Beagle Shareholders’ Letter – September 2019

Beagle is an investment company with a concentrated, illiquid portfolio. Our short term returns have been hurt by mark to market movements – but there is good news on this front (for which you will have to wait a bit). First, let’s review what Beagle is, and what it is invested in.

Beagle 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 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.

RECM’s unit trust fund management business is in the process of merging with another asset manager. The combined business will be renamed Counterpoint Asset Management, the brand of our new partner. In addition to owning an equity stake in the new, combined business, RECM still has some other financial service businesses which it will continue to operate. One of these is the management of Beagle. So, it continues to be business as usual.

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, through rolling out new Bingo halls and Limited Payout machines. However, due to the Corona virus induced lockdowns, the business has been closed since the end of March. It has been operating at reduced capacity since stage 4 was announced. Management has taken exceptional steps to cut costs, in order to conserve resources and protect our assets, being our gaming licenses. Our view is that society will return to normal over the next year or two. Despite this, we have decided to reduce Goldrush’s valuation by a third, given the uncertainty around its immediate future. Goldrush now makes up 30% of our total assets.

The valuation of our investment in the Reef Group (an unlisted company in the manufacturing sector) increased by 56%. 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 if the lockdown continued indefinitely. Since we moved to stage 4, it’s plants are operating again. Our interest in the Reef Group – along with the associated loans – make up 19 % of our assets.

The price of Phutuma Nathi (PN) shares – the BEE shareholder of MultiChoice South Africa – declined by 31% to R84,50 per share. We increased our shareholding during the course of the year, buying during periods of weakness. PN recently declared a dividend of R22,22 per share, representing a yield of 26% on our year end valuation. We will receive this dividend to the value of R1,1mn in September. PN makes up 15% of our assets.

During the year, we also continued to add to our holdings of YeboYethu (YY), the BEE shareholder of Vodacom SA. It’s share price declined by 26% to R15 per share over the year. Our shareholding has increased from 21 000 shares in 2019 to 207 000 shares at year end. YY now makes up 11% of our assets.

Our investment in MTN Zakhele (MTNZ) has increased by a multiple of 6 times, from R1,50 to R9,20 per share. 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. MTNZ is still small in our lives, representing only 2% of assets.

The value of our shareholding in Welkom Yizani (WY) – the BEE shareholder of Media 24 – declined by 34% over the course of the year. We continue to accumulate shares in this tightly held and illiquid counter. WY makes up 1% of our assets at this stage.

We own 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, as they are like call options. There has been no change to their value, one year into the investment.

We made one new investment over the past 6 months – into a company called TIP1 (Transformational Investment Portfolio 1). TIP1 is listed on the ZAR-X stock exchange, and is essentially a listed open ended investment vehicle. Management of TIP1 intend 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 not concluded any transactions, so we continue to value the investment at cost.

In the year to March 2019, we received dividends of R6,4mn. Some of the cash flow was used to buy the PN, YY, WY and Tip1 shares, but we still ended the year with cash resources of R5,9mn.

Overall, our Net Asset Value reduced by 3% from R29mn to R28,1m. 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 decline was exactly the same.

Included in the NAV is a deferred tax asset of R0,6mn. This big swing from a previous deferred tax liability of R1,9mn arose from two sources. Firstly, our asset value declined by 3% over the year, reducing our CGT liability. Secondly, our investment into Delta EMD paid a liquidation dividend, close to the full value of our investment. Post the final dividend, which we hope to receive in a few months’ time, the company will be wound up and have no value. We have thus suffered a substantial capital loss, which creates a corresponding tax asset.

Please find attached a spreadsheet setting out our investment portfolio.

Now for the good news. Since our year end, the market has staged a recovery and some of our investments have shown strong gains. In particular, YY is up by 75%, and PN is up by more than 30%. Overall, our NAV has grown by almost R4mn, to R32,8mn – to R1 999 per share. Please bear in mind, that this number has not been audited, and is subject to change.

We currently have more cash than ideas, so if you have a good investment idea, please give me a call. Also, due to our strong liquidity position, it is unlikely that we will issue any new shares this year, unless an (BEE investment) elephant crosses our path.

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 buyer – you know where to find me. Thank you for joining us on the voyage of the Beagle, and best wishes for the rest of the year!

Historic returns

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

Since inception, we have enjoyed very good returns of 21.9% p.a.

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. Also, trade in Beagle shares will be quite sporadic, so liquidity will always be constrained.

Possible transaction

We have a few shares for sale. 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. Also, if you own shares and want to sell, please let me know as well.

Piet Viljoen