Value could wash up on the West Coast shore

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

Pun­ters would usu­ally steer clear of an in­vest­ment com­pany that traded at a sub­stan­tial pre­mium to net as­set value (NAV).

If an in­vest­ment com­pany was nur­tur­ing a supremely ex­cit­ing early-stage in­vest­ment or boasted a team of ex­ec­u­tives with a per­fect record of in­vest­ment suc­cesses, then per­haps a large pre­mium over NAV would be jus­ti­fied.

Tre­ma­ton does not house any hugely ex­cit­ing po­ten­tial, but its ex­ec­u­tive man­age­ment team of Al­lan Groll and Arnie Shapiro does seem to op­er­ate in a re­as­sur­ingly un­con­ven­tional man­ner when it comes to clev­erly com­mit­ting cap­i­tal.

Of­fi­cially Tre­ma­ton car­ries an NAV of 167c, mean­ing the com­pany’s share price is more than dou­ble the signed-off value of the net as­sets.

The bulk of Tre­ma­ton’s as­sets is in real es­tate, with the sex­i­est non-prop­erty po­si­tion be­ing a valu­able 30% po­si­tion in the Mykonos casino (which is con­trolled by gam­ing gi­ant Tsogo Sun).

The prop­erty as­sets are an­chored by the sprawl­ing West Coast leisure devel­op­ment Club Mykonos Lange­baan (CML), but there are in­ter­est­ing real es­tate side­lines such as in­flu­en­tial hold­ings in the Ar­bi­trage Prop­erty Fund and the RESI In­vest­ment Group. Both th­ese spe­cial­ist prop­erty funds could be listed on the JSE once crit­i­cal mass has been built in the re­spec­tive port­fo­lios.

On the face of it there doesn’t ap­pear to be much jus­ti­fi­ca­tion for Tre­ma­ton trad­ing at an un­usu­ally large pre­mium to its NAV. But it’s worth scratch­ing be­low the sur­face.

Tre­ma­ton is some­what dif­fer­ent from the tra­di­tional di­ver­si­fied in­vest­ment trust counter.

The com­pany spe­cialises in back­ing as­sets that are sig­nif­i­cantly un­der­val­ued and, de­spite its rel­a­tively small size (mea­sured by mar­ket cap­i­tal­i­sa­tion), Tre­ma­ton aims to achieve a rather am­bi­tious av­er­age in­ter­nal rate of re­turn (IRR) of more than 20%.

It’s some­times dif­fi­cult to find the fun­da­men­tal un­der­pin to test the re­al­ism of that IRR tar­get. since Tre­ma­ton’s op­er­a­tional virtues — by its di­rec­tors’ own ad­mis­sion — are not easy to fathom. There are op­er­at­ing busi­nesses with sta­ble in­come flows, but th­ese sound de­vel­op­ments have been over­shad­owed in re­cent years by in­vest­ment ac­tiv­i­ties.

Di­rec­tors summed mat­ters up in their year to end Au­gust re­sults com­men­tary, not­ing: “The pat­tern of in­vest­ment ac­qui­si­tion and re­al­i­sa­tion is ir­reg­u­lar, which can re­sult in un­even prof­its that do not fol­low an eas­ily pre­dictable pat­tern.”

But to Tre­ma­ton’s credit there has been much ef­fort in en­sur­ing that share­hold­ers at least re­ceive regular div­i­dend pay­ments.

In get­ting to grips with

Tre­ma­ton’s value propo­si­tion, the sen­si­ble ap­proach is prob­a­bly to look past the of­fi­cial NAV and fol­low the di­rec­tors’ in­trin­sic value sig­nals. Di­rec­tors have pen­cilled in an in­trin­sic NAV of 326c/share for the in­terim pe­riod end­ing Fe­bru­ary this year.

In De­cem­ber last year Tre­ma­ton raised R120m by plac­ing new shares for cash at 300c/share. This was not long af­ter sig­nalling that the over­all deal pipe­line was big­ger and po­ten­tially more lu­cra­tive than at any time in Tre­ma­ton’s his­tory and that man­age­ment was con­fi­dent that bench­mark re­turns could be achieved over the next decade. San­lam In­vest­ment Man­age­ment and In­vestec As­set Man­age­ment par­tic­i­pated in the fund-rais­ing ex­er­cise along with a num­ber of street­wise smaller in­vest­ment en­ti­ties.

In­deed, Tre­ma­ton has al­ready clinched one sig­nif­i­cant deal since the share place­ment, through its sub­sidiary Ar­bi­trage, ac­quir­ing R203m worth of prop­er­ties from real es­tate stal­wart Re­de­fine.

But IM sug­gests that the big­gest po­ten­tial to un­lock value could lie in CML.

It’s worth not­ing gov­ern­ment’s ef­forts to raise the level of eco­nomic ac­tiv­ity on the West Coast through the re­cent procla­ma­tion of the Sal­danha Bay industrial devel­op­ment zone.

The zone aims to be a hub for com­pa­nies of­fer­ing ser­vices needed in the oil and gas fields of sub-Sa­ha­ran Africa, such as marine re­pairs and lo­gis­tics.

Notwith­stand­ing the slip­pery slide in the crude oil price, CML seems per­fectly poised to ben­e­fit from any in­creases in per­ma­nent pop­u­la­tion in a more vi­brant West Coast eco­nomic zone. So does the Mykonos casino.

IM reck­ons Tre­ma­ton is worth the cur­rent pre­mium on a longer-term view.

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