Allan Gray defends its shareholding in Net1

As tensions grow in response to the looming deadline imposed by the Constitutional Court (ConCourt) regarding SASSA’s contract with Cash Paymaster Services (CPS), a subsidiary of Net1 UEPS, attention has turned to the institutions that own shares in the company.

The largest of which is Allan Gray, who – through various accounts held on behalf of clients – own 8.9 million shares or approximately 17% of the issued share capital of Net1, according to data obtained from Iress. The table below shows Allan Gray continued to accumulate shares on a net basis in Net1 during the month of February, as the saga involving SASSA and CPS continued to play out.

Update: Allan Gray confirmed on Friday they did NOT add shares during February.

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In response to questions from Moneyweb, Allan Gray pointed out on Thursday that sister company Orbis does not hold any shares in Net1 in any of its funds.

After declaring SASSA’s last contract with CPS invalid due to a flawed tendering process, the agency was given until the end of March to undertake a new process, something it has not bothered to do, which is in direct contravention of the ConCourt.

There now appears to be no plausible way to continue paying social grants to 17 million people by the end of this month without extending the contract SASSA has with CPS. This means that in the next few days, SASSA will approach the same court it has thumbed its nose at, to compel them to allow SASSA to renew the contract it has with CPS.

Moneyweb asked Allan Gray whether it thought it was appropriate to hold, and continue to increase its shareholding, in a company that will benefit from the morally repugnant behaviour of a government agency like SASSA, particularly in light of the fact that the last contract was declared invalid.

The company provided us with the following response:

“As of 1 March 2017, our clients own 15.58% of Net1, which is approximately 0.7% of our equity portfolio. Our sister company Orbis does not own any shares of Net1 in any of their funds. 

We acquired a sizeable position in Net1 shares on behalf of our clients in December 2012 (having bought and sold smaller quantities of shares previously) and have held them since then with minimal variation. 

Our investment case for Net1 does not depend on the renewal of the SASSA contract. Our investment is based on the company’s track record of successfully implementing reliable and robust payment technologies, which comfortably handle millions of transactions, both on- and offline, across various different businesses and countries. We do not think the outcome of the potential contract extension will have a material impact on the underlying Net1 value, and even less so to our clients given the low weight in our client portfolios. 

Net1 is responsible for paying grant recipients up until 31 March 2017. The grant recipients will be severely impacted if their grants cannot be paid thereafter. The major beneficiaries of any arrangement that allows for grant payments to continue are the grant recipients and the national government. 

The government has budgeted expenditure of R180 billion on social assistance for the 2017/18 fiscal year. Under the existing SASSA contract Net1 received R1.8 billion (ex VAT) per year for distributing the grants. The costs of distributing the grants are therefore small (1%) in the context of the harm that would be caused if the grant recipients were to go unpaid. Several media reports have quoted Net1 as asking for an increased fee for distributing the grants – this does not seem unreasonable in light of the fact that over the last five years Net1 has not received any inflationary increases on the amount per grant that the government pays them for distribution, while the costs that Net1 incur to distribute the social grants have increased over this time. The consumer price index has risen 32% over the past 5 years. 

During our engagements with Net1 we have not discussed the SASSA contract at length (because it was public knowledge that it was coming to an end) and we are more focused on Net1’s other businesses. We have no reason to try and influence the company to achieve a certain price in these contract negotiations. We hope the parties involved are able to achieve a workable solution that will allow for the payment of social grants to continue.”

The firm also pointed out – per the ConCourt judgement on the legality of the previous contract with SASSA – that the only reason the contract was declared invalid was: “As is evident from this judgment, and the merits judgment, SASSA’s irregular conduct has been the sole cause for the declaration of invalidity and for the setting aside of the contract between it and Cash Paymaster.”

Allan Gray also noted the ConCourt instructed SASSA to halve the fee CPS charged it for the disbursement of payments, reducing this from R32 to R16.44 per person “resulting in a saving of R800 million per year for SASSA”.

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