Beagle Shareholders’ Letter – March 2021

Beagle’s annual results for the year ended March 2021 have been finalised and signed, so it’s time to once again share it with you.

For those of you that are not aware of the existence of Beagle, it is an investment entity 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 staff members, and approved by the trustees of the Foundation, 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 and Counterpoint staff and close “business family” with an additional investment opportunity which is differentiated from our local and global unit trusts, our hedge fund or our listed investment companies RAC and Astoria.

(I have added all our new staff members to the distribution list – if you are not interested, just ignore this mail. If you are interested in following the travails of the good ship Beagle, or possibly even want to buy shares at some point, please respond with an email saying so. If you don’t respond, I’ll take you off the distribution list. And if you are aware of someone I might have left off, please let me know.)

Over the past 6 months, financial markets have been firm, with the South Africa market being no exception. Underlying business conditions have been surprisingly strong, and most share prices have recovered from their pandemic-selling- induced low levels, with many at all time high levels.

We mark Beagle’s assets to market at prevailing market prices as at our year end, being 31 March. This is exactly a year after the worst of the decline due to the pandemic happened.

As a result, the net asset value (“NAV”) per share of Beagle has increased substantially – by 42,4%, from R1 716 per share at the end of March 2020 to R2 443 per share at the end of March 2021. Over the same period the All Share Total Return Index increased by a whopping 58%! So, despite a strong performance from Beagle over the period, it still managed to underperform All Share Index. Despite this disappointing short term underperformance, this year commemorates Beagle becoming one of those rare investment beasts – a ten bagger!

This table sets out the value of our NAV per share since inception. Attached you will find a graph showing this in picture form.

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 the past 5 years.

Beagle’s biggest investment is in Goldrush, a major player in the alternative gaming (Bingo, LPM’s and Sports Betting) industry in South Africa. During the year, Goldrush continued to grow strongly, despite being closed for three months during lockdown. Goldrush rolled out three new Bingo halls (i.e. mini casinos) and further Limited Payout machines. Due to strong growth in EBITDA during the second half of the year, the valuation has increased by 40%, using the same 7 EV:EBITDA multiple to value the business as we did last year. Beagle increased its investment in Goldrush by R2,1mn – at a favorable price – during the course of the year.

The valuation of our investment in the Reef Group (an unlisted company in the manufacturing sector) increased by 27%. The bulk of this uplift is in the form of a dividend which was declared, but kept on loan account. The money was retained to provide liquidity for a possible transaction. The Reef group is firing on all cylinders, experienced a record year during 2020 and continues to grow strongly post year end.

The market price of Phutuma Nathi (PN) – the BEE shareholder of MultiChoice South Africa – increased by 57% to R133 per share. PN declared an unchanged dividend of R22,22 per share, representing a yield of 17% on our year end valuation. We will receive this dividend to the value of R1,1mn in September. Last year’s dividend was used to increase Beagle’s holding of PN.

The market price of YeboYethu (YY) – the BEE shareholder of Vodacom SA – increased by 160% from its depressed levels of March 2020. It paid Beagle a dividend of just over R400k, which was used to buy more YY shares at attractive prices.

The market price of MTN Zakhele (MTNZ) – the BEE shareholder of MTN South Africa – has increased by 46% from a year ago. These shares are highly volatile, as they effectively represent an option on the share price of MTN Holdings, the listed provider of cellular communications in Africa and the Middle East. Expect a lot more volatility in future. Beagle utilized the volatility to sell a few of these shares at high prices.

Beagle was forced to sell its interest Welkom Yizani (WY) – the BEE shareholder of Media 24 – as Media 24 bought out all the minorities, including the empowerment shareholders – last year. Although disappointed by having to sell, Beagle made a satisfactory return on the investment over its holding period.

TIP1 is listed on the ZAR-X exchange, and is essentially a listed open ended investment vehicle where management intends to acquire tranches of BEE shares in selected companies over time. This will be done in exchange for shares in TIP1, thereby providing liquidity for shareholders in these valuable, but illiquid, schemes. To date, TIP1 has only made one small investment, and the share price is only slightly higher than our original cost

Beagle made one new investment during the course of the year, buying R2,6mn of Unicorn Capital Partner shares. This is an unlisted holding company of a business called Ritchey Crane Hire, which was taken private by Calibre Capital, one of Beagles associated businesses. Beagle is the anchor BEE shareholder in Ritchey.

In the year to March 2021, dividends of R2,6mn were received. Beagle has also received an interest free loan of R1,2mn from Reef engineering, in terms of their CSI program. After adding to the existing investments, selling WY and making the new investment in Ritchey, Beagle ended the year with free cash resources of R1,9mn.

Included in the NAV is a deferred tax liability of R1,9mn. This represents the liability for capital gains tax.

Attached is a spreadsheet setting out Beagle’s investment portfolio. Please let me know if you have any questions.

The release of these results also provides us with our semi-annual liquidity window. If anyone needs to sell their shares, please let me know asap. And if there are any buyers – you know where to find me. This year, due to some resignations, we will have some shares to sell. So please do let me know if you are interested. Transactions will happen at the audited NAV per share as at 31 March 2021, as per the numbers in this mail. Beagle has enjoyed very good returns over the years, and the directors of Beagle are comfortable with the current investment portfolio. However, as you plan your personal financial affairs, do not extrapolate this 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.

Thank you for joining us on the voyage of the Beagle, and best wishes for the rest of the year!

Piet Viljoen