QUESTION $1(40$ Marks; $120$ Minutes$)$

Shandukani Investment Group $($SIG$)$ is an investment group with diversified holdings in JSE$-$listed

and unlisted companies. Its portfolio currently entails equity investments in companies in the financial

services, energy, mining, property, and industrial sectors$.$ The group was founded in $2010$ by the former

Minister of Agriculture, Mr$.$ Buff Arlow, after his short stint in the country$$s cabinet ended following a

public outcry due to his unconstitutional appointment to the ministry.

Mr$.$ Arlow has since focused his attention on growing SIG, and SIG holding company continues to score

major government tenders and Black Economic Empowerment $($BEE$)$ deals with other companies listed

on the Johannesburg Stock Exchange $($JSE$).$ For the $2025$ financial year, Mr$.$ Arlow plans to broaden

the SIG property investment portfolio by venturing into student accommodation. The shift towards

student accommodation comes on the back of increasing enrolments at universities and Technical

Vocational Education and Training $($TVET$)$ colleges, which has led to increased demand for student

accommodation.

SIG is exploring two investment alternatives to penetrate the student accommodation market and has

set aside enough funds to invest in one of the alternatives. These investment alternatives are:

$(1)$ Buying a $35\%$ equity stake in Southpoint Limited, a Gauteng$-$based property investment company

with a strong presence in the Johannesburg Central Business District $($CBD$),$ which is close to some

of the major universities and TVET colleges in the country. Southpoint Limited$$s properties mainly

cater to students and low$-$to$-$medium income earners throughout the Gauteng province.

$(2)$ Buying four apartment buildings within walking distance from one another in the Johannesburg CBD$.$

These are currently owned by Joe Burden Properties $($JBP$),$ an American company in the process

of dissolving all its operations in South Africa amid concerns of low economic growth prospects.

SECTION A: Purchase of a $35\%$ equity stake in Southpoint Limited

Founded in $1908,$ Southpoint Limited is one of the leading property investment companies in Gauteng

and each year continues to generate strong cash flows, from which large dividends are often distributed

to its shareholders. Southpoint Limited is an unlisted public company, although its shares are widely

owned with an active market of willing buyers and sellers. Southpoint Limited$$s biggest shareholder,

Sunlam Insurers, currently owns an $18\%$ stake in the ordinary equity. SIG also owns $10\%$ of Sunlam

Insurers through a BEE deal, which was struck in $2020.$ Southpoint Limited$$s larger rivals have an

average industry historic earnings yield of $7,14\%,$ and most of these companies have a presence in

different cities across South Africa. The financial performance of Southpoint Limited for the financial

year ended $31$ July $2024($FY$2024)$ is provided below:

Statement of profit or loss and other comprehensive

income $($SPLOCI$)$

R $000$

Rental income $84450$

Property$-$related expenses $(28753)$

Other operating expenses $(10022)$

Profit before interest and taxation $45675$

SPLOCI continues on the next page.

Interest income $1362$

Interest expense $(16881)$

Profit before taxation $30156$

Page $8$ of $10$ MAC$3761$

Test $4/$September $2024$

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CONFIDENTIAL

Continued from previous page:

Profit attributable to owners of company also takes into account non$-$cash expenses $($relating to the

annual depreciation charge$)$ to the value of R$3,2$ million for the year ended $31$ July $2024.$

The Profit attributable to owners of company is expected to remain constant for the next two financial

years, then increase by an average of $4\%$ per annum for the two years thereafter, and then afterwards

grow at a constant rate of $3\%$ for the foreseeable future. To remain relevant in the highly competitive

industry, Southpoint Limited continues to prioritise and maintain its annual capital expenditure of R$8$

million as it has done so for the past many years. For this reason, the dividends will remain constant for

the next four years, and then the board of directors will revisit the decision in line with the profitability of

the business, as well as the state of the economy. The cost of equity of Southpoint Limited approximates

$15\%.$

Before buying shares in an existing business, SIG must satisfy itself that, based on the latest available

information, the following minimum key performance indicators are met by the potential target company:

$$ Net interest cover of $2,5$ times for leveraged companies;

$$ Dividend payout ratio of $40\%$; and

$$ EBITDA margin of $55\%.$

SECTION B: Purchase from Joe Burden Properties $($JBP$)$

SIG has expressed interest in acquiring four residential properties from JBP$,$ which $($if acquired$)$ it intends

to hold for the next $6$ years before selling them to a keen investor. SIG is concerned about the state of

development in the Johannesburg CBD and the sustainability of the current Nati