Stock spikes on R3bn Sassa contract

The Net1 UEPS share price reached a 12-month high this week, as it became evident its subsidiary, Cash Paymaster Services (CPS), would hold on to the valuable social grant distribution business for at least a year.

The share price, which moved to a high of R183 on Wednesday, hours after an MP referred to CPS as a “bunch of gangsters”, was also boosted by the prospect that a new contract with the South African Social Security Agency (Sassa) could generate an annual fee of more than R3bn for CPS.

The possibility that negotiations, which began on Wednesday, could see Sassa pay CPS as much as R25 per recipient per month, is bad news for taxpayers. But it is good news for Net1 shareholders, chief of whom are Allan Gray Limited and its associate, Orbis Investment Management.

Allan Gray and Orbis are the largest shareholders in Net1 by a substantial margin.

The former owns 8.97million Net1 shares, which were worth R1.64bn on Wednesday. Orbis owns an additional 9million Net1 shares, which were worth R1.65 bn.

Their stakes are equivalent to just more than 17% of Net1, giving them a combined 34%.

Both Orbis and Allan Gray are privately owned investment management companies founded by Allan Gray.

In 2016, Gray donated his

shares in the investment companies, worth several billion rand, to a charitable trust that is required to use the dividend income exclusively for philanthropic purposes.

On Wednesday, when asked to comment on the CPS contract, Orbis spokeswoman Eloise Cazalet said: “Unfortunately Orbis are unable to provide comment.”

Similarly Daniella Bergman at Allan Gray said: “Unfortunately, the team is not keen to comment at this stage.”

Allan Gray has been an early backer of Net1, which took up a secondary listing on the JSE in 2008. For most of this time, the share price performance failed to live up to early bullish expectations. In August 2015, it reached an all-time high of R275 shortly after being ranked in Fortune magazine’s list of 100 fastest-growing companies.

Net1 CEO Serge Belamant believes the share price has been held back by the almost constant adverse publicity that has surrounded the controversial CPS contract to distribute social grants.

That might be part of the reason, but the group’s disappointing figures — and its refusal to pay dividends — are more likely causes for the poor share price performance.

Part of that might be set to change. Certainly, there will be no let-up on the adverse publicity. And while there is little prospect for dividends, given the multibillion-rand splurge on Cell C, the group’s profits look to be on a firmer trajectory, thanks to its South African business.

It has written off most of the non-operational costs linked to the Sassa contract and its Easy Pay Everywhere service is making strong inroads into the market. In the six months to end-December 2016, Net1 reported an 18% hike in operating profit on a 13% increase in turnover from its South African operations.

The local operating margins, which increased to 25% from 24%, look to strengthen further, given the prospect of a much more generous fee from Sassa.