Beagle Shareholders’ Letter – March 2019

I know you have been checking your mail every day, to see when the results for the year ending March 2019 would be released. I normally try to get them out by end of June latest, so I understand your frustration, and apologise for the delay.

I am pleased to report that the NAV per share of Beagle has increased by 13.3% from R1 605 per share at the end of March 2018 to R1 818 per share at the end of March 2019. Over the same period the All Share Index increased by 5%. Since inception, Beagle has compounded its NAV at 27.3% p.a., compared to the JSE All Share Index’s return of 11.5%.

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 returns significantly in excess of the All Share Index.

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 communities. 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 16%. Goldrush continues to grow strongly, both organically and via acquisition.

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 2,4% over the year. We also received a dividend of just over R500k, representing a yield of c 5%

The price of Phutuma Nathi 1 shares – the BEE shares of MultiChoice South Africa – has increased by 44% to R124 per share. It should be noted that they paid us a dividend of R732k per share, representing a yield of over 15%. We foolishly sold some of our shares earlier in the year. Recently, the Multichoice Group (the holding company of Multichoice SA) listed on the JSE, and offered PH shareholders an additional 5% holding for no extra cost. This was one of the main causes of the uplift in the PN share price over the past year. In our opinion, PN remains undervalued, despite competition form the cord cutters like Netflix. At year end, PN declared a dividend of R22,22 per share, representing a yield of 18%. We will receive this dividend to the value of R994k in September.

Our investment in MTN Zakhele has declined by 90%, as it effectively represents an option on the share price of MTN holdings, the listed provider of cellular communications in Africa and the Middle East. Over the year under review, the share price of MTN has declined by 25% to R89 per share. We think MTN is undervalued, leaving MTN Zakhele with geared upside potential. If we can identify additional Zakhele units to purchase at current levels we will try to do so. Since year end, the MTN share price has shown some promising signs of life, increasing to R108 per share.

During the year under review, we added a new investment to our portfolio, YeboYethu holdings, the BEE partner of in Vodacom SA, which is listed on the JSE. We think it is trading at around a third of its intrinsic value. It is highly illiquid, as only black shareholders are allowed to transact in it. By year end we had biught 21 250 shares, and we are still trying to accumulate more, as the share price continues to decline.

The value of our shareholding in Yizani – the BEE shares in Media 24 – has not really shown any growth. However, this is a very small investment for us.

For a nominal amount, we also invested in preference shares issued by two business owned by one of RAC’s partners, Unicorn Investments. The economics are only positive for Beagle if these businesses do very well over the next 10 years. On the other hand, there is no downside for us, so they are like call options. Let’s hope that Jacques and his team at Unicorn pull out all the stops!

In the year to March 2019, we received dividends of R1.2mn in total, and as mentioned, sold some PN shares. We used some of these cash flows to buy the YeboYethu shares, but still ended the year with cash of R1,7mn.

Overall, our Net Asset Value increased from R25.6mn to R29mn, an increase of 13%. We did not issue any new shares this year, so on a per share basis (the correct way to measure the company’s performance) the increase was exactly the same.

Included in the NAV is a tax liability of R1.6mn, 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 the 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. If you are a seller, this is basically your once-a-year opportunity to transact. At this point we are in the fortunate position that there are many more buyers than sellers.

Given our cash surplus, it is unlikely we will issue any new shares this year, unless an (investment) elephant crosses our path. If so, you will be the first to know. Let’s hold thumbs!

Piet Viljoen