The good, the bad and the ugly of empowerment shares

2013-12-15 14:00

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Mandela once said: ‘Money won’t create success; the freedom to make it will.’ When it comes to investing, black South Africans have the additional choice of broad-based black economic empowerment share schemes. These include schemes such as Sasol Inzalo, Phuthuma Nathi, Thembeka Capital, Eyomhlaba, Hlumisa, MTN Zakhele, Ukhamba, and Welkom Yizani. Next February, we will be able to add Vodacom YeboYethu to the list. Craig Gradidge reports


It was certainly a good year for investors in Phuthuma Nathi, MTN Zakhele and Thembeka Capital. Phuthuma Nathi owns 20% of satellite-TV operator MultiChoice. The company declared a dividend that was more than 100% greater than the previous dividend and the share price responded by increasing from mid-R50 to more than R110 a share in a relatively short period.

Trade in Phuthuma Nathi has been robust, with daily trade often more than R1?million in value. The outlook for Phuthuma Nathi is positive as it still trades at a large discount to estimates of the share value. Industry heavyweight Coronation values the TV business of Naspers, MultiChoice International Holdings, at more than R240 a share.

This implies a per-share valuation of around R230 a share for Phuthuma Nathi, which trades at R90 a share today. That is a huge discount, which is understandable given there is no clear liquidity event for investors.

But this discount could narrow over time to a more palatable level. An unbundling of the TV assets from Naspers could be a catalyst for a sharp increase in the share price of Phuthuma Nathi, but this is unlikely at this stage.

It has also been a good year for Thembeka Capital, a diversified investment holding company invested in companies such as Capitec, Curro, MTN Zakhele, Sasol Inzalo, Pioneer Foods and a host of unlisted agri-investments. The share is very difficult to get hold of and it could take investors a long time to build up decent exposure to this stock. The company is valued at R112 after taxes and costs, but it trades at around R91 a share today.

This is a narrow discount and suggests that the stock is overvalued as shareholders are not applying a deep enough discount to reflect the lack of a clear liquidity event. It may also suggest that investors are not happy to let go of stock. Many of the underlying holdings have performed well since the last valuation, implying more upside to come.

MTN Zakhele has the dubious honour of falling into the good and the bad. On the good side, it has been a fantastic performer for investors, returning around 300% for those who managed to sell shares in the little trading that has happened thus far.

This is a spectacular return for the three years that investors have held these shares. There appears to be more upside to MTN?Zakhele, which has a net asset value of more than R104 a share and forward-looking valuations of between R120 and R146 a share.

Ukhamba Holdings makes the list despite having only been trading for less than a month. The exciting thing about Ukhamba is that it started out as a scheme for listed Imperial Holdings staff.

Management realised the need for investors to be able to realise some economic benefit during the empowerment period.

Ukhamba has a very long empowerment period, with almost 12?years still to go. By allowing shareholders to trade on an

over-the-counter platform (set up and administered by Equity Express), Ukhamba management has created another investment option for black investors.

Sasol BEE ordinary shares started off the year below R300 a share and currently trade at around R375 a share. Investors also received R19 a share in dividends. There is no funding structure,

so investors do not have the added risk of high debt levels to contend with. The share still trades at an attractive discount to Sasol ordinary shares (currently 26%) and an attractive dividend of more than 5% a year.

So, investors will make a good return even if Sasol ordinary shares deliver muted returns between now and the end of the empowerment period in September 2018.


Sasol Inzalo (Inzalo) falls in this category, largely due to the difficulty that investors and prospective investors experience when trying to trade.

A number of investment clubs that I work with have all struggled to get exposure to Inzalo. Problems include not receiving the correct forms, a disorganised call centre and an insistence on a primarily telephone-based customer service. Trade levels are fairly low and sellers can often wait for many weeks for a trade.

MTN Zakhele has experienced significant challenges on the trading front since opening to trade in November. Management names unprecedented volumes as the problem, but while trading levels have been high, they certainly have not been at a level that should cause the platform to shut down.

Trade has been suspended until mid-December at this stage. This may be an effort to dampen trade volumes. My only concern is that investors in need of selling are able to do so soon.

Welkom Yizani opened for trading this week and trade was relatively muted on day one. Valuations vary between R10 and R24 a share. Coronation values Media24 at close on R14 a share.

Trade on day one saw sellers getting between R10 and R20 a share, but even those that managed to sell at R20 a share have a return of around 10% a year over the seven years that the scheme has been in existence.

The outlook for Media24 is not terribly exciting, with print-media circulation figures largely in decline. It will be interesting to see how e-commerce platforms such as Spree perform in the coming years.


Schemes in this category include African Bank, Eyomhlaba and Hlumisa. Eyomhlaba has gone from a net asset value of R26 a share in January to R13.77 today, while Hlumisa has fallen from R18.04 to R9.28. So investors have experienced a drop in share price similar to those experienced by ordinary African Bank shareholders.

But it must be noted that both shares traded at big discounts to their net asset values in January, meaning that most investors have experienced a much lower decline in value if the current net asset value is compared with the price they paid in January.

These deals have only two more years to go before they end and convert to ordinary African Bank shares.

Buyers at the current price are picking up shares at a deep discount to net asset value (around 50%), which means that they could make a good return at the end of December 2015 when that discount disappears.

A welcome development over the past year has been the increased coverage in the media of broad-based black economic empowerment share schemes. This increase in news feed will help investors gain a better understanding of these schemes.

Hopefully, investors will also gain an improved understanding of the inherent risks and how to incorporate broad-based black economic empowerment share schemes in their overall investment planning. A highlight of next year is expected to be the opening of trade in Vodacom’s YeboYethu scheme.

»?Gradidge is an investment and retirement planning specialist at Gradidge-Mahura Investments

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