Market fails to find the pots of gold under African Rainbow, but they may be there
Since listing in late 2017, African Rainbow Capital Investments (ARCI) has hardly set the JSE alight. On the contrary, it has been a dismal share-price performer, declining 54% since its October 2017 high. This is a pity, as it has not exhibited a disastrous showing during this period in terms of net asset value (NAV) growth.
Co-CEO Johan van der Merwe puts it succinctly: “We have been singularly unsuccessful in convincing the market of the value proposition of ARCI.”
What has perhaps escaped the attention of the average investor is its high-quality portfolio of assets, which leans towards disruptive companies such as securities trading platform A2X, TymeBank and mobile network operator Rain. Often its assets are unlisted, with ARCI providing a conduit into investments that would otherwise be unavailable to retail investors.
A2X, in which ARCI has a stake, is challenging the existing securities exchange order by providing a high-quality, lowercost secondary listing capability; TymeBank is unsettling the long-standing traditional financial services order by providing cheap mass banking, heading towards the 1-million customer mark; and Rain is bringing data services to much of the SA population, taking on the large established operators such as MTN and Vodacom, at significantly lower prices.
Outside these high-profile assets, ARCI also has a number of less glamorous but nevertheless vitally important companies in its portfolio. Fledge Capital houses WeBuyCars, an instant carbuying service. This company is doing especially well with online offerings in the moribund SA economy.
The Kropz holdings have assets in phosphate rock mining, struggling recently with notable write-downs. But the longer-term outlook for phosphate producers appears bright, as phosphate is an integral plant nutrient.
“Phosphate is life”, says ARCI co-CEO Johan van Zyl. “And we sit on a large part of a finite resource. Even though we haven’t got it right as yet, we’ll get it right in the future.”
In this collection of diversified assets, there is the potential to exploit significant synergies between companies
— for example, by being able to Rica potential SIM-card customers for Rain at TymeBank kiosks distributed across the Pick n Pay and Boxer networks.
ARCI cash was R725m at the 2019 year end, compared with R1.6bn a year earlier. Acquisitions totalled R1.63bn, while divestitures came to R500m. Diluted headline earnings per share fell 67% from 79c in 2018 to 26c in the year to June 2019.
Intrinsic net asset value rose mildly by 2.4% from R9.12 as at June 2018 to R9.34 per share as at June 2019. Total intrinsic portfolio value has ticked up since listing, starting at R8.735bn. As at June 2018, it had risen to R9.5bn; and as at June 2019, it was R9.740bn. However, this is well below the medium- to long-term target of 16% growth that management set itself at inception.
Valuing investment companies such as ARCI is best done by comparing share price to net tangible asset per share and calculating the discount.
As at end-June 2019, tangible NAV per share was 945c, compared with a share price of 409c, giving a discount of 57%. This is especially steep and reflects the market’s unwillingness or inability to value the share properly.
Van der Merwe is confident the SA economy is at or close to the bottom of the economic cycle. Because ARCI’s prospects are so closely correlated to local GDP, this means any recovery would result in immediate benefits.
ARCI is a relatively new entity, and as such requires careful analysis by prospective investors. As they become more familiar with the share, a fairer discount to NAV should logically develop over time. Provided there are no nasty surprises in the portfolio, the gap should narrow to a more realistic 20% or thereabouts, similar to Remgro’s, which is the usual benchmark for investment holding companies.
WHAT HAS PERHAPS ESCAPED THE ATTENTION OF THE AVERAGE INVESTOR IS ITS HIGH-QUALITY PORTFOLIO OF DISRUPTIVE ASSETS
BECAUSE PROSPECTS ARE SO CLOSELY CORRELATED TO LOCAL GDP, ANY RECOVERY WOULD RESULT IN IMMEDIATE BENEFITS