For a time, from 2000 until early last year, the corporate black empowerment scene was one of soul-searching and decline. Black investment bankers were more likely to be at ANC workshops and conferences (waiting desperately to get a sense of the policy direction on empowerment) than in boardrooms making deals.
Since the second quarter of last year, though, the mood has changed and people are more upbeat about black economic empowerment (BEE) . "It was a good year, much better than previous years," says Aloe Capital CE Atlee Masuku.
Much of that is due to developments in the mining sector, and in particular the effect of the mining charter, which has shown that government can get serious about transformation when it wants to. The result is that business is taking the initiative on empowerment, to prevent government from setting the agenda.
"If there's a criticism," says Masuku, "it's that BEE is too focused on mining."
Two of the best performers in the black chip index are mining companies.
The story of the year is the listing of African Rainbow Minerals' (ARM) gold subsidiary, ARMgold. In a year of crashing equity markets, the listing was a resounding success and immediately made ARMgold the third-biggest empowerment company by market capitalisation. This mitigated a drop in the value of black chips on the JSE (the result of delistings and some poor performances).
The share has outperformed most gold stocks and lost less value (32%) than its peers.
With a healthy prelisting balance sheet of just under R100m, strong revenue growth and good cash flow, ARMgold needed to raise capital only for acquisitive expansion. Its primary mines' reserves were low. However, ARMgold executive chairman Patrice Motsepe did something of a U-turn, merging with Harmony Gold instead.
With more than R2bn on the balance sheet and the mining charter on its side, some people felt ARMgold could have become as big as or bigger than Harmony. Some analysts saw the prospect of ARMgold acquiring a group like Harmony a few years down the line. But there's no guarantee that, even had ARMgold acquired attractive assets, its scrip would have become more valuable than Harmony's, especially when considering the p:e ratios of the two groups.
For more sober analysts , the merger was the most logical step. It pre-empts probable future rationalisation and positions the group to be in the lead in the new mining order under the Mineral & Petroleum Resources Development Act.
Harmony gains empowerment credentials; ARMgold gains critical mass and deals with the reserves of its Gauteng mines. The move also allows the new group to become more competitive and globally attractive at a critical moment.
The mining industry, already under pressure from the stronger rand, will have its margins hit when it has to pay royalties under new legislation. Consolidating now allows for room for international expansion. It also means a new and significantly large entrant to the BEE index. As Motsepe points out, the merged group is an empowered company.
The other major black mining company, Mvelaphanda Resources (Mvela), had a more challenging year. Sales fell to R1,4bn for the year to September 2002. As a result, return on equity dropped from an extraordinary 421% the previous year to a still attractive 37%. More importantly, the company's share still managed to outperform the sector . Mvelaphanda paid a special dividend of R80m last year for the benefit of its empowerment shareholders.
The third black mining chip on the JSE, Matodzi Resources, also saw a remarkable performance in its share price, despite declining turnover and negative earnings. The company is a little-known penny stock, run by Sello Rasethaba, and its only tangible asset is a marginal diamond mine in Lesotho. It also has a 12% stake in JCI. Again, as a technical play on share price (the empowerment deals expected to flow out of the mining charter are a big driver of share price) you would have done well out of Matodzi. The share rose by more than 600% between May 2002 and January 2003. At the time of writing it was trading at 60c, still four times higher than its year low of 15c. Matodzi, which was formerly New Mining Co, has shown three consecutive years of losses.
Even outside the mining industry, last year was something of a bull market for black chips. Well over two-thirds of the black or black-empowered companies gained in share price over the year. The average gain was 36%. The overall value of black chips as a percentage of the JSE rose only 2%, though, because MTN Group, which accounts for just less than 50% of the overall market value of black chips, saw a small decline in share price.
Yet MTN was the best-performing black value stock, excluding one or two penny stocks and the occasional dead-cat bounce. During the year, the group announced excellent results from its Nigerian operations. The growth of the Nigerian market, far beyond original projections, meant that MTN met its target of getting 35% of its revenue from outside SA early. The cellphone group also returned positive earnings, after depressed headline earnings from the huge capital investment in Nigeria. Net capital expenditure for the group was more than R3,5bn, almost all for the Nigerian subsidiary.
There were also interesting strategic and operational developments at MTN. Management acquired 18,7% of the group from Transnet. The stake is held under a new company called Newshelf, which will house the shares, including an employee share scheme . Despite criticism about the fact that key senior management would own 70% of the stake, management correctly pointed out that the value of the 30% that formed that employee share scheme was fairly generous. The criticism was prompted largely by the fact that the Public Investment Commissioner (PIC) was one of the funders for the acquisition. The PIC will put up R1,5bn in debt. The group also changed its name from M-Cell to the MTN Group.
MTN looks attractive despite the sluggish share price. NAV is up from 220,7c to 313,7c and the share trades at an average of 1 180c.
Another consistent performer on the JSE was Kagiso Media. After a bid by Nail to buy the group failed, management went back to what it does best, perform. Return on equity went up from 29% to 42%, headline earnings increased 20% and after nearly three years, the group's share price rose 36% during the year. As a result the group's market value is up R100m from the time of the potential sale to Nail. Though the group still faces growth restrictions and so remains a medium-sized stock, its superb cash flow and earnings make it one of the JSE's prized assets.
There were a number of other notable performers. One of the better ones was Sekunjalo Investments. The group bounced back from the LeisureNet saga by going from a pretax loss of R25,3m for financial 2001 to a pretax profit of R24,4m and a return on equity of 254,9%. The share price responded well in the last quarter, reaching 41c by the first quarter of 2003.
Brimstone Investment Corp's share price doubled in the year, with solid earnings growth.
Despite the share performances of BEE companies, most remain poorly rated.
Masuku says only 12% of BEE companies are better rated than the JSE overall index, using p:e multiples. He ascribes this to the fact that much of BEE is still momentum investment and little value investment. True, BEE tends to be defined by trends that have little to do with fundamental value. This seems unlikely to change.
Much has been made of financial services being the next growth area for BEE in the coming year. The only realistic way for BEE to get a serious play in financial services is to start with advisory boutiques and grow them.
It seems, though, that more BEE companies are settling down for the long haul in specific industries, instead of casting about for opportunities.
