Broad-based black economic empowerment share schemes have dominated headlines over the last few years as companies have sought to find a formula that will allow them to increase black shareholders at a reasonable cost. Typically, BEE share schemes are highly leveraged plays on an underlying stake in the empowering company that use dividend flows to pay off their debt. As such, they can be volatile. When the underlying asset is performing well and paying healthy dividends, things are good, but a dip in the performance of the empowering company can mean a very sharp fall for the BBBEE vehicle.
The performance of South Africa’s various BBBEE schemes has varied. Good schemes, usually ones with lower leverage in which the empowering company has outperformed, include MTN Zakhele, Vodacom YeboYethu, and MultiChoice Phutuma Nathi. Deals that have struggled, usually thanks to a combination of very high debt levels and a poor performance by the empowering company, include Naspers Welkom Yizani, African Bank’s Eyomhlaba and Hlumisa, and Sasol Inzalo. Empowering is not an easy thing to get right. – FD
GUGULETHU MFUPHI:  South African investors have a few BEE share schemes to choose from. As we discuss the performance of these shares, Riaz Gardee, who is a Market Commentator and BEE analyst, joins us now for more. Riaz, I got taken by BEE shares a couple of years back with the launch of Phuthuma Nathi, but when you look at the company results that have been published recently, the likes of Sasol, Vodacom, and MTN, their BEE shares are corresponding and their share prices are actually reaching all-time highs.
ALEC HOGG: Hang on. You got taken…what does that mean ‘you got taken’?
GUGULETHU MFUPHI: Â I was consumed and interested in BEE shares.
ALEC HOGG:Â Did you buy?
GUGULETHU MFUPHI: Â Yes, I did.
ALEC HOGG: But you weren’t taken….you made money out of it.
GUGULETHU MFUPHI:  Well Alec, back to the question…
ALEC HOGG:Â You became involved in the market.
GUGULETHU MFUPHI:  I did. It was an exciting market, a very interesting one, and one that we need to be more vocal about, actually.
ALEC HOGG: But you’re married now, because the guys who are listening to this and thinking ‘Gugu has all these shares that have gone up – Hello’.
GUGULETHU MFUPHI: Â They should perhaps follow me with stock picks.
RIAZ GARDEE:  Thanks Gugu, I think that’s a good point that you made. Remember, the underlying shares are in essence, what you own. That should therefore track the BEE shares, especially where there’s leverage, because that will be magnified as well. That’s the main reason why those shares have gone up by so much. Exactly as you mentioned, Sasol and MTN have recently announced good results and that obviously had an impact on their underlying price, which is close to being at all-time highs, and that transpired down to the other shares as well.
GUGULETHU MFUPHI: Â Fairly positive dividends were also paid out to both Sasol and MTN, but BEE shares also have a debt component.
RIAZ GARDEE:  What will happen is the dividends that are paid will be paid to the SPV’s – the BEE companies – which will use that to pay down their debt. That will therefore have a significant boost, especially since the dividends are much higher than initially anticipated. The companies should therefore be debt-free quicker than initially thought, and that will just add value for the shareholders.
ALEC HOGG: So it’s quite a leveraging effect then. If the dividend growth is higher, as you say, as it has been in this past year, then it makes those BEE shares even more valuable.
RIAZ GARDEE:  For the ones that are leveraged and remember they’re not all leveraged. For example, Sasol has two. One is leveraged and one is unleveraged and you can see that movement between the two very clearly in terms of the leverage effect.
ALEC HOGG:Â How so?
RIAZ GARDEE:  The ones that are not leveraged is Sasol BEE 1, which is listed on the JSE. They normally just trade 30 percent lower than the underlying share because that’s all they are – it’s a restricted share. On the other hand, the Sasol Inzalo has a large amount of debt component, so that’s trading at about R100.00 now. To give you an idea: if the Sasol price goes up by another R100.00, they would go up by R100.00 as well, so they would double up basically, whereas the other share wouldn’t go up by the same proportion. The leverage therefore, has a significant upside and downside.
ALEC HOGG:Â What about Phuthuma Nathi?
RIAZ GARDEE:  I think Phuthuma Nathi is a different dynamic because there’s no trigger even in terms of the shares unlocking. They need the license for the DSTV and the TV license. They therefore have that license indefinitely, basically, so the scheme won’t unwind at a particular point as the other ones, which have definite end dates. Nevertheless, you have an underlying business, which is a South African business, which is a strong business with a lot of cash flows, not too much competition it seems, and a healthy customer base.
ALEC HOGG: So you don’t get the gearing effect or the discounts that you get on the other ones.
RIAZ GARDEE:  As much…
ALEC HOGG: So Gugu has done all right. She’s in a good stock.
RIAZ GARDEE:  I think she…it depends which one she’s in, obviously.
GUGULETHU MFUPHI:  Well, we will discuss that later maybe. Alec, you mentioned Phuthuma Nathi, which is under Naspers. Another one that’s under Naspers is Welkom Yizani and since that started trading in December last year, there hasn’t been much movement in that share price.
RIAZ GARDEE:  Again, underlying…that’s more their media assets, so the key rule of all of these transactions is ‘what is the underlying entity that you’re holding’ and that will determine how you progress. Those ones are not therefore, the TV assets. They are the media assets and it has just shown what has happened in the two industries.
ALEC HOGG: So you’d much rather be in the TV assets than media assets.
RIAZ GARDEE:  Of course, there’s far more growth.
ALEC HOGG: It’s an instructive issue that you make there, because not all BEE shares are going to be worth…well, they’re not all equal by a long way.
RIAZ GARDEE:  Correct, and I think the difference is the exit mechanism, the time to exist, and the gearing, and those will determine what the value is. At the end of the day, you need to look at what you are buying because there’s no use buying something that seems cheap, but you’re not happy with the underlying product.
GUGULETHU MFUPHI:  I’m happy that you mentioned that, because one cheap share, Alec belongs under the ABIL umbrella – Eyomhlaba and Hlumisa. There share price has been rather erratic and I take it investors are confused as to what’s happening with ABIL going forward.
RIAZ GARDEE:  I think this is what has driven that because they had a rights issue recently. There is also significant uncertainty in that market segment, so it has then transpired down into the share as well and it’s exactly the other side of Sasol. The one has gone up significantly. This has gone down significantly.
ALEC HOGG: Offering value…?
RIAZ GARDEE:  If you’re confident in the industry – which is the micro-loan sector – where they play… I think they have many issues they need to work through, and they’re getting there. It’s a difficult industry in a sense that the consumers too, are pressurised now – the interest rate environment and the fuel cost going up. All of this impacts significantly on their ability to repay and the loans that they then take out.
GUGULETHU MFUPHI:  Another one that many people aren’t familiar with is Ukhamba – that’s under Imperial Holdings.
RIAZ GARDEE:  Yes, I think what’s happened there is the Imperial price has come down recently, primarily because of the interest rates. Remember, they are predominantly in logistics and automotive – that sector. With the interest rates going up and the decline in the economy, those shares have come down as well for that very reason. I think there’s not much growth expected in the next year for that sector of the market.
GUGULETHU MFUPHI: Â Even with Mark Lamberti at the helm?
RIAZ GARDEE:  Well, I think he’ll do a fantastic job, but there are outside factors as well in terms of the consumers being able to buy, the interest rate environment, and the increases in all the costs you’re facing.
ALEC HOGG: So there is that relationship, despite the fact that Ukhamba is a very cheap way into Imperial. If the Imperial main share price comes down, Ukhamba will follow.
RIAZ GARDEE:  That’s exactly what will happen.
ALEC HOGG: But what about the discounts? To me, that’s the most appealing issue about BEE shares. If you qualify…- i.e. I don’t qualify, but the two of you qualify – to buy into these stocks, why would you even bother buying – say – MTN stocks on the Johannesburg Stock Exchange when you can go to MTN Zakhele?
RIAZ GARDEE: I think that’s a good analogy, you made. The only reason that you would buy the one from the other is that you don’t have the time restrictions. If you’re not pressed for money and you can wait for three years obviously, you might as well buy Zakhele. Just remember, in the other shares, the comparison is not directly as easy because for example, on Vodacom they’re only on Vodacom SA, so it’s a part of the business, and not the Vodacom Group. In addition, in the other companies you mentioned – Phuthuma Nathi – is not the whole of Naspers. It’s certain divisions within those companies. MTN Zakhele is an anomaly where you have the group and in that case, obviously, you would rather buy the discounted one than the fully priced one.
