PICK OF THE MONTH
Stellenbosch-based investment behemoth Remgro is not the “easy pick” that it was a decade ago.
Remgro, founded and controlled by the industrious Rupert family, has long been tagged the “share that every South African should own”.
The premise for investing in Remgro was simple. The company offered investors a well diversified portfolio of investments that mostly owned strong brands, generated powerful cash flows and held defendable positions in their respective industries.
Remgro held a considerable advantage over unit trusts — the default option for retail investors — in that fees were considerably lower. And it could not be considered a passive investment company because it exerted considerable influence over its underlying investments through its large shareholdings.
The beauty of it all was that investors could purchase the investment portfolio at a discount — this traditionally ranged from 15% to 20%, but was sometimes as much as 25%.
Arguably one of Remgro’s strongest selling points, aside from the long-term value that its astute (and patient) management team added to the investment portfolio, was that it offered investors access to unlisted shares they couldn’t otherwise acquire.
In the past — when the old Rembrandt Group still existed — the more substantial interests would have included the huge tobacco interests (held under Rothmans) and Vodacom (before it was listed).
These days, market perceptions of Remgro are somewhat altered. The discount has been (for want of a better phrase) a little more intense — hardly stretching to 5% at times, though the share price has in recent weeks offered a more attractive range of 10%-15%.
The narrower discount is a little perplexing, since at last count (end-December 2014) the listed constituents of Remgro’s portfolio — FirstRand/RMB, Mediclinic International, RMI, RCL Foods, Distell and Grindrod — comprised over 75% of the intrinsic value.
This development, as Remgro CEO Jannie Durand points out, is certainly not a strategic outcome. He reiterates that the company has a strong preference for unlisted investments. But the resurgent share performances of the listed investments, particularly Mediclinic and RMB/FirstRand, have effectively diminished the value of the unlisted portion.
Put another way, this strong “listed bias” in Remgro’s portfolio diminishes the company’s attraction to investors. They could easily mimic the portfolio, or even customise their investment, leaving out the listed parts that might be in a cyclical downswing or perceived as overpriced.
With the narrowed discount in mind, could there be anything of huge upside potential among the unlisted components?
The most significant unlisted holding is the 25,8% stake in consumer brands giant Unilever. Unilever, which owns household names like Omo, Joko, Sunlight, Vaseline, Robertsons, Flora and Lux, is a brands powerhouse and valued at around R9bn. But lately Unilever has taken strain, especially in the cleaning products division, where its margins have been casualties of the so-called “washing powder war”. Unfortunately Remgro probably won’t be able to increase its stake in Unilever as it would like to, though it has recently extended Unilever a loan.
Other unlisted investments include the influential stake in media group Sabido (the owner of e.tv), a major share of empowerment investment company Kagiso Tiso Holdings, gases business Air Products, undersea cable specialist Seacom, glass business PG Industries and optic fibre network provider Dark Fibre Africa. It would take a serious and consistent upsurge in value for any of these unlisted investments — barring Unilever, KTH and maybe Sabido — to move the needle at Remgro.
So why should investors even bother with Remgro? Three words: potential deal flow.
Though never really considered as exciting as Cape investment compatriots Hosken Consolidated Investments or PSG Group, Remgro has lately racked up more corporate activity than most. This incorporates sizeable rights issues to allow Mediclinic to pursue Swiss private hospital deals and to transform the old Rainbow Foods into a much more appetising consumer brands business, RCL Foods.
Remgro has also moved strongly into the infrastructure space by taking a 25% stake in Grindrod (which has bought into unlisted agribusinesses NWK and Senwes), partnering with Kagiso Infrastructure Empowerment Fund and setting up Pembani Remgro Infrastructure Managers.
The value proposition has changed, but for sound (rather than spectacular) long-term returns without too much risk, Remgro remains a prudent option. And the distinct possibility of new deal flows adds that extra dab of flavour.
The resurgent share performances of the listed investments … have effectively diminished the value of the unlisted portion