SA’s flourishing BEE share exchange considers branching into other parts of Africa

While the Johannesburg Stock Exchange is the sole provider of listed equity and bond trading platforms in South Africa, in the rapidly developing Over-The-Counter area, two businesses compete for relative crumbs. The better established of these is Singular Systems, which grew out of a software company that saw an opportunity in a trading arena where race and restrictions exist. It has grown to represent 15 schemes including BEE share trading for Sasol, Multichoice, Vodacom and Imperial. Its competitor is the grouping which manages the MTN Zakhele scheme where trading has settled down after a stuttering start. In this podcast, Singular director Etienne Nel explains the development of the business and opportunities which are continuously emerging. While there is no intention of taking on the JSE, significant opportunities do exist in other African countries, two of which are currently considering the system. Listen to the Podcast or download it for future listening. Fascinating story.  – AH      

ALEC HOGG:  In this Biznews Special Podcast, Etienne Nel from Singular Systems is with us in the studio.  Etienne, Singular systems has now become synonymous with BEE shares.  It didn't start out that way.

ETIENNE NEL:  Hi Alec, no it didn't.  We effectively are a bespoke software development firm with our first product being a piece of software called Share Trust that administers share option schemes and the like.  Effectively, Share Trust forms the basis of Equity Express, which is now – let's call it the Rolls Royce of OTC trading platforms in South Africa.

ALEC HOGG:  Just to go back a little…BEE shares were issued by some companies – not many – certainly not all of them.  What was their intention at the time…was it that they could trade?

ETIENNE NEL:  I think some companies had the vision to give their shareholders the ultimate form of empowerment, which is tradability.  At the time when they issued these shares, there was no such thing as an Equity Express platform available to them, and OTC was slightly random.  All we did…we came up with the idea to formalise it  bit more, give it a bit more structure, and put it on a very nice web-based transparent platform.

ALEC HOGG:  But why wouldn't they just trade these shares in the Johannesburg Stock Exchange?

ETIENNE NEL:  Alec, the JSE being a self-regulating organisation has listing rules and requirements.  You can appreciate that by virtue of the fact that all of these BEE schemes have different shareholder rules.  For example, African Bank requires only natural Black persons.  Something like a Thembeka and an Ukhamba requires 100 percent black-owned companies, whereas something like a Phuthuma Nathi is happy with 50.1 percent black-owned companies.  By virtue of the fact that your shareholder rules vary quite dramatically, it's difficult for the JSE to police that and by virtue of the fact that they have listing rules they obviously have to enforce that, being a sell-regulating organisation.  You couldn't change JSE rules to fit your underlying listings' profiles. It has to work the other way around and needless to say, JSE simply can't do that.

ALEC HOGG:  So Equity Express is really for bespoke share plan, presumably not just BEE related.

ETIENNE NEL:  Correct.  What you could look at is…we like to use the word 'controlled liquidity' where for example, another client of ours – TWK, which is a co-op – and effectively, only bona fide farmers who are members of a co-op are allowed to actually transact in those shares.  Ultimately, the Companies Act allows you to set your own shareholder rules and by implication, our software can then be programmed to apply those shareholder rules and give you liquidity at the same time.

ALEC HOGG:  It sounds as though it could be expanded into a much broader market.

ETIENNE NEL:  Alec, the possibilities are virtually limitless if you start thinking about it.  In the good old days on the JSE floor, we used to trade Kruger Rands.  Now, with electronic settlement, nobody is willing to take the risk of settling a physical Kruger.  Provided you can settle the underlying assets – and provided obviously, that it's a uniformly settle-able asset – you could certainly trade it.  Yes, the sky is the limit.  You could look at the bench instruments, preference shares, commodities if you want – fruit, and hard commodities etcetera.

ALEC HOGG:  Are you moving there?

ETIENNE NEL:  We are in discussions with some parties but ultimately, what you want is settlement because that's the core that drives believability in the platform.  You lose trust only once, so in Equity Express, we've had over 70,000 deals without a single trade having ever failed and that's what makes the platform so believable.  The last thing you want is to bring on a new product and you have a failed trade where something goes wrong in the settlement process:  the seller doesn't get money or the buyer doesn't get his product.

ALEC HOGG:  So you pre-vet both the sellers and the buyers to make sure that they can transact in a particular security.

ETIENNE NEL:  Correct – yes.  That way we virtually guarantee settlement.

ALEC HOGG:  When was the first BEE scheme launched on the Equity Express platform?

ETIENNE NEL:  That was African Bank.  In fact, they had two: Eyomhlaba and Hlumisa.  They went live with trading in May 2011, so we've been at it for just under three years now.

ALEC HOGG:  And these schemes today…how many do you have?

ETIENNE NEL:  Fifteen, so we're quite proud of our track record so far.

ALEC HOGG:  You lost out on the MTN Zakhele scheme, which….  I guess they're a bit sorry that they didn't come to you in the first place.  What happened there?

ETIENNE NEL:  We were invited to bid, but we obviously didn't make the grade for whatever reason, and MTN felt that they'd rather go with the existing service provider.  On the other 15 that we have, our clients are delighted.  We've never had a failed trade, as I've said earlier and our total downtime since our first 'go live' in May 2011 I think, is six hours.

ALEC HOGG:  You talk about downtime because it's electronic.  Do you have trading hours where you open and close?

ETIENNE NEL:  Alec, we do.  Once again, it being that the issue is choice, we allow them to choose their trading hours.  For example, Vodacom's YeboYethu wanted to have 12 hours' worth of trading, so they actually trade from 9:00am until 9:00pm, even though the call centre isn't operational during those hours.  The call centre works during office hours, so the call centre would facilitate shareholder queries during working hours; but if you're savvy enough you can trade on the web.

ALEC HOGG:  So you could actually trade as you say, until 9:00pm if you were a qualifying buyer in the YeboYethu scheme.

ETIENNE NEL:  Well, both buyers and sellers – yes.  However to all intents and purposes, you could trade 24 hours per day, but then you start looking at practical arrangements.  For instance, when do you update the software?  For example, this weekend we upgraded the Phuthuma Nathi platform to a new look and feel, so maintenance-type issues do start playing a role if you trade 24 hours per day because you don't really have any downtime for that.

ALEC HOGG:  The idea of having buying and selling prices on a screen at any point in time: was that a key part of the offering right from the beginning?

ETIENNE NEL:  It was absolutely vital, Alec.  We feel that it's transparency that drives the price.  It achieves better price discover.  The last thing you want is for a shareholder to wonder 'where are the buyers' or 'where are the sellers sitting at' because ultimately, that is the purest form of empowerment, we think.

ALEC HOGG:  Being able to actually trade in the stock…  What about the discount?  That's the thing that really has me scratching my head.  How do you (1) value the shares that are there and (2) when you do value them, as I've done one or two of them, see them trading at such huge discounts to what the intrinsic value appears to be?

ETIENNE NEL:  Alec, that's actually a difficult question because if you look at something like Sasol, some pundits actually argue that Sasol Inzalo, which is the debt-funded structure that trades OTC using our software, is trading in the region of about R110.00 per share.  If you look at all the debt, after tax etcetera, which is a very complex calculation – by my own admission, I'm not clever enough to figure that one out – but I'm being told that it's trading at a premium to its Nett asset value.  Similarly, something like a Phuthuma Nathi, which by far and away is our most liquid share – you're looking at a liquidity ratio of about 18 percent of market cap, which is very liquid by any….

ALEC HOGG:  If you want to buy or sell, you can do it in a day.

ETIENNE NEL:  Absolutely.  That one obviously, is trading at a discount, but there's no real back-to-back see-through to a listed share price.

ALEC HOGG:  Because that has to do with MultiChoice…

ETIENNE NEL:  Correct.

ALEC HOGG:  Which is not, itself, listed.

ETIENNE NEL:  MultiChoice SA specifically – yes.  I'm personally struggling to get my head around it.  I've been in the financial markets for 20-odd years and I don't quite understand why the discounts are so large.  If you think about it, you have liquidity, there's a transparent market, and the buyers are willing to put down the money.  When I say…  We're talking about sophisticated people coming to the market.  They've done their homework.  They're willing to put down money.  What I suspect might be an angle, is possibly the large levels of debt within these structures, because most of them actually have debt.  Not one of them is debt-free, and I think that plays a huge role in it.

ALEC HOGG:  So there's a lot of opportunity for somebody who gets out their calculator and starts working at what these schemes are really worth and perhaps, making deep discounts.

ETIENNE NEL:  Absolutely.  Some of these companies…once the debt's paid off…ultimately, do not convert into the underlying share which, by implication, then makes them dividend paying of dividend yield type stocks.  Something like for example a Remgro has been trading at a discount ever since I can remember.  That discount just varies depending on market conditions.  Yes, I think there are very real opportunities.

ALEC HOGG:  What about overseas listed companies that have South African operations…say, an IBM, a Microsoft, or a Google: Could they also use your platform?  Is that not an opportunity perhaps to start trading exotic securities, which aren't available at the moment – here?

ETIENNE NEL:  Alec, absolutely.  If you think about it carefully, some large mines for example, you could look at some of the platinum mines that have 50,000 staff members – just to bring it a bit closer to home.  I'm not sure if Larry and Sergei would give up Google SA, but you could certainly create a special purpose vehicle that houses a certain portion of shares and that particular bit, you could trade over the counter.

ALEC HOGG:   So what's stopping it?

ETIENNE NEL:  I probably need to work a bit harder.

ALEC HOGG:  In talking to people and saying to the Anglo American or the Aesop's, 'here's a way that you can actually trade it on the market'…

ETIENNE NEL:  Yes.

ALEC HOGG:   The opportunity for you guys going ahead…  Clearly, the Johannesburg Stock Exchange must be one opportunity.  You could move more into their market.  It would be hard for them to come into your market.  What about other parts of the continent where markets are not as sophisticated and perhaps the competitor wouldn't be as daunting as the JSE might be?

ETIENNE NEL:  Alec, that's a very valid question.  We are in fact, in discussions with two African countries, as we speak.  Unfortunately, I can't disclose who they are but suffice to say that – and this is purely by chance – that our platform…  Unlike First World Stock Exchange Solutions, which requires a huge amount of bandwidth our solution is a very light solution.  In fact, you can run it off 3G on a Smartphone.  By virtue of the fact that it's a lightweight solution and it's very robust, we inadvertently created a capital market solution for Africa.  We are therefore actually quite excited about the prospects for Africa and this year is going to be a big focus for us, into the rest of the continent.

ALEC HOGG:   The JSE has listed its own shares on the JSE.  Would singular systems ever list its own shares on Equity Express?

ETIENNE NEL:  I think in the fullness of time we could consider that and have an OTC of our own – yes.

ALEC HOGG:   A fascinating story: Etienne Nel is the Director of Singular Systems.