Monday, January 24

Black investors are better off buying AB InBev shares vs. SAB Zenzele Kabili


There was a lot of fanfare surrounding the launch of SAB Zenzele Kabili (SAB Zenzele Kabili) at the end of May. The share price had a hot run shortly after trading, closing at R110 the share after opening at around R45 a share.

Read: Why is SAB Zenzele Kabili trading at three times its value? (June 11, 2021)
Listen / Read: Gradidge Mahura’s Craig Gradidge Questions the Value of SAB Zenzele Kabili (June 10, 2021)

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Despite warnings from various quarters, including a less than subtle voluntary update from the company itself on June 11, the stock price rose and remained above R180 for a few more days. The stock was trading at R100 at the time of writing. The underlying asset, AB InBeveuser-Busch InBev SA / NV (AB InBev) is trading at around R918 per share.

As AB InBev’s share price has fallen since the agreement was signed, the value of SAB Zenzele Kabili has fallen from its initial Net Asset Value (NAV) of R60 per share. Therefore, the gap between SAB Zenzele Kabili’s share price and its value has widened further. In fact, it has broadened to the point where black investors are better off buying AB InBev shares rather than SAB Zenzele Kabili shares.

This is not a unique situation, as other Black-based Economic Empowerment (B-BBEE) stocks have traded at a premium over net asset value (NAV). Sasol’s common stock traded below the price of SOLBE1 (Sasol BEE’s common share), its discounted share scheme, during much of the Covid-19-induced market crisis. Recently, enthusiasm for Imperial’s proposed share purchase has caused Ukhamba 1 to also trade at a premium to NAV.

Reviewing the SAB Zenzele Kabili valuation

SAB Zenzele Kabili’s estimated NAV and fair value are shown in the table below.

Value of AB InBev shares owned by SAB Zenzele Kabili R4 687 018 830
Debt and SAB Zenzele Kabili R2 973 000 000
SAB Do It Double NAV R1 714 018 830
Number of SAB Zenzele Double shares issued 40 550,000
NAV by SAB Zenzele Double Action R42
Discount for liquidity and risk 30%
Fair value per double share of SAB Zenzele R30
SAB Make It Double Spot Price R100

There are two levers that drive SAB Zenzele Kabili’s value: a rising AB InBev share price and decreasing debt levels. The fastest way for SAB Zenzele Kabili to increase in value is for AB InBev’s share price to increase. Suppose AB InBev goes to R2,000 per share for the sake of argument. That’s a 118% increase in the share price. In this scenario, SAB Zenzele Kabili’s NAV would increase to R179, with a fair value increasing to R125. From the current share price of R100, that’s a 79% and 25% increase in the NAV and fair value of SAB Zenzele Kabili, respectively.

The calculations are shown in the following table.

Value of AB InBev shares owned by SAB Zenzele Kabili R10 211 370 000
Debt and SAB Zenzele Kabili R2 973 000 000
Net asset value of SAB Zenzele Double R7 238 370 000
Number of SAB Zenzele Double shares issued 40 550,000
NAV by SAB Zenzele Double Action R179
Discount for liquidity and risk 30%
Fair value per double share of SAB Zenzele R125

The alleged rise in AB InBev’s share price is unlikely to occur in a world where Covid-19 continues to mutate and run rampant around the world. Therefore, it could take a few years before such a scenario is possible. This further reduces the attractiveness of SAB Zenzele Kabili relative to AB InBev, as debt levels at SAB Zenzele Kabili may further increase, further reducing the NAV’s profitability by 79%.

This brings us to the second factor of value at SAB Zenzele Kabili: its debt levels.

Debt

SAB Zenzele Kabili has a debt of R2.97 billion on its balance sheet. This debt has a favorable interest rate of 70% of the prime rate, currently 4.90%. Debt service is done with dividends paid by AB InBev to SAB Zenzele Kabili. However, SAB Zenzele Kabili will pay a 25% trickle dividend to SAB Zenzele Kabili shareholders after administration and other operating costs of SAB Zenzele Kabili. This leaves 75% of the dividend earned by SAB Zenzele Kabili for debt service. So let’s take a closer look at AB InBev’s ability to pay dividends.

AB InBev’s dividend history is shown in the table below.

No Period Declared LDT Payment date government office Badge
10 Final 25-Feb-21 04-May-21 10-May-21 50.00 EURc
9 Final 27-Feb-20 09-Jun-20 15-June-20 50.00 EURc
8 Provisional 25-Oct-19 Nov 19, 19 Nov 25, 19 80.00 EURc
7 Final 28-Feb-19 06-May-19 13-May-19 100.00 EURc
6 Provisional 25-Oct-18 27-nov-18 03-Dec-18 80.00 EURc
5 Final 01-mar-18 Apr 30, 18 07-May-18 200.00 EURc
4 Provisional 26-Oct-17 Nov 14-17 Nov 20, 17 160.00 EURc
3 Final 02-mar-17 02-May-17 08-May-17 200.00 EURc
2 Provisional 28-Oct-16 15-nov-16 Nov 21, 16 160.00 EURc
1 Final February 25, 2016 28-Apr-16 09-May-16 200.00 EURc

Source: Profile data

Dividends in 2016 and 2017 were quite decent with a stake of € 360 ca. But as market conditions deteriorated, so did the amount of dividends paid by AB InBev. In fact, AB InBev cut its interim dividend in 2020 while battling the severe impact of Covid on its business. Suppose, for the sake of argument, that AB InBev pays the same dividend as last year, and then somehow manages to revert to 2016/2017 dividend payments of € 360c in 2023. SAB Zenzele Kabili would receive these amounts less a Belgian withholding tax of 30% (but SAB Zenzele Kabili can claim 15% in terms of a double taxation agreement between SA and Belgium). It would not pay withholdings in SA for being a company and therefore exempt.

We further assume the following:

  • SAB Zenzele Kabili operating costs at 3% AB InBev dividend
  • Interest rates remain at 4.90% for 10 years.

In this scenario, SAB Zenzele Kabili would still have around R1.9 billion in debt. If we further assume that at the end of 10 years AB InBev is now trading at R2,000 per share (best case), then SAB Zenzele Kabili would have a NAV of around R205 per share and a fair value of R144 per share.

Despite fairly generous assumptions about value drivers, SAB Zenzele Kabili strives to provide shareholders with the return they would get from owning AB InBev.

Black investors looking to add to their portfolios will be better served by considering other public deals that trade at discounts to their NAV (and fair values ​​in some cases) and avoid those that trade at premiums.

Especially those with significantly higher premiums than current valuations. Or they could buy AB InBev instead of SAB Zenzele Kabili.

Read: Investment opportunities in the public space of B-BBEE shares

Craig Gradidge CFP® is an Investment and Retirement Planning Specialist at Gradidge Mahura Investments

Hear from SA Breweries’ Duncan Pask on how to get started trading SAB Zenzele Kabili stock (or read the transcript here):


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