The problem with Remgro
The skewed listed-unlisted position stems mainly from the enormous success Remgro has enjoyed by backing private hospitals group Mediclinic, writes Marc Hasenfuss
Maybe the smaller investments will have a valueenhancing role at a later stage — perhaps with the benefit of corporate action
The stature of Remgro* as a compelling investment vehicle on the JSE is, it seems, once again open to question.
A decade ago Remgro was viewed as a boring investment counter, a perception that started changing only when the late (great) CEO Thys Visser started shaking things up in the portfolio.
These days, Remgro is hardly boring — but to some investors the JSE’s premier investment vehicle might be increasingly looking like a victim of its own success(es).
As things stood at the end of the interim period on December 31 2015, Remgro was to all intents and purposes a reflection of its large listed investments. The biggest five listed investments — private hospitals group Mediclinic, the RMBH/ FirstRand banking hub, the RMI insurance cluster, RCL Foods and liquor giant Distell — generated almost all Remgro’s earnings.
In terms of value, the big five represented 78% of the R153bn net asset value. If other listed investments or listed proxies — such as Grindrod and e-Media — are included, this figure shifts through the 80% mark.
This is not ideal for a company that, not too long ago, indicated a preference for unlisted investments. In truth, Remgro does have an array of interesting unlisted investments — ranging from the R9,4bn holding in consumer brands giant Unilever to a R745m position in glass group PGSI.
The problem is that the unlisted investments (apart from Unilever, perhaps) don’t really come into reckoning now that the portfolio is dominated by listed investments. To be honest, the skewed listed-unlisted position stems mainly from the enormous success Remgro has enjoyed by backing private hospitals group Mediclinic. This venture was started in Stellenbosch by Remgro director Edwin Hertzog in the 1980s, and has grown from a large local player into a sprawling international business with a primary listing on the London Stock Exchange.
Remgro CEO Jannie Durand is pragmatic about developments — specifically the emergence of Mediclinic as the dominant investment in the R150bn portfolio. “We invest in good businesses, and Mediclinic has enjoyed a spectacular performance. We deliberately invested heavily in Mediclinic, and we are happy with the way things are falling into place.”
Philosophically, though, having an investment company loaded mainly with listed holdings does arguably make Remgro less compelling as an investment vehicle than smaller counters like Brait, GPI, Sabvest or AEEI.
In the case of the latter four, the main value proposition lies in unlisted investments that cannot easily be accessed (if at all) other than through the listed investment company.
In the instance of Remgro, it is possible to customise a “replica Remgro” by choosing the mix of listed investment holdings that suits individual risk and reward considerations. With Remgro’s discount to intrinsic value narrowed, an investor could feel justified in compiling a “Remgro-lite” by buying Mediclinic, RCL Foods, Distell and Grindrod — but avoiding the
financial services assets such as RMBH, FirstRand and RMI as well as Remgro’s mixed bag of peripheral investments.
The one thing investors do relinquish by buying only parts of Remgro is access to a management team that has proven over decades to be a smart allocator of capital and an astute assessor of risk.
But could it be argued that investors can afford to forgo the value that management brings to Remgro because management’s efforts will probably still be reflected in the larger listed investments.
Before questioning the relevance of Remgro as an investment vehicle, it’s perhaps instructive to go back to 2012 when the company reiterated a commitment to ensure shareholder value was unlocked. This would be done by cleaning up the investment portfolio, strengthening existing investments and mulling share buy-backs if no meaningful acquisitions or investments could be made.
In terms of delivery, Remgro strengthened its investment in Mediclinic by facilitating and funding offshore acquisitions. The same could be said for transforming Rainbow Chickens into a richer array of food brands under RCL Foods and fortifying Distell’s offshore position with the acquisition of cognac brand Bisquit and Scotch producer Burn Stewart.
The conditions for share buy-backs have not been optimum as the increase in corporate activity among Remgro’s investments has led to the discount to intrinsic value narrowing markedly (though it was over 15% at the time of writing).
Remgro has not swept vigorously to clean up its portfolio. The stake in technology company Britehouse was sold recently, earning Remgro a profit of R94m. But there are many small investments, especially in its industrial and media hubs, that are unlikely to move the needle even, in the unlikely event, that these are rapidly doubled in size. The sense is that Remgro is quite attached to some of its smaller businesses. Durand makes a point of praising the performances of industrial counters like industrial gasses specialist Air Products, oil company Total and building products group Wispeco — even though the collective profits and value is tiny in the bigger picture.
Maybe the smaller investments will have a valueenhancing role at a later stage — perhaps with the benefit of corporate action (Wispeco, for instance, made an acquisition recently) or as part of a different (and separately listed) structure.
But Remgro’s unfamiliar debt position — linked to participation in new-look and bigger Mediclinic and re-packaged into offshore bonds as well as preference shares — might still inform decisions to sell off smaller investments when these debt instruments fall due.
Possible portfolio changes were hinted at by Durand in Remgro’s recent investment presentation. Most significantly, he argued that holdings in RCL Foods and Distell should be regarded as unlisted investments because of a lack of liquidity in the respective shares. Perhaps this betrays a desire by Remgro to buy out minority shareholders in both Distell and RCL?
There was another telling admission. Asked whether Remgro had a pre-emptive right on the sizeable stake that SABMiller (now in the throes of a takeover by AB InBev) retained in Distell, Durand inadvertently offered a valuable insight into the company’s investment strategy. After being corrected on his original contention that an acquisition of SABMiller’s Distell stake would trigger a mandatory offer to minorities, Durand half-joked that it (a mandatory offer) “would not be a bad thing”.
Owning 100% of sizeable assets like RCL Foods and Distell would greatly enhance Remgro’s investment proposition — especially since both companies can be scaled up markedly by acquisitions, joint ventures and mergers.
The development of Mediclinic could also usher in structural changes at Remgro over the longer term. With its London Stock Exchange listing facilitating the use of scrip as currency, Mediclinic is expected to stay on the acquisition trail as it extends its global reach. In referencing Mediclinic’s rapid growth, Durand spoke of “children getting bigger than their parents” and “giving underlying investments room to fly so that they can leave home”.
Investors could read a lot into these statements. But Durand specifically cited Remgro’s other great investment, cigarette group Rothmans International, which eventually was merged into British American Tobacco and unbundled with a secondary listing on the JSE.
Whether Remgro intends —– some time down the line — to unbundle its stake in Mediclinic remains to be seen. But such a move would shift larger unlisted investments like Unilever, Dark Fibre Africa, the Milestone China Fund and Seacom into the spotlight.
The bottom line is that there is clearly still dynamism at Remgro which should preclude the counter being slated as an investment entity easily mimicked (and refined) by investors buying the individual listed components of the portfolio.
Private hospitals group Mediclinic and the RMBH/FirstRand banking hub are two of Remgro’s biggest five listed investments.
Jannie Durand, the CEO of Remgro