52 a share. On a simple NAV basis the answer would be a resounding no, but that methodology ignores the guaranteed dividend flow from the preferred ordinary shares that Inzalo holds, which amounts to another R2.7bn in value until the empowerment period ends. However, the behaviour of interest rates over the period is also a factor, and the high debt levels in Inzalo could potentially crowd out any value if interest rates were to spike or remain elevated for an extended period. These two factors almost seem to cancel each other out, leaving the Sasol share price as the main source of value for Inzalo shareholders. If one is positive about the prospects for the Sasol share price, then this would be a good way to benefit from that view. Shareholders and prospective shareholders can check out www.sasolinzalotrading.com for information on how to trade and where buyers and sellers are at.

Sasol BEE Ordinary shares (SOLBE1) – Hot (for dividend seekers)

SOLBE1’s are simply Sasol (SOL) ordinary shares that were offered to investors at a discount to prevailing SOL prices at the time of the deal. These shares rank pari passu with SOL in that shareholders have the same voting rights and entitlement to dividends. The current share price of SOLBE1 (around R315 a share) makes it an attractive option for investors seeking high dividends. The dividend yield is over 6% p.a. which is very attractive. In September 2018 the shares become ordinary SOL shares which can then be traded on the open market with anyone. Currently SOL trades at around R432 a share, meaning that SOLBE1 shareholders are buying in at a 27% discount. This discount seems reasonable given the low liquidity in the stock and that there are still over five years until the empowerment period ends. This share is attractive to investors who need income and who are not seeking to bet on huge capital growth prospects.

Eyomhlaba and Hlumisa – Not (for now)

Eyomhlaba (EYO) and Hlumisa (HLU) are African Bank’s (ABIL) two BBBEE deals. ABIL has been in the news recently as the downturn in the credit cycle and the underwhelming performance in Ellerines has weighed heavily on the share price. ABIL shares are down around 50% since April 2013. This has severely impacted on value in both HLU and EYO which have both fallen by similar amounts to ABIL. Before the massive sell-off in the ABIL share price both shares were trading at a discount of around 40% to the underlying value of the business. This was extremely attractive at the time. With ABIL at around R16.30 per share at the moment, these discounts have unwound significantly with EYO at a discount we estimate to be in the mid 20s and HLU in the mid teens. Clearly EYO is currently more attractive given the higher discount. However, investors should adopt a more cautious approach with these shares and rather wait for at least another set of ABIL results before committing to an investment. The relatively short term until the empowerment period ends makes this a potentially attractive option for less than patient investors.

Shareholders and prospective shareholders can visit www.eyomhlabatrading.co.za and www.hlumisatrading.co.za for trading information.

Thembeka Capital – Hot

Thembeka Capital (TC) remains a personal favourite, and should be the first BBBEE share that one buys. The reason for this is that it is a diversified investment with holdings in companies such as Capitec, Curro Holdings, Pioneer Foods, MTN Zakhele, Sasol Inzalo, PSG and a myriad of unlisted shares. The unlisted portion of the portfolio is largely in agriculture, which is a major theme for investors considering the African continent at the moment. Another reason for the attraction of TC is the deep discount at which it trades to net asset value (NAV). The shares are worth around R112 after CGT and costs, and trade at around R65 a share which implies a discount of 42%. This is attractive for the long-term investor patient enough to wait for a liquidity event in the stock. A liquidity event could be the listing of TC, or an unbundling of one or more of the underlying shares, such as Capitec or PSG. Management has not given shareholders any indication that such an event is imminent which implies that the discount may persist. In the interim investors can collect a reasonable dividend, although the dividend yield is low at around 1.3%.

Visit www.thembekaotc.co.za for trading information.

Phuthuma Nathi – Hot (sort of)

Phuthuma Nathi (PN) owns 20% of MultiChoice South Africa (MCSA), which owns brands such as DSTv and SuperSport. PN opened for trading in December 2011 and has attracted a lot of attention from investors. However, according to recent reports, more than 87% of investors who bought into the scheme in 2006 remain on as shareholders. These investors have been well rewarded for their loyalty with a recent dividend of R2.66 a share before dividends withholding tax. Given that they paid R10 per share in 2006, this means they will earn 26.6% (or 22.6% after DWT) this year. In fact, these investors have received over R6.80 in dividends over the period meaning they have received over 68% of their investment back in dividends. The share also trades at around R68 at the moment meaning that investors have made an additional 580% capital growth on top of that. This is a phenomenal return and shows just how well these deals can work if structured well. MCSA recently paid a special dividend to PN, most of which is going to investors, but a portion of which will go to servicing debt. Given the cash-generative nature of MCSA, it is expected that this debt could be settled in the next two or three years. This would lead to significant value creation in the share. However, there remains no evidence of a liquidity event in this stock, and trade is likely to remain between qualifying black investors. This implies that the significant discount that the share trades to NAV is likely to persist for much longer. In fact in the recent results management said “we look forward to continuing a long and prosperous relationship with our Phuthuma Nathi shareholders…”

Visit www.phuthuma.co.za for information on trading.

Craig Graddige holds several of these shares in his personal capacity.