Beagle Shareholders’ Letter – September 2018

I am pleased to report that the NAV per share of Beagle has increased by 11.4% from R1 605 at the end of March to R1 788 at end September, i.e. over the first 6 months of this financial year. It is also up by 13.7% from the level of R1 572 a year ago.

This pleasing increase is despite the management of Beagle making two significant investment mistakes. Firstly, we reduced our shareholding in Phutuma Nathi, secondly we invested in the BEE scheme of MTN, called MTN Zakhele. More on these mistakes later, but for now, if management had not made these decisions, the NAV of Beagle would have been over R100 higher on a per share basis!

Just to remind you, Beagle is an investment entity, which has been set up specifically to act as an empowerment investor. Its main shareholder is the RECM Foundation which provides funding for educational activities in some of Cape Town’s poorest areas. As such, its beneficiaries are all black children. The trustees of the Foundation are also all independent of RECM, and are all black. Black shareholding of Beagle currently stands at just over 53%.

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 shares.
The value of our largest investment – an investment into the BEE structure of Goldrush (a major player in the alternative gaming industry in South Africa) – has grown by 10% since March. Goldrush continues to expand and still has a pleasing growth trajectory ahead of it.

Over the past 6 months, the valuation of the Calibre private equity partnership – which has as its only asset shares in the Reef Group, an unlisted manufacturer of electronic switching boxes – has declined by 4%. It did pay us a dividend of close to R250k, though.

Phutuma Nathi – the BEE shares of MultiChoice (the guys who are responsible for programming on DSTV) – has increased by 62%. They also paid us a paid us a dividend of R19.56 per share (pretax). The reason for the sharp increase in price is that Naspers (the ultimate controlling shareholder of MultiChoice) has decided to unbundle the company and list it separately. In addition, they are giving another 5% of MultiChoice SA to Phutuma Nathi shareholders for free. (Phutuma Nathi currently already owns 20%). The separate listing of MultiChoice should bring better price discovery to bear and increase liquidity. At current prices (even after the jump in the share price of Phutuma Nathi, MultiChoice SA is valued on a dividend yield of 14%, and a P/E ratio of less than 7. We think it could be worth double that in a transparent market. As mentioned, we made the mistake of reducing our holding in this business over the past 6 months, as we got carried away by the negative sentiment around Pay TV. Needless to say, Beagle management is suitably chastised, and will try not to make any more rash decisions in future!

Last year we invested into MTN Zakhele, which is MTN’s BEE shareholder. Unfortunately, MTN has been accused by the Nigerian regulatory authorities of tax related (and other) transgressions. In this regard, a fine of $8bn has been levied on them. MTN disputes this fine, and are negotiating with the relevant authorities. Needless to say, this news has had a negative effect on the share price of MTN. MTN Zakhele has been even more negatively affected, as debt against its MTN shares. With the benefit of hindsight, management of Beagle destroyed value by buying these shares. Having said that, the MTN Zakhele shares are not allowed to be traded at all for a period of 5 years, so even if we wanted to right now (which we do!) we would not have been able to buy more. 5 years is a long time, and we have no doubt MTN will recover from this setback over that period. In the meantime, we are actively looking to find any disenchanted shareholders, and mechanisms by which to purchase their shares.

The value of our shareholding in Yizani – the BEE shares in Media 24 – has grown by 10%.

Our cash balance has increased to R2.6mn, due to the generous dividend policy of Phutuma Nathi, Calibre PE repaying a portion of its loan (in lieu if a dividend) and our boneheaded sale of some Phutuma Nathi shares.
Included in the NAV is a tax liability, 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.

Historic returns

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

We have enjoyed very good returns so far (29% p.a.) despite management’s mistakes.

The following table compares our performance against that of the JSE ALL Share Index (Total Return) over different time periods:

However, 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 management of Beagle will continue to do their best to ensure a positive outcome, but this cannot be guaranteed. Our mistakes over the past 6 months are a case in point.

Possible fundraising

We are seeing quite a few investment opportunities. Given the current economic environment, coupled with poor sentiment, this is not surprising. Although we are very well positioned in terms of cash available to take advantage of these opportunities, we think that, in this environment more cash equals more opportunities.

As such we would like to raise another R2mn, or just over 1 000 shares. This will be done at the current NAV of R1 788 per share. Please bear in mind this number has not been audited, and is subject to change. If there are any changes, we do not expect them to be significant.

Given our current shareholding structure, and black shareholding requirements, these shares are available to black and white people. Preference will obviously be given to black people, in the event of oversubscription.

Please let me know asap if you are interested.

Piet Viljoen