Value could wash up on the West Coast shore
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.