In this Podcast, our BEE share specialist, chartered accountant Riaz Gardee, guides us through the impact of recent financial results from two of the giants in this sector of the market – Sasol and MTN – if you’re Black and prepared to wait at least three years. Indeed, with MTN’s scheme closing out in 2017 and an effective 30% discount available to today’s purchasers, buying the BEE option rather than a JSE-listed alternative generates a 10% a year bonus. Much better than a savings account – and with plenty upside potential. – AH
RIAZ GARDEE: Â This week, there have been Sasol results, which have come out as well as MTN, and those have both had direct impact on the underlying BEE transactions.
ALEC HOGG: Yes, the Sasol results …maybe we can start with those ones. They were very strong – a 26 percent profit improvement. What happened to the underlying  shares?
RIAZ GARDEE:  The Sasol shares have performed exceptionally well on the back of those results and the current price is around R567.00. That has had a direct impact on the BEE shares. The Sasol BEE 1, which is listed on the JSE, is about R425.00, so that has gone up correspondingly. I think it’s interesting to note that that generally tracks the Sasol shares and that’s currently at a discount of about 33 percent.
ALEC HOGG:Â What does that mean?
RIAZ GARDEE:  That means that because there are restrictions in place and you can only trade them with other BEE participants until 2018, there’s a liquidity discount so buyers are taking that into account and they are paying less for that.
ALEC HOGG: And the Sasol BEE shares – the Inzalo scheme which is listed on Equity Express.
RIAZ GARDEE:  Yes, I think that’s a good point. Inzalo basically, is a leverage option. The one on the JSE is unleveraged, so Inzalo has much more movement when the shares move because there’s a large leverage component. Simply put, Inzalo is around R100.00 and currently, with the Sasol shares their market cap has gone up significantly as well. They own about two-point-four percent of Sasol, which probably comes out to about nine billion Rand, and they have debt of about seven billion. The value of that portfolio is about two-point-five billion and the current market cap is one-point-five billion. Again, there’s a discount of about 40-odd percent to the underlying shares for the same reason – there are restrictions in place.
ALEC HOGG: So no black guy should actually be buying Sasol’s ordinary shares? There’s no reason to do that.
RIAZ GARDEE:  Yes, providing he has time, so if he can wait for the lock-in periods then he should do that. If he needs the money quicker than the periods elapse, then obviously it’s not a good idea for him.
ALEC HOGG: And then he’ll have to sell to another black person.
RIAZ GARDEE:  That’s it.
ALEC HOGG: And the liquidity discount as you say, on the JSE is about 30 percent, whereas on the Equity Express it’s even higher.
RIAZ GARDEE:  It’s even higher, and I think it just comes back to the pool of shareholders. Inzalo has – roughly – about 213 000 and the Sasol BEE 1 on the JSE has about 110 000 shareholders. Broadly speaking, I think many of them are not sellers, so I think that’s adding to the liquidity discount. Many of them are taking the advice and holding on, so because there are few sellers, that’s obviously having an impact on the price.
ALEC HOGG: It still makes a lot of sense to go and buy the shares just to hold on. What are the holding periods for the two?
RIAZ GARDEE: Â Sasol has about five more years to go.
ALEC HOGG:Â On both?
RIAZ GARDEE:  Yes, until 2018. When they launched it initially in 2008, they were both ten-year schemes. The only difference was that one was leveraged and the other was unleveraged, so for the one you got a discount of about ten percent and for that, you had to have restrictions for ten years. For the one you got funding and for that, you got restrictions of ten years. The restrictions are broken down. In the first few years, you’re allowed to not trade at all and then you can only trade for black participants.
ALEC HOGG: That’s interesting. MTN: there results are also out.
RIAZ GARDEE:  Yes, MTN has done very well recently. The results came out. Their dividends have gone up significantly, so I think that’s another fact, which impacts on their Zakhele shares as they’ll be paid a lot more dividends. That will allow them to retire the debt much quicker. Currently, the MTN Zakhele shares are trading at around R96.00 – close to R100.00 and the MTN shares (underlying) has gone to about R205.00. The discount, again, is about 30 percent if you work it out in terms of…
ALEC HOGG: If you take the debt and everything else, out…around 30 percent.
RIAZ GARDEE: Â Twenty-five to 30 percent.
ALEC HOGG:Â So your dividend yield on that would be very high.
RIAZ GARDEE:  Remember, a lot of the dividends are used to repay the debt, so the dividends are paid from MTN to Zakhele, they repay their debt, and they would then repay the balance. I don’t think you would typically be buying it for dividends. You’d be buying it when the value unlocks. The other important thing in MTN is that there are only three years left in terms of the locking period, so it’s not a long time. Three years go by in a flash.
ALEC HOGG: Unfortunately, the older you get the quicker it goes. That three years’ discount…you’re actually being paid ten percent per year to own their shares.
RIAZ GARDEE: Â Yes, you can look at it that way as well.
ALEC HOGG: And hopefully, the MTN share price still goes higher up. How is that trading system going now? It had a stuttery start.
RIAZ GARDEE:  Yes, it had a stuttery start. I think they were overwhelmed by the amount of trade that came in. Everybody wanted to offload their shares, it seemed, and the system just collapsed. I think the silver lining on that cloud is that the share price has gone up significantly since they’ve come back on, so the guys who didn’t sell could probably sell at a higher price now.
ALEC HOGG: Everybody’s happy with that. The competitor Vodacom has the YeboYethu scheme.
RIAZ GARDEE:  Yes, Vodacom has YeboYethu and their shares are around R50-odd trading. I think the other important distinction with Vodacom is it’s only the South African operation, so it’s only Vodacom South Africa. It’s not the Vodacom Group, which is trading on the JSE. Similarly, that’s worth about R70.00 and if you take out the discount, it’s trading at a discount at R50, so again – similar types of discounts.
ALEC HOGG: Big discounts if you qualify for these shares. If you look at the whole spectrum, which one would you say is offering the most appeal?
RIAZ GARDEE:  Well, I would say the one offering the most appeal is MTN. Firstly, the locking period is the shortest – it’s three years – and then you have exposure to the whole MTN Group, which is not only South Africa, but also all the operations in the entire emerging market where they operate. They’re also number one and number two in over 20 geographies. You’re therefore definitely getting quality premium stock at a discounted price.

ALEC HOGG: What about Ukhamba, the one that’s related to Imperial? That’s one that’s always…it’s a good group, they have a new Chief Executive in Mark Lamberti, who at 63 is taking on a big role, but he says he’s up for it for some years.
RIAZ GARDEE:  Yes, Ukhamba…how that started out is the employee BEE shares, which were then opened up to everybody. There’s therefore definitely some scope to look at that. However, it’s much smaller in terms of market cap and size than Sasol and MTN. The size of those transactions are smaller and there are less shareholders as well, so it may be a little bit more difficult to get hold of them compared to Zakhele and Vodacom.
ALEC HOGG: Riaz, from a broader perspective, you do have these options for black people now. Would you be fishing exclusively in the BEE share market if you were qualified, or would you have some there and some through the JSE?
RIAZ GARDEE:  Well, I think it comes back down to your timescale again, your horizon and what return you want. You’d probably want to mix it. That’s always the reason when you need money sooner than three or five years, and you need to look at the underlying. The same principle applies for these BEE shares. You need to look at ‘would you actually buy the underlying share’. That’s the main question. There’s no point in buying something because it’s discounted if you’re not happy with the underlying.
ALEC HOGG: My wife thinks differently. If it’s on sale, it must be…
RIAZ GARDEE: That’s a good analogy.
ALEC HOGG:Â You have the same story.
RIAZ GARDEE: That’s a good analogy.
ALEC HOGG: Haven’t we just…? Just to close off with…the process…if you first of all take the Equity Express platform – because that is where most of these shares are listed – how do you get to buy and sell shares there?
RIAZ GARDEE: Well, what you need to do is you need to register with them. Basically, it’s similar process to opening a bank account, so you need to give them FICA documents, you register, you get a password, and once you’re online, you deposit funds into that account and you trade electronically.
ALEC HOGG:Â And they have to make sure that you are black.
RIAZ GARDEE:Â Yes, so that will be in the process of FICA – the documents that they would request: ID number etcetera in their process to verify that.
ALEC HOGG: To make sure that there isn’t any fronting, which I guess would defeat the whole object/exercise.
RIAZ GARDEE:Â Exactly.
ALEC HOGG: What about other companies…do you hear anything in the wind that other companies would like to follow where the Vodacom’s, the MTN’s, and the Sasol’s have gone?
RIAZ GARDEE: I think many of them would, especially now that they’re seeing the large number of shareholder base they’re attracting, but I think it’s important to bear in mind that many of these transactions were done a few years ago and they have now come to fruition. The market factors have also determined who has done a transaction and when, which sector they’re in, and what the requirements for that sector are, so there are many other factors, which play into the role as well.