Beagle Shareholders’ Letter – March 2023

Dear shareholders, family and friends

It’s my pleasure to share Beagle’s results for the year ended March 2023 with you.

I have taken the liberty of adding some new staff members and more friends to the distribution list. If you are not interested in receiving information about Beagle in the future, please let me know. On the other hand, if you know someone that would be interested, please pass along their details – I’d be happy to add them to the list.

Beagle is an investment holding company 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 trustees of the Foundation manage its affairs, are independent of RECM and are all black.

As a spin-off, Beagle also provides the staff of RECM, the staff of its “business family”, as well as friends and family with an additional investment opportunity that is differentiated from our local and global unit trusts managed by our associate Merchant West Investments, our hedge fund managed by RECM, or our listed investment companies RAC and Astoria.

You can read more about Beagle here.

2023 annual results

To calculate the net asset value, we mark Beagle’s listed assets to market at prevailing market prices as at our year-end, being 31 March. The unlisted assets are valued internally, on a consistently conservative basis, twice a year.

At year-end, the net asset value (“NAV”) per share of Beagle increased by 21,3%, from R3 572 per share at the end of March 2022 to R4 333 per share. Over the same period, the FTSE/JSE All-Share Total Return Index increased by 4,9%.

Since its inception, Beagle has compounded its NAV per share at 26,4% p.a. compared to the 11,3% delivered by the JSE All Share Index (with dividends reinvested). Despite a poor run from 2015 to 2020, a passive investment in the JSE has managed to deliver returns above inflation, growing investors’ wealth in real terms. Beagle has certain structural advantages, which have allowed it to do even better. Those advantages include:

• It is a privately owned business, not subject to the ebbs and flows of public opinion.
• It has a solid base of long-term orientated shareholders.
• It has access to cheap, non-recourse leverage due to its BEE status.
• It has permanent capital allowing it to invest in illiquid situations, at times when they are favourably priced.

You might notice that “the brilliance of Beagle’s management” is not listed as one! In managing Beagle, our most important job is to sit still and watch its investments compound their value due to underlying business growth magnified by leverage. Inactivity is well rewarded, and we love our job.

Beagle now controls assets of almost R120mn.

The table below sets out the progression of our NAV per share since 2011, compared to the JSE All Share Index.

Our portfolio

During the past financial year, Beagle made one new investment in a structure – called Beaprop – that owns 3,7mn shares in Spear REIT, which in turn owns commercial properties situated exclusively in the Western Cape. The full transaction value was over R27mn, of which Beagle paid R6,9mn and the remainder was lent to it on a non-recourse basis. The annual (growing) distribution paid by Spear more than covers the interest payable on the structure. To fund this investment, Beagle raised capital via the issue of 1 996 new shares at a price of R3 585 per share. In this process, we welcomed a few new shareholders on board. We have said this before, but it bears repeating – we are grateful for the quick response and the support from many of our existing shareholders.

Spear REIT has had a good year, growing its NAV per share by 1,5% and its distribution per share by 11,3%. Most REITS have struggled to grow over the past few years. Spear is one of the few exceptions, due to a combination of an energetic and ethical management team, and a favourable geographic exposure. At Beagle, we look forward to a long and fruitful relationship with Spear REIT.

Our biggest investment, Reef Group now stands at R45,2mn, representing 47% of our investment portfolio. Beagle has a 4% direct interest in the Reef group. The Reef group owns Reef Switchboards, Victoria engineering and UCP holdings. Beagle also has stakes in all three of these companies.

The group enjoyed a strong valuation uplift, due to the nature of the investment being highly leveraged. Reef’s good year was driven mainly by another outstanding performance at Reef Switchboards, while Victoria Engineering struggled with the low level of general economic activity. UCP – owner of Ritchey Crane Hire – had a better year than last, growing by over 15%. Our investment in Reef produced solid dividends.

Goldrush – a major player in the alternative gaming (Bingo, LPM’s, and Sports Betting) industry in South Africa had a middling year. After a good start, the increased levels of blackouts in the country affected them negatively. We did manage to buy a few more shares at advantageous prices during the year, and the valuation increased by 6% on a per-share basis. Despite these travails, Goldrush grew it’s dividend substantially. When and if blackouts reduce and economic activity increases, Goldrush is well placed to capitalise on the growth projects that have been put in place over the past few years.

The market price of YeboYethu (YY) – the BEE shareholder of Vodacom – declined by 24%. We added a small number of shares to our holding during the course of the year.

The market price of Phutuma Nathi (PN) – the BEE shareholder of MultiChoice South Africa – declined by 5%. For 2022, PN declared an unchanged dividend of R22,22 per share, representing a yield of 16% on our year-end valuation. The economic environment in South Africa is also affecting MultiChoice negatively, forcing PN to cut its dividend by 10% in its latest full year results for 2023.

The market price of SOLBE1 – an empowerment structure related to Sasol – increased marginally by 3%. Sasol resumed paying dividends last year, after a long period of financial restructuring. We added a small amount of shares to our existing position.

The market price of MTN Zakhele Futhi (MTNZ) – the BEE shareholder of MTN South Africa – declined sharply by 40%. This is a volatile asset, as it is an option on the value of MTN. As such, it also does not pay dividends.

The “other” line includes our investment in TIPone, which is listed on the Cape Town Stock Exchange and is essentially an open-ended BEE investment vehicle where management intends to acquire tranches of BEE shares in selected companies over time. This is not a material investment for Beagle. Its share price declined by 40% over the year.

Cashflow and balance sheet

In the year to March 2023, Beagle received dividends of just over R5mn. Beagle also has an interest-free loan of R1,4mn from Reef, in terms of their CSI program. Beagle repaid R1,2mn of its original R5mn loan from Merchant West and raised R7mn in new equity from shareholders. After adding to some of our existing investments and making the new investment in Spear REIT, Beagle ended the year with cash of R5,2mn.

Included in the NAV is a deduction for the deferred tax liability of R6,3mn. This represents the capital gains tax which Beagle would have to pay if it sold all its investments today.

Dividend Declaration

Beagle is now in a position where it receives a steady stream of dividends from its investments. Under normal circumstances, Beagle would retain and reinvest these dividends, as investment opportunities in the BEE space remain compelling. However, its biggest Black shareholder, the RECM Foundation, is building a program in Early Childhood Development. A regular dividend stream, which supplements its lumpy stream of donations, makes all the difference in the world to make the program sustainable and make a permanent and lasting impact of the lives of the youngsters involved.

Going forward Beagle will therefore adopt a dividend policy to pay out up to half of the dividends it received, after deducting the costs of running the business and interest payments. This year, that amounts to a dividend of R50 per share. This means the Foundation will have almost R200 000 more to spend this year than it did last year. Our aim will be to grow this dividend steadily over time, so the Foundation can fulfil its mission sustainably.

If you can help in any way to source donations for the good work the Foundation is doing, it would be greatly appreciated. AND you will make a real difference to the lives of many deserving youngsters in a very efficient manner. You can learn more about the Foundation here.

Some administration

The release of these results also provides us with our regular semi-annual liquidity window. If anyone wants to sell any of their shares, please let me know. And if there are any buyers – you know where to find me. Unfortunately, we cannot guarantee that you will be able to buy or sell any shares – that depends on the willingness of other shareholders to transact. Transactions have traditionally happened at the audited NAV per share, but this year we will first pay out the dividend on 1 August and use the NAV post this payment for transactional purposes.

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, leveraged 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