Sasol’s BEE shareholders benefit from buying in

2012-03-24 09:23

Last week we looked at how the higher than expected dividend issued by MTN positively affected shareholders in MTN Zakhele.

The latest Sasol results also have important implications for shareholders in the Sasol broad-based black economic empowerment share schemes, not least because those invested in Sasol Inzalo are now able to trade in these shares, something they were not able to do at the release of the previous set of Sasol results.

Sasol BEE share offers

The Sasol broad-based black economic empowerment public deal consisted of two schemes; the funded invitation (Sasol Inzalo) and the cash invitation (SOLBE1). The funded invitation was extremely sought after and ended up being more than 300% oversubscribed, while the cash invitation was oversubscribed by 13%.

The result was that investors in the funded offer received significantly fewer shares than they had applied for. I applied for more than 2 000 Inzalo shares, and only received 175 shares.

The cash offer (SOLBE1) was simply ordinary shares offered at a discounted price which means that shareholders receive the same dividend, and have equal voting rights as SOL shares. At the end of the empowerment period SOLBE1 shares become SOL shares in a ratio of 1:1.

The funded offer (Inzalo) saw investors pay an average of R22 per share for Sasol shares trading at more than R400 at the time.

The difference between the price paid and the price of the shares at the time was R366 per Sasol share and this was funded with debt. The dividends from Sasol over the empowerment period would be used to service this debt.

At the end of the empowerment period shares will be sold to settle the remaining debt, and the remaining shares distributed to Inzalo shareholders.

The success of this deal is driven by three factors; the cost of debt over the period, the amount of dividends paid by Sasol over the period, and the exit price of Sasol shares at the end of the empowerment period.

Sasol interim results
Sasol produced a good set of results for the six months ended December 31 2011, with operating profit up 70% to R20.5 billion and headline earnings a share up 81% to R23.50. The group declared an interim dividend of R5.70, up 84% on the previous comparable period.

These results were supported by the oil price being at an average of $111 a barrel and a weaker R/$ exchange rate in the latter part of 2011.

The company’s share price is significantly above the 52 week low level of R303 per share, trading around the R400 level for much of 2012.

A top rated analyst expects the dividend for the current financial year to be around R18.50 a share, up 42% on last year. However, this was before the introduction of dividends withholding tax and the increase in the rate to 15%. That would imply an expected dividend of around R17.30 a share.
What does this mean for Sasol’s BEE investors?

Cash offer

Those invested in SOLBE1 can look forward to a healthy dividend yield while they wait for the empowerment period to end in September 2018. SOLBE1 is currently trading around R270 a share which means that based on the projected dividends, shareholders will receive a dividend income of 6.41% after the dividend tax.

This is significantly higher than pre-tax interest rates that one can earn at a bank or in a money market fund.

In addition to this income, if the share price of SOL remains at current levels until September 2018, then SOLBE1 shareholders can expect capital growth of around 45% as the discount unwinds.

Funded offer (Inzalo)
The value of the Sasol shares held by Inzalo has been increasing since June 2009, from R4.3 billion to R5.7 billion at the end of June last year. However, the corresponding debt burden has also increased from R5.8 billion to R6.2 billion over the same period due to interest costs.

With the share price increasing from around R350 in June last year to the current R400 a share, the asset base could be worth around R6.5 billion at the moment.

The 84% increase in the interim dividend takes the total dividend earned over the past year to R15.60 a share, up from R10.80 the previous year.

The increased dividend together with the current low interest environment bodes well for Inzalo shareholders who will see interest costs remain stable, but revenue increasing significantly (by approximately 44.4%).

This should lead to a decreasing debt burden in Inzalo. As a result of the debt costs, Inzalo shares are actually at a negative value of R21.70 per share.

However, given the latest Sasol dividend, the share price will be close to positive which means Inzalo shareholders are already “in the money” and will benefit directly from any increase in the share price or further dividend.

While the current value is still significantly lower than the price paid by investors (average R22 a share), the turnaround in the financial position of Inzalo is positive.

It will be interesting to see if the board of Inzalo decides to pay a dividend now that it is able to do so for the first time.

I suspect that they may wish to take advantage of the improved financial position to service as much of the debt as possible. These results paint a positive picture for Sasol’s many BEE investors, but as always, risk is ever present when investing in shares.

The empowerment period runs until September 2018 which is more than six years away. This is a reasonable investment horizon for any equity investment and investors should consider holding onto their shares if they can. SOLBE1 shares look attractive from a yield perspective and from a valuation perspective.

» Gradidge is a co-founder of Gradidge-Mahura Investments, a new generation financial planning business based in Melrose Arch. He owns SOLBE1 and Inzalo shares

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