Beagle Shareholders’ Letter – March 2018

I am pleased to report that the NAV per share of Beagle has increased by 14.2% from R1 406 per share at the end of March 2017 to R1 605 per share at the end of March 2018. Over the same period the All Share Index increased by 9.6%. Since inception, Beagle has compounded its NAV at 29% p.a., compared to the JSE All Share Index’s return of 12%.

Historic returns

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

The following table compares our performance against that of the JSE ALL Share Index (Total Return) over different time periods. As you can see we have consistently generated significant returns in excess of the All Share Index. So if anyone ever tells you active managers can’t outperform an index, think about this table:

As you plan your personal financial affairs, do not extrapolate our history into the future. Beagle is an investment company with a concentrated, illiquid portfolio. The directors of Beagle will continue to do their best to ensure a positive outcome, but this cannot be guaranteed.

Just to remind you, Beagle is an investment entity, which is managed by RECM, as appointed by the directors of Beagle. It has been set up specifically to act as an empowerment investor. Its main shareholder is the RECM Foundation which provides funding for education initiatives in some of Cape Town’s poorest townships. The beneficiaries are nominated annually by the staff of RECM, and are all predominantly black. The trustees of the Foundation are also all independent of RECM, and are all black. Black shareholding of Beagle currently stands at 53%.

As a spin off, Beagle also provides RECM’s staff and close “business family” with an investment opportunity which is differentiated from our unit trusts, our hedge fund or RAC, our listed investment company.

Over the past year, the value of our investment into the BEE structure of Goldrush, a major player in the alternative gaming industry in South Africa, has grown by 60%. It has now become our biggest investment, comprising 55% of our asset base. During the course of the year, we purchased additional shares to the value of R2,5mn.

The valuation of our investment in the Calibre private equity partnership – which owns shares in the Reef Group, as well as Victoria engineering (unlisted industrial companies in the steel sector) has increased by 10% over the year.

Phutuma Nathi 1 – the BEE shares of MultiChoice (the guys who are responsible for programming on DSTV) – has declined by 27% to R86 per share. It should be noted that they paid us a dividend of R19,25 per share, which softens the blow a bit. We added to our holding of this investment over the past year – before they declared and paid the dividend. PN is valued on a P/E of less than 4, and a dividend yield of 22%. The year has been a tough one for MultiChoice – it was embroiled in a scandal with the SABC and is losing subscribers to OTT (Over The Top, i.e. internet based) content providers such as Netflix. We do think the current valuation takes account of all the downside risks.

Our investment in MTN Zakhele has declined by 17%, as it effectively represents an option on the share price of MTN holdings, the listed provider of cellular communications. Over the past year, the share price of MTN has continued its decline, which started around 4 years ago. We think MTN is undervalued, leaving MTN Zakhele with geared upside potential. If we can identify additional Zakhele units to purchase we will try to do so.

The value of our shareholding in Yizani – the BEE shares in Media 24 – has grown by 11%. However, this is a very small investment for us.

We received in total of R1mn in dividends, and raised R1,5mn through the issue of 1 050 new shares. We used these cash flows to purchase additional shares in Phuma Nathi and Goldrush

Overall, our Net Asset Value increased from R21mn to R25.6mn, an increase of 22%. On a per share basis (the correct way to measure the manager’s performance) the increase was more muted at 14.2%, due to the increased number of shares in issue.

Included in the NAV is a tax liability of R1mn, which is our provision for capital gains tax. 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. Given very high tax rates in South Africa today, we do take care in structuring our investments to – legally – minimize our potential tax liability.

Please find attached a spreadsheet setting out our investment portfolio.

If anyone plans on selling their shares, please let me know asap. If there are any buyers, also let me know. There are no natural sellers that I know of this year, so there might not be any shares available or buyers.

Piet Viljoen