Tricky months ahead

CEO Jannie Durand says it is difficult to make sizeable investments in SA before the ANC’S December showdown

The share price of investment giant Remgro was offering a discount of close to 19% on the stated intrinsic net asset value (NAV) of R258/share as at September 18.

That’s better than the 28% discount the share price offered in October 2008 when Remgro unbundled its shares in British American Tobacco (BAT). But there have subsequently been times when the discount narrowed to under

10% — and even 5% on several occasions.

The prevailing discount suggested — as recently as mid-afternoon last Friday — that the market is not expecting fireworks at Remgro in terms of value creation, or even value unlocking in the short to medium term. But come late afternoon on Friday, Remgro announced an R11bn transaction to sell its 25% stake in consumer brands giant Unilever SA back to Unilever — with the rider that the “spreads” business (including margarine brands like Rama and Flora) will probably be whisked into food brands subsidiary RCL Foods.

As at the end of June, 81.5% of Remgro’s intrinsic NAV of R150bn was represented by only six holdings: Mediclinic International, Firstrand/rmb, Rand Merchant Insurance

(RMI), RCL Foods, Distell and the 25% stake in unlisted consumer brands conglomerate Unilever. The mainly listed large investments endured a mixed year to end-june. Arguably the best performances came from smaller unlisted companies such as 50%-owned Dark Fibre Africa (DFA), 50%-owned industrial gases specialist Air Products and 100%-owned aluminium building products group Wispeco. These companies, unfortunately, are buried deep beneath the listed bulk. Any new investments — and there have been a few in the venture capital portfolio — won’t break the surface either.

Remgro’s quandary was pointedly articulated at the investment presentation last week by an analyst who noted that the group would need to execute a R7.5bn deal to change the NAV exposure by just 5%. The analyst asked just how many deals of that size — especially in the unlisted space — are available to Remgro.

Remgro CEO Jannie Durand conceded it is difficult, at this delicate juncture, to make sizeable investments in SA. “Until December [when the ANC’S elective conference will be held] it will be a very unstable and volatile environment in which to invest,” he said. Durand seemed to take issue with a contention that Remgro has suffered from “new investment inertia” over the past four years. He pointed out that the group spent more capital in the past four to five years than the previous four to five years.

That is true. But Remgro has mostly directed capital at existing investments — notably the continued internationalisation of private hospitals group Mediclinic (which now has a primary listing on the JSE).

Presumably Remgro will also support plans to further broaden the reach of key investments such as financial services hub RMI, RCL Foods and liquor group Distell. When asked what Remgro might be perusing in terms of new deals, Durand declined to comment other than to confirm support for existing investment platforms. But he did respond quite tellingly to a question around whether Remgro would commit further capital to Mediclinic — an investment that now accounts for about 45% of the group’s intrinsic NAV.

Though Remgro would first need to assess the availability of capital, he said, the group is willing to dilute its Mediclinic stake. “We are happy to be a smaller shareholder in a bigger business.” This is a strategy that Remgro famously followed with its core tobacco interests when it (and corporate cousin Richemont) merged a controlling stake in cigarette group Rothmans International into BAT, in exchange for a significant minority stake in the enlarged business. Aside from perhaps heightening expectations that Mediclinic could pursue a mega-deal, Durand’s admission suggests Remgro is all too aware that its portfolio composition hinges too heavily on too few listed investments. This issue is now further compounded by the sale of the stake in Unilever SA — the group’s biggest unlisted investment.

At this point it is fairly easy for investors to replicate the bulk of Remgro’s portfolio, or even

Remgro

customise a portfolio by different weightings in Remgro’s main underlying investments.

Though it’s not entirely of its own volition, the scoreboard will show Remgro has shifted further and further away from its stated preference for holding stakes in unlisted companies.

Inevitably, the question must be asked: is Remgro relevant as an investment vehicle?

For risk-averse investors looking for a diverse and high-quality portfolio at a discount, steady growth, conservative management and reassuring dividend flows, Remgro remains a default option. But to make Remgro really appealing to investors, its status as the only entry point to attractive unlisted investments (DFA, Air Products, Seacom, Wispeco, Business Partners and an intriguing venture capital bouquet) needs to be enhanced. This can only come about by a major restructuring — either buying out minority shareholders in certain listed investments and delisting these, or splitting the company into a listed investment holding company and an unlisted investment holding company. Neither, to be frank, appear on the cards for the short term . . . if at all. In the interim (or until the new-deal-flow tap is turned on again), Remgro represents mainly a play on the share price discount to intrinsic value.

Maybe the group can then follow fellow Stellenbosch-based investment company PSG’S example of conveniently updating its intrinsic NAV on its website on a regular basis.