Beagle Shareholders’ Letter – March 2024

Dear shareholders, family, and friends

It’s my pleasure to share Beagle’s results for the year ending March 2024 with you.

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

Beagle is an investment holding company managed by RECM, as appointed by the directors of Beagle. It has been set up expressly to act as an empowerment investor.  Its main shareholder is the RECM Foundation, which funds early childhood education initiatives in some of South Africa’s poorest communities. The trustees of the Foundation manage its affairs independently of RECM. More information about the Foundation will be provided later in the letter.

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 the local and global unit trusts managed by our associate Merchant West Investments, the hedge fund managed by RECM, or our listed investment companies RAC and Astoria.

You can read more about Beagle at https://recm.co.za/beagle/

2024 annual results

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

At year-end, the net asset value (“NAV”) per share of Beagle increased by 41,3%, from R4 333 per share at the end of March 2023 to R6 121 per share. Over the same period, the FTSE/JSE All-Share Total Return Index increased by 1,5%.

Since its inception 13 years ago, Beagle has compounded its NAV per share at 27,4% p.a. compared to the 10,6% delivered by the JSE All Share Index (with dividends reinvested). Despite a poor run from 2016 to 2020 and again over the past two years, a passive investment in the JSE has managed to deliver returns well above inflation, growing investors’ wealth in real terms – despite widespread perceptions to the contrary.  Beagle has certain structural advantages, which have allowed it to do even better. Those advantages include:

1. It is a privately owned business, not subject to the ebb and flow of public opinion.
2. It has a solid base of committed long-term-orientated shareholders.
3. It has access to cheap, non-recourse leverage due to its BEE status.
4. It has permanent capital, allowing it to invest in illiquid situations when they are favourably priced.

You will notice that “the brilliance of Beagle’s management” is not listed as a structural advantage. In managing Beagle, our most important contribution has been to sit still and watch its investments compound their value due to underlying business growth magnified by leverage. Inactivity has been well rewarded.

The graph below shows how the NAV per share has progressed over the past few years:

(We might have to start using a log scale!)

The table below shows the progression of our NAV per share since 2011, compared to the JSE All Share Index. Note that the return for 2024 includes the R50 per share dividend paid during the year under review.

 Our portfolio

During the past financial year, Beagle made no new investments.

Our most significant investment, Reef Group, is now valued at R85,4mn, representing 64% of our investment portfolio. The Reef group controls Reef Holdings, which owns 100% of Reef Switchboards and Victoria Engineering.

The group enjoyed a substantial valuation uplift due to a record year of operating performance, magnified by significant leverage.

The Reef Group declared a dividend of R5mn to Beagle after year-end.

Goldrush is a major player in the alternative gaming (Bingo, LPM’s, Sports and Online betting) industry in South Africa and makes up 10% of Beagle’s NAV. Goldrush had a poor year. Increased levels of load-shedding in the country affected them negatively. Ultimately, the effects of load-shedding were mitigated but at the cost of giving up margin. The weak position of the SA consumer exacerbated matters. As a result, its valuation was reduced by c 3%.

Despite these setbacks, Goldrush grew its dividend by 21%, reflecting its strong cash-generating ability in a constrained business environment. Adding back the dividend results in a flat return for the year. When and if load-shedding reduces, interest rates decline, 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 NAV of Beaprop (which holds our investment in Spear REIT) increased by 54%. Spears’ share price was up by 10%, and the debt outstanding against these shares was reduced by utilising the dividend payments from Spear. Spear had a middling year, with property valuations constrained by high interest rates and the weak economic environment. Management continues to both manage its properties and allocate capital well. Beaprop now makes up 10% of Beagles’ NAV. The value reflecting for Beaprop of R8,7mn is the equity value in the company; the company owns 3 740 260 shares of Spear REIT to the value of R30,7mn at year-end. A non-recourse loan of R22mn partially funds this.

The market price of Phutuma Nathi (PN) – the BEE shareholder of MultiChoice South Africa – declined by 30%.  The main reason for this was the market’s disappointment about the reduced dividend paid for the 2023 financial year.  PN declared a dividend of R20.37 per share, down from R22.22 a year ago. This represents a yield of 20.8% on the year-end valuation. The good news is that the dividend for 2024 is unchanged despite the weak economic environment. Multichoice South Africa continues to operate well despite the headwinds faced by the pay-tv industry.

We added to our holding of PN during the year, taking advantage of the low share price.

The market price of YeboYethu (YY) – the BEE shareholder of Vodacom – declined by 28% to R24,50 per share, also reflecting the challenging economic environment. It now represents 4% of NAV.

YY declared an increased dividend of R1,88 per share against R1,61 in 2023. This represents a yield of 9% against the current share price of R20 per share.

UCP – owner of Ritchey Crane Hire – had an even better year than 2023, growing by 29%, and now represents 4% of NAV

UCP also declared a dividend of R1mn to Beagle.

The market price of SOLBE1 – an empowerment structure related to Sasol, declined by 25% over the year. Despite a weak rand, Sasol cut its dividend by 50% to R12 per share for the year, reflecting operational difficulties. We added a small number of shares to our existing position. SOLBE1 represents 2% of NAV.

The market price of MTN Zakhele (MTNZ) – the BEE shareholder of MTN South Africa – declined by 25%. This is a volatile asset, as it is an option on the value of MTN. As such, it also does not pay dividends. The instrument matures in November this year, and the success – or lack thereof will depend on the share price of MTN at that point. If it proves to have been a failure, it would have been the second successive BBE structure that failed to create value for black MTN shareholders. The ramifications will be interesting.

Cashflow and balance sheet

In the year to March 2023, Beagle received dividends of just over R9mn.  Our operating expenses were R1,3mn during the year, and the interest cost for the year was R250,000. We repaid an R4mn loan from Merchant West in full at the end of September last year. Beagle also has an interest-free loan of R1,5mn from Reef wrt their CSI program. As a result, there will be no interest costs in future. We paid a dividend of R50 per share or almost R1mn. Beagle ended the year with over R5mn cash on the balance sheet.

The NAV includes a deduction for the deferred tax liability of R13,5mn. This represents the capital gains tax Beagle would have to pay if it sold all its investments today.

Attached is a spreadsheet setting out Beagle’s investment portfolio. On Wednesday, 10 July, at 14h00, I will host a discussion of the results. Anyone can attend in person at the RECM offices or online via Teams. Please let Yolanda Bowers (Yolanda.bowers@recm.co.za) at RECM know if you want to attend online or in person. Bree Street – where our offices are – is famous for its good coffee and croissants. If you choose to participate in person, we will have some available.  If you attend online, Yolanda will send you a meeting link. No coffee or croissants, though.

Dividend Declaration

Beagle has adopted a dividend policy to pay out up to half of the dividends received after deducting the business’s costs and interest payments.  This year that amounts to a dividend of R100 per share, double last year’s payout of R50.  This means the Foundation will have almost R400,000 more to spend this year than last. Our aim in managing Beagle is to grow this dividend steadily over time so the Foundation can fulfil its mission sustainably.

South Africa has a brighter future if its youth are well educated, and that starts with its youngest citizens. The foundation welcomes partners, and we invite you to join us in our strategy of supporting initiatives that increase the capacity of existing organisations to deliver early childhood development programs, which in turn positively impact the greater education sector.

We appreciate the support of the RECM family of companies and the support of family, friends, and the greater community. Join us in making a difference in the lives of not just the children who receive care but also those of the educators and caregivers who work tirelessly to deliver it.

You can learn more about the Foundation at https://recm.co.za/recm-foundation/.

Some administration

Releasing these results also provides shareholders with the regular semi-annual liquidity window.  Please let me know if anyone wants to sell any of their shares. And if there are any buyers – you also 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. We will pay the dividend on 1 August and use the marked-to-market NAV post this payment for transactional purposes.

Beagle has enjoyed good returns over the years, and the directors of Beagle are comfortable with the current investment portfolio. However, do not extrapolate this history into the future as you plan your financial affairs. 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 realised, 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!