Artificially flavouring BEE stew?
Is there a huge downside risk for empowerment fund?
AT A TIME WHEN UNIT TRUSTS and shares are being smacked silly by prevailing market volatility, StratEquity’s Empowerment Investments (SEI) has only lost between 5% and 7% of its value since launching earlier this year. In May this year SEI shares were offered to the public at a net asset value of 103c/share. Last week on “Black Monday” – when the market came off around 5% – the units were trading at 96c/share.
That’s truly a remarkable achievement considering the JSE’s all-share index over the same period has dropped by around 25% since mid-year.
One might surmise that, as a fund comprising mainly JSE-listed investments, SEI boasts superior asset management and hedging skills.
Well that, in Finweek’s opinion, may be stretching matters a bit far. In fact, we’re amazed SEI retained so much of its value when 22% of its composite NAV is held in exchange-traded funds.
As pointed out in an earlier Finweek report (“More transparency, please,” 18 September) the investment vehicle’s other main constituents are cash (21% of NAV), unspecified interest-bearing loans (11%), an investment in marine transportation (6%) as well as smaller investments in Finbond and StratCorp (StratEquity’s listed parent).
But the bulk of its portfolio value lies in recently listed meat producer Best Cut Holdings, representing a chunky 33% of the portfolio. Now Best Cut is blessed with share illiquidity. That not only keeps an artificial bearing on the company’s share price but also stabilises SEI during this volatile period.
A key consideration for investors buying into the empowerment fund’s second tranche share offer is determining what Best Cut is really worth. The ruling price for Best Cut on the JSE was 75c/share on Wednesday last week. That’s presumably the mark-to-market value that StratEquity applies when valuing Best Cut.
But – and this is a big BUT – there are no bidders (ie, buyers) for Best Cut’s shares on the JSE. In fact, it would not be amiss to declare there’s no current market interest in Best Cut. That lack of trading has certainly helped Best Cut – which listed in January
– retain a value close to its pre-listing placement values of 80c/share. By comparison, the values of other new listings – even those that have performed strongly – have been hammered over the past six months.
At the ruling 75c/share Best Cut is worth nearly R90m – a huge premium on the group’s tangible NAV of 17,4/share stated as at end-June this year. With earnings of 2,99c/share for the year to end-June, the share is “trading” at an earnings multiple of more than 25 times – a heady rating by any standards.
How Best Cut has maintained its value while its fellow newcomers have swooned under tense JSE trading is quite baffling. We say that because since listing Best Cut has seen the resignation of its CEO (Nick Serfontein) and group operations MD and founder (Alexis Steenkamp) after the release of the group’s interim results – events that would usually spook sentiment.
It would be natural to view those resignations with some suspicion when considering that recently released results for the year to end-June showed Best Cut falling short of its pre-listing earnings forecast by around 70%.
As pointed out on our Fin24 website last week, it would appear Best Cut actually ran at a loss in the second half of the financial year. It seems cash flow was also staunched, with full-year cash flow reflected as only R6,8m compared to R9m at the interim stage.
The key question for participants in SEI’s vehicle is whether they’re buying in at a price that doesn’t realistically reflect the risks in the biggest component of the fund’s NAV. Of course, you can’t pre-judge what could transpire at Best Cut. But it may be worth highlighting that much of Best Cut’s “go forward” is based on expanding operations out of KwaZulu-Natal. The group has taken a tilt at the Gauteng market and now wants to find points of presence in the Eastern and Western Cape.
It would be reasonable to ask whether it’s an appropriate time to be expanding – what with input costs eating into margins and consumer spending being reined in?
Expansion efforts could cost Best Cut if sufficient cash flows aren’t generated to sustain aggressive efforts to broaden its operating base. Already the group has seen gearing ratcheted up, with borrowings increasing R28m during the year.
Finweek recommends investors make sure they can stomach the risks associated with Best Cut before pitching into StratEquity’s “resilient” empowerment investment vehicle.