Shaun Harris
taking Stock
Since the market crash last October our black chips have looked more like black blips in danger of fading right off the investment radar. Personal intrigue at board level has also not helped perceptions of black economic empowerment companies, which are presently probably as negative as they have ever been since the first wave of empowerment took off after the elections in 1994.
Now there are a couple of fund managers out there who will take me to task for concentrating too much on the shorter-term performance of these shares. Economic empowerment, they quite correctly point out, is a much broader issue than simply share-price performance.
And it’s a long process – part of the reason for the black chips’ fall from grace is that earlier empowerment deals were constructed too quickly, using some unusual financial engineering to try and short-cut the process.
The crack in the stock market exposed lots of the structural weaknesses of these deals, like the special-purpose vehicles often used to fund the companies and the injudicious use of low-voting N shares and pyramids.
But even if part of the motivation for investing in black chips is a sense of social responsibility, you still want a decent return on your money. Which is why some of the black chips are looking very interesting at the moment. Share prices, it seems, have been beaten down too low, and these counters are offering exceptional value in some cases.
Remember the performance of these shares through 1997 and the first half of 1998? They were impressive, even if in some cases for the wrong reasons, like established white-owned business trying to cash in on state contracts or the preferred status of empowerment companies opening them up to strong deal flow.
The early stages of the second phase of empowerment now seem under way, prompted in part by more critical scrutiny of the financing of these companies and an attempt to redefine empowerment, probably captured most clearly by New Africa Investments Limited (Nail) chair Dikgang Moseneke. He says the focus should shift from black shareholder control of the holding company to control of the operations, creating value and spreading empowerment at the rock face.
If we accept that empowerment is here to stay and that the shake-up of these companies currently under way should result in more sustainable operations, then a lot of the shares look very cheap.
A comprehensive report by Legae Securities, the independent stockbroker that specialises in tracking black economic empowerment companies, sees value in many of the shares. It defines a black- controlled company as holding 45% of the equity and voting control, and there are currently 25 such companies listed on the Johannesburg Stock Exchange with a combined market capitalisation of about R47-billion.
Just to give an indication of what looks good in this class of shares it’s worth listing the companies that Legae gives an outright buy recommendation – African Harvest, Brimstone, Hosken, Kunene Technology, Molope, Nail, Real Africa Holdings and Thebe Financial Services. Lots of other black chip shares hold promise as well.
The most affordable and hassle-free way to invest in these shares is through the two empowerment unit trust funds available at the moment, Brait Phambili and the Sanlam Empowerment Equity fund.
Over the past year, roughly coinciding with the market crash, returns have been poor – a negative 23,9% from Brait and negative 4% from Sanlam. More recent results for the past three months continue the trend – a negative 21,8% and 6,6% from Brait and Sanlam, respectively.
That reflects the serious downrating of these shares over the period, partly for some of the reasons mentioned above and also because the black chips largely overlap with the financial services, information technology and media sectors, all of which have also been under pressure. So many of these companies have been hit by a double whammy.
What’s the outlook now? Neil Horne, who runs Brait Phambili, believes that the second wave of empowerment, with more emphasis on control of underlying operations and focus on procurement and outsourcing to smaller and medium-sized black-owned business, holds definite promise over the medium term.
“What we are saying to our clients is that there is a move away from the shareholding definition of empowerment to one that makes more economic sense. This has been recognised by [the] government too, which in terms of its procurement policies is placing a lot more focus on operations rather than control.”
Horne is restructuring his fund accordingly, also paying a lot of attention to those companies that have a large business exposure to black consumers.
Godfrey Albertyn of Real Africa Asset Management (they run the portfolio for the Sanlam fund) says following the dramatic underperformance of the empowerment shares they are now looking exceptionally cheap. “Black economic empowerment is a reality in South Africa, and over the medium term these shares, as a group, should perform better than average. That’s the reason why we started the fund.”
He is particularly upbeat on those companies – and they are probably the smaller players right now – that will gradually spread the benefits of shareholding and enablement to the black community, saying they will be the long- term winners.
Mike Ray, head of research at Legae, also sees the second phase of economic transformation as being slower but more substantial. He writes: “The consolidation phase currently under way is likely to enable the emergence of a rationalised, focused and more permanent group of black economic empowerment entities . looking forward at the company level, we anticipate a slower but more meaningful transformation process whereby direct involvement in the operational process becomes a key driver.”
Looking back, some of the excesses shown by directors of empowerment companies, and even the outright failures, have probably been a good thing. A lot has come out in the wash and there is now a clearer, more realistic view of what empowerment companies are and what they should achieve.
Commercially these companies will still benefit from government and parastatal business, and in many instances will be preferred by the large corporations and international groups. But generally they have lost their special status and will be judged by normal market criteria, ultimately the return on equity they provide. Most important, though, is that these shares are looking cheap at the moment relative to the potential they offer.