Phuthuma sets the investment trend

2014-09-07 15:00

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Phuthuma Nathi is an example of how black investors can benefit from investing in quality businesses.

This week, MultiChoice announced a special dividend that will see the debt obligations in its broad-based black economic empowerment schemes settled two years ahead of schedule, allowing investors to enjoy the full benefits of future capital and dividend growth.

Mandla Langa, chair of both Phuthuma Nathi Investments (PN) and Phuthuma Nathi Investments 2 (PN2), said investors who bought into the schemes when they were launched in 2006 and 2007 respectively, would have seen capital growth of more than 1?300% on their original R10 investment after Phuthuma Nathi shares closed at R142.50 a share for PN, and R146.56 a share for PN2 on August 29.

Shareholders have also received dividends each year, which have grown more than four times. The total dividends received amount to R14.40 a share for PN and R16.65 for PN2, which means investors received more than their initial investment in dividends alone.

Craig Gradidge of Gradidge-Mahura Investments says the success of schemes is a result of strong growth in MultiChoice, which has benefited from strong revenues from its DStv business. The failure of TopTV to make any inroads into the satellite television’s customer base demonstrates the virtual monopoly DStv has in the pay-to-view market.

“DStv is a cash generative, debit order business and highly resilient,” says Gradidge, who adds that for many customers, DStv is a non-negotiable and cash-strapped consumers would rather cancel their life policies than their DStv contract.

Should you cash in?

It may be tempting to sell out of your investment and take the cash; however the long-term prospects for MultiChoice remain positive and shareholders can look forward to further growth and also benefit from income generated from dividends.

Gradidge says the settlement of debt with the latest dividends has further reduced the risk of this investment because there are no longer any debt obligations. The settlement of the debt also means that investors will benefit from future dividend flow that was previously used to settle the debt.

Over the past few years, MultiChoice has issued special dividends over and above the ordinary dividends, which has allowed the empowerment schemes to settle their debt obligations.

This may not continue if Naspers, which owns 80% of MultiChoice, decides to use future cash flow to reinvest in the growth of the MultiChoice business rather than pay out to shareholders.

However, even without special dividends, shareholders who bought into the schemes at R10 a share are now effectively receiving an ordinary dividend income of 16%. Apart from further potential capital growth, this is an extremely attractive, tax-efficient income stream, considering that interest earned on bank deposits is only about 5%.

Should you buy?

The empowerment scheme still provides investors with the opportunity to buy into a quality business at a discount.?In December 2011, Phuthuma Nathi was open to public trade, and qualifying black investors were able to buy shares through the over-the-counter platform operated by Equity Express. Both schemes trade at a discount to the underlying MultiChoice business, which means a new investor would effectively be buying a business worth more than R250 a share for just R150 a share. The share schemes are expected to continue to trade at a discount due to the fact that trading remains restricted, and there is no date to unwind the share schemes.

Gradidge says, however, that one could see this discount narrowing due to the settling of the debt, which has lowered the risk of the empowerment scheme as an investment vehicle. A narrowing of the discount would mean an increase in the share price of both PN and PN2. In addition, there are a number of institutional shareholders, such as Brimstone and Anchor Capital’s BEE investment company (Ngonyama Capital), which have been buying shares in Phuthuma Nathi.

If MultiChoice continues to pay special dividends at current levels, new investors would receive a dividend yield of about 6.5%, which is still attractive given the current interest rates.

Dividend announcement

Phuthuma Nathi has been one of the most successful broad-based black economic empowerment investments to date and Craig Gradidge of Gradidge-Mahura Investments says that Phuthuma Nathi had all the ingredients for success from the beginning:

» A highly cash generative business with a solid market position

» ?The empowerment company (MultiChoice) was unlisted, which reduced the amount of noise in the market in terms of the value of the investment

»?It had a simple funding structure with attractive funding costs and on flexible terms. Debt funding came in at 75% of prime, and there were no fixed terms for the payment of interest. This helped PN weather the financial crisis quite well

»?Dividend growth from the underlying MultiChoice business grew strongly over the period, resulting in debt being settled earlier than expected

» The long initial lock-in period (5 years) meant that investors were unable to trade during the financial crisis

Ingredients for success

Phuthuma Nathi shareholders will receive a dividend of 165.93 cents per ordinary share, plus a special dividend of 586.40 cents per ordinary share. This is a total of 752.33 cents in dividends per ordinary share – up 182% over last year’s 266.66 cents.

Phuthuma Nathi 2 shareholders will receive a dividend of 165.93 cents per ordinary share plus a special dividend of 801.28 cents per ordinary share. The total is 967.21 cents per ordinary share – an increase of 263% from last year’s 266.66 cents. PN2 shareholders receive a higher special dividend as funding obligations for this scheme were lower than PN’s.

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