It's a sad fact that the market capitalisation of black chips is just a speck on the JSE Securities Exchange. The Black Economic Empowerment (BEE) index was at its lowest point in more than seven years at the beginning of 2002, and threatening to drop to under 1% of the JSE's total market capitalisation. That was before it was saved by a new listing.
The focus of empowerment business on media and financial services appears to be over. After the recent dismal performance of media groups and the difficulties in financial services, black groups have been staying away , though Kagiso Trust did buy a treasury services company late last year.
There was a spate of activity in the petroleum sector as the big oil companies sought empowerment partners to meet government's requirement that 25% of their shares be black-owned. It is difficult to assess the quality of those deals and the activity was all with the unlisted majors.
From a BEE perspective, the real story was that old-fashioned and long-ignored sector, mining.
Resources bounced back off a resurgent gold price and weak rand, which boosted earnings. Considering the events of September 11 and the Japanese obsession with gold as a haven because of that country's deflation problems, some people have been talking about gold regaining its monetary status. That may be wishful thinking, likely to dissipate as soon as everyone forgets who Afghanistan's President is.
For African Rainbow Minerals (ARM), led by Patrice Motsepe, the return of gold was welcome. The empowerment mining company was catapulted into the world gold-mining ranks after a successful joint bid with Harmony for AngloGold's Free State mines in November last year. As Top Companies was going to press, ARM made a successful debut on the JSE.
The real big news in the mining sector was former Gauteng premier Tokyo Sexwale's Mvelaphanda (Mvela) Holdings.
Early this year , after a rapid acquisition spree, Mvela listed on the JSE through a reverse takeover of East Daggafontein in a R630m deal. That capped a three-year run that had begun with the purchase of Gem Diamonds. The listing gave Mvela a 70% stake of East Daggafontein, which has a 57% stake in a joint venture with Impala Platinum to recover platinum group metals in the East Rand. Mvela also controls 22,5% of Northam Platinum.
The gold price may or may not remain favourable to Motsepe . Mvela is in a more secure position, though platinum was beginning to dip from historic highs before the rand's depreciation boosted the value of earnings. .
BEE performance on the JSE
Choosing the star performer on the JSE is a no-brainer. Johnnic telecommunications subsidiary M-Cell, worth R21bn at the time of publication, now accounts for more than 80% of the market capitalisation of the BEE index.
Over the past year, M-Cell has shown an average 41% return on equity. Earnings per share grew 47% from the 2000 year-end to 75,5c.
Though the price is struggling to recover from a rerating earlier in 2001, M-Cell's underlying business seems to be in good shape.
Its expensive foray into Nigeria has not yet received the full blessing of investors. On cursory evidence, it appears the Nigerian investment will prove to be an important market that will eventually rival SA.
Concerns about the cost and the cellular group's debt ratio have been tempered by the market potential of Nigeria. That country could significantly boost the company's sales. Pyramid Research estimates that the Nigerian market will grow to $1,9bn by 2006, about the size of the current SA market.
Group turnover last year was R8,3bn. African sales, before Nigeria, are just R377m. Return on sales is just under 20%.
M-Cell has also come up with creative responses to concerns over its debt levels. Its Nigerian foray is partly financed through a Nigerian naira-denominated bond worth US170m, which was oversubscribed. That lessens worry about M-Cell's rand-denominated debt obligations.
Though MTN is still growing in the SA market, much of its future depends on Nigeria .
Financial services
It is rough terrain and many have fallen by the wayside, but African Merchant Bank (AMB), the small empowerment investment bank, has held its head high .
AMB, which was unbundled from Nail nearly two years ago, is back to being an empowerment company since Pamodzi increased its stake to just under 20%. The bank did not perform as strongly last year as it had in the past, but it did fairly well under difficult market conditions.
Revenue growth increased a mere 7% and attributable earnings grew 10% to R164m. Return on investment is 14,7%, significantly better than that of other small banks and competing financial services groups.
Trading and investment income, which was poor in the first half of the year, improved by year-end. But the group's mainstay is public finance, which last year generated over 50% of the group's advisory fee income. AMB's increased black equity holding and the make-up of the public finance team should keep the cash coming from this source.
Small but dynamite
One of the surprise packages of last year was Fortune Beverages, the soft-drink bottler and distributor that is 50% owned by the Kunene Brothers. Fortune last year delivered a return on equity of 26%. Results for the year-end showed increases in turnover (12%), operating income (214%) and pre-tax earnings (125%). EPS growth was a staggering 282%.
If you were a shareholder your dividend payments would have doubled. If you'd bought the share last year and sold sometime early this year, the value of your shares would have doubled too. That had as much to do with market appreciation of the group's performance as with an offer from the SA Bottling Co (Sabco) to buy out the company.
The downside is that is the offer is for only a portion of shareholders' interests - 8%, with the rest to be kept in a kind of reserve as shares of unlisted Coca-Cola for five years. Hopefully, Coke SA will then list. The deal now means the effective delisting of Fortune.
Another strong performer in the empowerment index was another Kunene Bros company, Grintek.
Increased exports caused Grintek's attributable profits for the six months to December to leap a jaw-dropping 832%. Well, it was only R3,7m. Still, EPS growth was 39% and return on equity 41,2%. There was also an impressive improvement in cash flow of 59% to R143m. The windfall came largely from foreign defence contracts.
There weren't many other bright stars in the empowerment index. The other companies with big market caps are Hosken and Johnnic.
With the exception of the groups covered here, your money would have been better in a bank, especially after the Reserve Bank's interest hikes.