🔒 WORLDVIEW: Here’s how to turn the SASSA noise into a profitable investment

By Alec Hogg

The media is in a tizz over the possible suspension of South Africa’s social security agency SASSA’s payments to 10m welfare grant recipients. A five year contract awarded to Net1 expires at the end of this month. After massive reputational damage over allegations of corruption, Net1 refused to renew. And right now, nobody else can do the job.

Serge Belamant, CEO, Net1

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For investors, though, whatever happens next won’t be bad for the Nasdaq and JSE-listed Net1. The company stated plainly some time back that it no longer wants the business and is ready and able to walk away at the end of the month. A SENS announcement yesterday confirmed that Net1 is deadly serious having now secured an alternative future.

The company confirmed the acquisition of a direct stake of 15% in Cell C for R2bn together with purchasing control of DNI, Cell C’s pre-paid distribution business. This is the final piece in the carefully negotiated puzzle that started with Net1 tying up with Cell C’s new 45% shareholder Blue Label, where it has also agreed a R2bn investment for a 15% shareholding.

In the private sector, survival depends on planning ahead. Net1 has realised that despite a world class social welfare payments delivery system, political interference threatened its derailment. Through a bold and opportunistic plan, it has now swapped SASSA’s base of 10m for the even bigger 25m clients of Cell C. This is critical for Net1, whose business model is based on electronic delivery of cheap and highly disruptive financial services products.

On the other hand, it is the Zuma Administration which is now up the creek without a paddle. To put it mildly, those millions of social grant recipients won’t take kindly to being told their monthly stipend isn’t getting paid. Social Development Minister Bathabile Dlamini will have been told to do whatever she must to avoid that happening. So after years of publicly abusing her service provider, she somehow needs to convince Net1 to bail her out.

The way I see it, Serge Belamant’s company has two options. The first would be to agree to temporarily continue distributing the grants, but for a period which suits it and, obviously, at a more attractive profit margin. The second would be to sell off its entire social service machinery to a Government whose instincts are all about command and control.

Either alternative is sure to be good for long-suffering investors. Although Net1’s share price has picked up from last September’s massively oversold R118 a share, at the current R183 its market cap is still R9.6bn. That’s modest in the context of R4bn in cash holdings and annual operating cash flows of R2bn. Net1’s share price rating has everything to do with reputational damage over the SASSA contract. Hence the decision to walk away.

In all the noise, investors seem to have forgotten that in April last year the World Bank’s development arm, the IFC, invested a chunky $107.7m to acquire 18% of Net1. The IFC paid the equivalent of R175 a share and only did so after a lengthy Due Diligence found there was no substance in the corruption allegations. Smart investors should follow its lead. Especially if there is any price weakness emanating from the SASSA noise.

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