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

There was a lot of fanfare around the launch of SAB Zenzele Kabili (SAB Zenzele Kabili) at the end of May. The share price went on a strong run soon after listing, closing at R110 a 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: Craig Gradidge of Gradidge Mahura questions the value of SAB Zenzele Kabili (June 10, 2021)

Despite the warnings from various quarters including a less than subtle voluntary update from the company itself on June 11, the share price went to and stayed above R180 for a few days longer. The share 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 a share.

Given that the AB InBev share price has dropped since the deal was struck, the value of SAB Zenzele Kabili has fallen from its initial net asset value (NAV) of R60 a share. So the gap between the SAB Zenzele Kabili share price and its value has widened further. In fact it has widened 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 Broad-based Black Economic Empowerment (B-BBEE) shares have traded at a premium to net asset value (NAV). Sasol ordinary shares traded below the price of SOLBE1 (Sasol BEE ordinary share), its discounted share scheme, for much of the Covid-19-induced market crisis. Recently, excitement around Imperial’s proposed share buyout has seen Ukhamba 1 also trade at a premium to NAV.

Revisiting the valuation of SAB Zenzele Kabili

The estimated NAV and fair value of SAB Zenzele Kabili are shown in the table below.

Value of AB InBev shares owned by SAB Zenzele Kabili	R4 687 018 830
Debt in SAB Zenzele Kabili	R2 973 000 000
NAV of SAB Zenzele Kabili	R1 714 018 830
Number of SAB Zenzele Kabili shares in issue	40 550 000
NAV per SAB Zenzele Kabili share	R42
Liquidity and risk discount	30%
Fair Value per SAB Zenzele Kabili share	R30
Spot price of SAB Zenzele Kabili	R100

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

Calculations are shown in the table below.

Value of AB InBev shares owned by SAB Zenzele Kabili	R10 211 370 000
Debt in SAB Zenzele Kabili	R2 973 000 000
Net asset value of SAB Zenzele Kabili	R7 238 370 000
Number of SAB Zenzele Kabili shares in issue	40 550 000
NAV per SAB Zenzele Kabili share	R179
Liquidity and risk discount	30%
Fair Value per SAB Zenzele Kabili share	R125

The assumed increase in the AB InBev share price is unlikely to happen in a world where Covid-19 continues to mutate and run rampant across the globe. So it could be 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 in SAB Zenzele Kabili may rise even higher, which would reduce the NAV return of 79% further.

This leads us to the second value driver in SAB Zenzele Kabili: its debt levels.

Debt

SAB Zenzele Kabili has R2.97 billion worth of debt on its balance sheet. This debt carries a favorable interest rate of 70% of the prime rate – currently 4.90%. The debt is serviced by the 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 costs of running SAB Zenzele Kabili. This leaves 75% of the dividend earned by SAB Zenzele Kabili for servicing debt. 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	Pay date	Amt	Currency
10	Final	25-Feb-21	04-May-21	10-May-21	50.00	EURc
9	Final	27-Feb-20	09-Jun-20	15-Jun-20	50.00	EURc
8	Interim	25-Oct-19	19-Nov-19	25-Nov-19	80.00	EURc
7	Final	28-Feb-19	06-May-19	13-May-19	100.00	EURc
6	Interim	25-Oct-18	27-Nov-18	03-Dec-18	80.00	EURc
5	Final	01-Mar-18	30-Apr-18	07-May-18	200.00	EURc
4	Interim	26-Oct-17	14-Nov-17	20-Nov-17	160.00	EURc
3	Final	02-Mar-17	02-May-17	08-May-17	200.00	EURc
2	Interim	28-Oct-16	15-Nov-16	21-Nov-16	160.00	EURc
1	Final	25-Feb-16	28-Apr-16	09-May-16	200.00	EURc

Source: Profile Data

Dividends in 2016 and 2017 were pretty decent at 360€c a share. But as market conditions deteriorated so did the amount of dividends paid out by AB InBev. In fact AB InBev cut its interim dividend in 2020 as it battled the severe impact of Covid on its business. Let’s assume for the sake of an argument that AB InBev pays the same dividend as last year, then somehow manages to get back to 2016/2017 dividend payouts of 360€c in 2023. SAB Zenzele Kabili would receive these amounts less a Belgian withholdings tax of 30% (but SAB Zenzele Kabili can claim back 15% in terms of a double taxation agreement between SA and Belgium). It wouldn’t pay withholdings tax in SA as it is a company and therefore exempt.

We further assume the following:

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

In this scenario SAB Zenzele Kabili would still owe 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 a share (a best case scenario), then SAB Zenzele Kabili would have a NAV of around R205 a share and a fair value of R144 a share.

Despite fairly generous assumptions on the value drivers, SAB Zenzele Kabili struggles to give shareholders the return that they would get from owning AB InBev instead.

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

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

Read: Investment opportunities in the public B-BBEE share space

Craig Gradidge CFP® is an investment and retirement planning specialist at Gradidge Mahura Investments

Listen to Duncan Pask of SA Breweries on how to start trading in SAB Zenzele Kabili shares (or read the transcript here):