PICK OF THE MONTH

Rem­gro

Financial Mail - Investors Monthly - - Contents - Marc Hasenfuss The writer holds Rem­gro shares.

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

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