Beagle Shareholders’ Letter – March 2017

Beagle is an investment entity which has been set up specifically to act as an empowered investor, as its main shareholder is the RECM Foundation. As a spin off, Beagle also provides the staff and other friends of RECM with an investment opportunity into a class of investments which are not available through our unit trusts, hedge fund or RAC.

I am pleased to report that the NAV per share of Beagle has increased by 9.5% from R1202.09 at the end of March 2016 to R1 316.07 at end March 2017, its latest financial year end.

Historic returns

This table sets out the value of our NAV per share since inception:

Overall, Beagle has compounded at 30.3% p.a. since inception, seven years ago. This compares to the All Share Index growth of 12.1% p.a. over the same period. Admittedly, our rate of growth has slowed down a bit over the past two years, as we have only achieved a compound annual growth rate of 11.7% over that period.

The main reason for this is that we invested – knowingly – in a business with poor economics last year (IPT, as you might recall). Instead of climbing out of this hole, we grabbed an extra shovel. It’s true – your directors actually thought merging one poor business with another one, and adding more capital into the mix was a good idea. The outcome, unsurprisingly was a write down, impacting our returns negatively.

Compounding this misstep is the fact that the economy has been quite tough, as reflected in poor returns from the JSE All Share Index of only 3.8% over the same period. Despite our shovel grabbing overexcitement, over the two year period, Beagle has still outperformed the index by 7.6% p.a.

Please find a spreadsheet setting out our investment portfolio as at year end attached.

As usual, the last year was patchy in terms of contributions to our returns….

• The valuation of our investment in Phutuma Nathi 1, the BEE partner of Multichoice, declined by 7% over the past 12 months. It once more paid a sizeable dividend during the year. At the current price, Phutuma Nathi is on a dividend yield of 15%. Subsequent to year end, we added to our holding.

• The value of our shareholding in Calibre Investments, the BEE partner of the Reef Group – an unlisted manufacturer of electronic switching boxes – has grown by 30%. During the course of the year, we added an additional R3.5mn into this investment.

• The value of our shareholding in Yizani – the BEE partner of Media 24 – declined by 30% over the period. This is a small investment however.

• The value of our investment in Goldrush grew by 30% over the year. Goldrush is one of the premier alternative gaming companies in South Africa and Africa.

• We sold our investment in IPT at a loss of R1.5mn. We have no further exposure to this investment.

• We added a new investment, shares in MTN Zakhele Futhi. This is the second empowerment transaction MTN has done. These shares essentially represent a geared position in MTN.

• We raised new capital to the amount of R6.1mn by issuing an additional 4918 shares. We used this injection inter alia, to repay debt, make an additional investment into Calibre Investments and make a new investment into MTN. The price of the shares were fixed at the NAV of Beagle at the time.

At year end, Beagle had almost R800 000 in cash on its balance sheet, and we are debt free, having repaid our debt to Calibre during the course of last year. Some of this cash was used after year end to increase our holding in Phutuma Nathi.

Included in the NAV is a tax liability, which is our provision for capital gains tax. This liability has (fortunately) increased to R2.5mn from last year’s R2.2mn. This is only payable when we sell an investment. We are very happy to pay capital gains tax, because it means our investment has gone up in value. While we own the assets, we don’t have to pay the tax, and have full use of this provision to invest, for as long as we own the shares on which it applies. As you might have deduced, this is in essence, an interest free loan from SARS, which is another valuable asset for long term investors such as Beagle.

There is a contingent consideration of almost R300 000 on the balance sheet. This is only payable if Goldrush gets the go-ahead to roll out its licenses in KZN. This contingent payable expired in April 2017, as the conditions have not been met.

We have enjoyed very good returns over the years, and the directors of Beagle are comfortable with our current investment portfolio. However, as you plan your personal financial affairs, do not extrapolate the history into the future. Beagle is an investment company with a highly concentrated, illiquid portfolio. The directors of Beagle will continue to do their best to ensure a positive outcome, but this cannot be guaranteed. Also, an investment in Beagle cannot easily be realized, so you should never invest with money you might need urgently at some point.

I would also appreciate it if you could keep this information confidential, as Beagle is an unlisted private company, and its affairs do not properly belong in the public domain. Also, RAC has not released its results yet, so the numbers on Goldrush are material non-public information wrt RAC. If you are in any doubt what that means, please speak to Guy. In short, you cannot transact, or cause anyone to transact in RAC shares based on this information.

As mentioned earlier this year, we provide an annual opportunity to buy or sell shares in Beagle. The R1316.07 NAV per share has not yet been audited, and is subject to change, but you can use this as the reference price for this year’s transactions. Were the NAV to change, I will let you know immediately. If you would like to buy or sell – please give me a call, or drop me a mail. If you are not yet an investor, this is your chance to get aboard.

If you have any questions – or investment ideas! – give me a call. The full audited financials of Beagle are available upon request.

Piet Viljoen