Jean Pierre Verster: Advice on Naspers offshore listing, property – and Abil

Biznews community members love Jean Pierre Verster, rating him one of their most popular investment commentators. And he certainly didn't disappoint in this week's episode of Rational Radio. In this fascinating interview he explains why five years after the collapse of Abil, the story isn't over yet – especially not for Preference Share owners. He also unpacks the options available to Naspers shareholders on the listing of its offshore assets in Amsterdam; and takes a close look at SA's bombed out property sector. – Alec Hogg.Well it's always a good night when one gets to talk to Jean Pierre Verster. Last time we met was in London. You've moved on since then. Now you have your own business, Protea Capital Management, you're also having a look back on the whole Abil story and there are a few things I'd like to pick up with you. You're one of the most popular investment managers with the business community. People just love you and the fact that you are on the show is a great thing for our community. Just to go back a little bit on the Abil story, you went short on Abil long before the collapse. We've subsequently seen that they've now sold last week – Stangen for hundreds of millions of rands. They've also got this thing called African Phoenix. There's still no new African Bank that's coming in but if one had held on to Abil shares right through the whole process how would you be sitting right now..___STEADY_PAYWALL___.Sure Alec. The last time you and I spoke was in London in October 2016 and before that we spoke in August 2014 just days after African Bank Investments Limited was suspended on the JSE and their main subsidiary African Bank was of course placed in curatorship. That precipitated the suspension of the shares. Now those shares were suspended at 31 cents per share. So if you were an ordinary shareholder of African Bank Investments Limited that is what the value of your investment was frozen at. From previous years of trading through the 40 rand per share to a low at the suspension of 31 cents per share. Now those shares were suspended for the better part of a year. And during that time like I mentioned the main subsidiary African Bank, the actual bank was taken into curatorship and the company ultimately lost control of the bank. So all that was left was Ellerines, which was placed in business rescue and wound up and then another subsidiary, the one you referred to that was recently sold, Stangen – Standard General Insurance. It's quite interesting if you go back to the time when African Bank Investments Limited got suspended and lost control of African Bank, two years later it came with its first financials after the loss of control of African Bank. They did show a negative ordinary shareholder value of I think it was roughly minus R500m. So in effect ordinary shareholders were wiped out completely. But, and this is an important point, African Bank Investments Holdings Ltd also issued preference shares and those preference shares contributed capital to the business in 2005 and 2011 – just over a billion rand. So even though common equity shareholders were wiped out in the demise of African Bank because there was still pref shareholder capital left, and because the Investment holding company still owned Stangen the board decided not to continue paying pref share dividends, some value was accumulated again, to the point where today African Phoenix – the new named African Bank Investments Limited, is now trading at sixty three cents. So that is the current value that an ordinary shareholder – that was suspended at 31 cents per share in 2014 has today. Roughly double that at 63 cents per share but that value was created on the back of Stangen and on the back of the group not paying pref share dividends..Okay. So now we understand. So if you'd been one of those scalpers or the cigar butt investors who went in just before it was suspended and you paid 31 cents rather than the 40 rand that some some people had held onto, at least that 31 cents is now virtually double..Correct and if I use the rule of 72 and divided by the five years gone by, that means it's roughly a 14 percent return on your investment if you bought it just before the suspension, so not a terrific return but not a bad return either. It could have been very different Alec and that's why I started my explanation by saying that the common equity shareholders were actually wiped out. It's very contentious that the bank or the board of African Bank Investments Ltd decided not to continue paying preference dividends and that is why the common shareholders have over doubled their value because those pref dividends were issued – not by the banks but were issued by the investment holding company and a lot of those pref holders were pensioners and individuals who did not understand corporate law and the rights that they had. Because of that the pref dividend – basically when they were suspended but when their suspension was lifted they collapsed in price to around R20. The preference share from previously being roughly at R80 per preference share. These poor pensioners sold out to a lot of hedge funds that then accumulated preference shares and ordinary shares and in that process – in this last five year period, came to this point where we've now seen a transfer of value of hundreds of millions of rands from the pockets of preference shareholders to ordinary shareholders. This means these hedge funds and other directors are pulling the strings behind the scenes. It is quite interesting that the story isn't quite over yet Alec. This was a scheme of arrangement as they called it where all the pref shares were repurchased roughly a month ago just before the Stangen sale but three pref shareholders dissented. I'm one of those three and we said to the company that we demand fair value for preference shares and there's still probably a court case to come and the courts will determine what is the fair value of these preference shares..What an interesting story. Thanks Jean Pierre. That is the one that I think has passed most of us by. We also were asked in our webinar earlier this week about Naspers and I said I didn't know the details as well as a money manager. I'm hoping you can help us through this. We've got a lot of people who in the business community have been invested in Naspers, we've loved the stock and they've done very well out of it. But now what do they do with this listing of Prosus in Amsterdam. Can you advise us?.Basically what Naspers are doing is they are taking 25 per cent of their business and selling it to offshore investors and doing it in a structure called Prosus and listing those shares that they will sell on the Euronext Exchange in Amsterdam ,and South Africans investors in this whole reorganisation will be given a choice. There's a default, and then a choice that they need to exercise actively. The default is that they will receive shares in Prosus – one Prosus share for every one Naspers share that they previously had, and in effect their economic interest does not change. But that reorganisation for a taxable investor. So this is not an ordinary private investor, not a fund, not a collect investment scheme for an ordinary investor. This will be a taxable event for that 25 percent of the shares that are sold to new foreign shareholders. So what it means is if you do nothing as a private shareholder, you will be taxed on 25 percent of the value of a Naspers share. So you might be happy to get those shares because there's an expectation that the discounted sum of the parts which has continued in the nice fat listing might decrease in percentage terms in the process listing but you will get that benefit while on the other side paying tax on 25 percent of your holding. So for South African private individuals who want to try and defer that tax event they can actively choose to rather receive Naspers shares listed still on the JSE, rather than the Prosus share and if they do that they defer the capital gains. It will ultimately need to be paid when they do ultimately shell their shares one day, but then the problem you have is you hold shares in a holding company of a holding company and you run the risk that the total discount between Naspers and its underlying investments like Tencent actually increases because there are now two entities between you and the operating businesses and that is the problem Alec, and I can't tell you that one option is better than the other. You either need to pay the tax now in this year with 25 percent of your holding being taxable or you defer the tax and run the risk of a higher discount and therefore the Naspers share will become the Prosus share and that is why a lot of people have called it a Hobson's choice because you sort of lose either way, you're an actual investor but if you hold it to a unit trust your unit trust manager will probably choose the Prosus share and you will not be taxed on that because unit trusts do not pay capital gains..Well it is one advantage of unit trusts. They've come under a lot of pressure lately with all the costs etc. But that's good news. Thanks for articulating that. Just to close off with, we also had questions on the South African property sector and I had a look at the South African Property index which in the end of 2017 – 18 months ago the index is down 29 percent, there is hope that there will be interest rate cuts which is usually good for property but how are you reading this, is a time to go back into those property stocks?.Well firstly if you look at the index it's important to understand what the constituent of that index is. In the case of the property index the Resilient group of companies is a large part of that. Alec another story where that's probably another chapter to be written, is tussle between the Resilient group of companies and my previous employer – 36one, that happened at the start of 2018, which does mean that because the Resilient group of companies with such a high weighting in the index and those shares specifically fell a lot, one needs to have a view on those specific shares in the Resilient group to then decide your view on the index. Subsequently things in South Africa have gotten even tougher and a lot of other property companies are also seeing fresh lows on their share prices. Even today there was an announcement between Emira and SA Corporate. And recently there was an announcement between Arrowhead and Gemgrow. A lot of the smaller companies are starting to merge and you'll probably continue to see that in the property space because things are so tough. The only way that some of these companies can show any growth in distributions is to merge and gain scale. But for me in the short term I see things on the ground in South Africa, a very tough negative reversion, very difficult for property companies and therefore I don't think it's necessarily a good time to get involved in property yet..Jean Pierre Verster, the chief executive of Protea Capital Management and I'm sure lots of people have now got new guidance on exactly where we go to from here on those big issues. The Naspers issue, property issues and interesting to get the insights on Abil.

Jean Pierre Verster: Advice on Naspers offshore listing, property – and Abil

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