MTN Zakhele looks like a winner


MTN is a pioneer in broad-based BEE, having issued many public offerings since its 1997 Ikageng scheme that created phenomenal value for previously disadvantaged participants.

Ikageng shares were issued at R2.50 and are now trading at R216.

During 2010, MTN structured and facilitated another BEE scheme whereby the public was invited to purchase shares in MTN Zakhele.

MTN Zakhele is not to be confused with MTN as it is a totally separate special purpose company with its primary asset being 75.4m MTN shares representing 4% of MTN’s equity.

In addition to the equity contribution of R20 per share raised by Zakhele at the time, loans were also raised to fund the deficit in order to purchase these MTN shares. The Zakhele asset value is thus the market value of the MTN shares it owns less these liabilities; the number shareholders should be looking at.

Restrictions and trading

After allocating the Zakhele shares in 2010, shareholders were subject to a 3-year trading restriction when the shares could not be traded. In November 2013, this restriction lapsed and shareholders could trade with some restrictions.

So what should shareholders do once the platform (shut down in November due to over-loading) re-opens later this month?

Transaction dynamics

Zakhele had assets of R15bn (75.4m MTN shares times the November share price of R190/share) and liabilities of R4.8bn. The Net Asset Value (NAV) per Zakhele share was R117/share during November 2013.

Any increase or decrease in the MTN share price will have a direct correlation to the Zakhele price. At the current MTN price of R215 the NAV is R140 a share, but it is trading at R80.

So why is the Zakhele share trading below NAV? One of the key reasons is the share has trading restrictions for another three years and is less liquid. Currently it can only be traded on the over-the-counter platform with other BEE participants. If there were no restrictions the Zakhele price would trade close to its NAV which will happen once these restrictions lapse in November 2016. Furthermore dividends received by Zakhele over the next three years from MTN for its 75.4m MTN shares will be utilised to repay the outstanding debt thereby reducing the R4.8bn debt by 2016 and increasing the NAV. Shareholders will benefit further as it is anticipated that dividends paid by MTN will increase over the next three years.

The key determinants of Za-khele’s price are therefore:

  •  the debt outstanding by Za-khele,
  •  the time period remaining for the restrictions to lapse, and
  •  the MTN share price.

The first two are known variables and the third one can be reasonably estimated.

Based on current earnings projections and growth forecasts there should be strong support for the MTN share price at current levels and probably even higher over the next three years.

The way forward

As the restrictions lapse, the Zakhele share price should move closer to its NAV.

If investors do not need the cash urgently then it would be better to wait.

If investors have excess cash, they should buy at current levels. Buying the Zakhele shares at R80 and exiting at R141 in three years would imply a 20% return per annum for the next three years and this requires no increase in the share price at all.

Riaz Gardee is a Chartered Accountant and financial writer

today in print