Shares in Sasol Inzalo – the Black Economic Empowerment (BEE) counter for the JSE-listed petrochemical group – have fallen 28% in the last week. Despite this sharp drop, Inzalo still looks expensive and investors should be wary of piling in at these levels.
Check out this column from Craig Gradidge from Gradidge-Mahura Investments which appeared in a recent edition of Finweek and might give you some clues about how to value the share.
Are new Sasol Inzalo shareholders overpaying?
I received a copy of the latest Sasol Inzalo financial statements this afternoon. After a quick glance through the financials I am convinced that my recent decision to sell my exposure was a good one. I am expecting a newborn anytime from yesterday, and I needed to raise some cash to fund those expenses not covered by my medical aid. Yep, the medical aid that will give me cheap tickets to see a movie, but not cover my medical expenses… But I digress!
When it comes to selling shares, the rule I have is to sell those shares that seem the most expensive at the time. In this instance my Sasol Inzalo shares stood out like a proverbial sore thumb. The financials show an asset (Sasol Preferred Ordinary shares, which become Sasol shares at the end of the empowerment period) of R5.5bn. However, the same financials show outstanding liabilities (debt) of R6.6bn. This leaves negative shareholders’ equity (value) of R1.07bn or negative R66 a share. This is significantly higher (or lower) than the previous set of financials which showed a value of around negative R40 a share. The shares are essentially worthless.
However, a cursory glance at www.sasolinzalotrading.com shows these shares trading at R80 a share (close of trading on 31 October 2012). Why would someone pay R80 for a share that is essentially worth nothing? By contrast shares in African Bank’s BBBEE deal, Eyomhlaba, trade at a discount to their net asset value (assets minus liabilities). Eyomhlaba is worth north of R25 a share, but trades at less than R15 a share. In addition to that Eyomhlaba is an active buyer of African Bank stock in the market, which means that the NAV could increase further even if the share price were to remain flat or even fall. A similar picture emerges for some of the other BBBEE public share offers.
I accept that there is an element of option pricing in the structure of the Sasol Inzalo deal, which could result in value appearing quite quickly. A 10% move in the share price of Sasol would see the value of Sasol Inzalo go from R66 to R23, an improvement in value of over 60%. In addition to this, there is a guaranteed dividend flow to Sasol Inzalo from the preferred ordinary shares, which will help reduce some of the outstanding debt. It is also estimated that Sasol Inzalo will have to sell some shares at the end of the empowerment period to settle debt, so investors are likely to receive less than one Sasol ordinary share for every Sasol Inzalo share. The Inzalo share price is up close on 10% since the valuation for the latest financials but they are still essentially worthless at the moment.
Are investors overpaying at R80 a share today? Do they see value emerging within the empowerment period and are prepared to overpay for that today? I suspect that some investors see Sasol trading at R370 and Sasol Inzalo at R80 and think they are getting a bargain. The Sasol BEE Ordinary Shares (discounted ordinary shares) trade at R278 at the moment, but at least they are on a dividend yield of close on 7%. Investors comparing share price to share price would have to look at SOLBE1 relative to SOL, they cannot simply look at Sasol Inzalo relative to Sasol and make a judgement call. Could investors be confusing the shares and forgetting the impact of debt on the value of Sasol Inzalo? Perhaps the problem is that I am missing some important information and will be kicking myself a few years from now? Whatever the reason, the Inzalo shares look very expensive.
Craig Gradidge is the Director of Investments at Gradidge-Mahura Investments.