Make them tough
Afascinating bit of correspondence penned by investor Nick Krige to Herman Bosman, CEO of RMB Holdings (RMH), fell into my hands this week. I took note because I feel RMH, which has an influential stake in banking giant Firstrand as its value mainstay, perpetuates an archaic (and pointless) holding company structure that no longer has a place on the JSE.
The most recent time I witnessed Krige in action was at last year’s Trencor AGM, where he gave the board a piece of his mind sans the usual corporate diplomacy.
What’s irking Krige this time — and presumably bothering other investors too — is not the holding company structure as much as the extension of RMH’S investment strategy into property.
RMH Property has made investments through the acquisition of a 27.5% interest in Atterbury Property Holdings, a 34.1% interest in Propertuity Development (an urban renewal business) and 40% of Genesis Properties (a mezzanine debt and equity funding specialist).
But these investments are minuscule at this point. As things stand, RMH carries a market capitalisation of R122bn, representing a 13% discount to the market value of its 34% stake in Firstrand.
With the property interests at last count worth less than R1bn, it is not difficult to perceive RMH as a discounted proxy for Firstrand.
Stating a case
Krige believes the widening discount (now around 13%) to intrinsic value that RMH has traded at over the past year is directly related to plans to grow a
R10bn property portfolio.
He notes: “My fear is that the market has started to identify RMH as a holding company and is now debating what the appropriate holding company discount should be.
“If the market settles on a typical
20% discount, then RMH shareholders stand to lose R28bn in value.”
Krige says — and I tend to agree — that destroying R28bn in value to build a R10bn property portfolio is not prudent.
He points out that many entrepreneurs build property companies from scratch, pointing as an example to market leader Growthpoint, which started as a tiny seed planted by Investec. More recently real estate specialists like Storage and Equites were started by entrepreneurs with limited resources.
Krige adds: “I have seen some of these companies start in the proverbial ‘garage’ with sticky tape and glue, and it is difficult to understand why RMH feels the need to shelter a property venture within RMH. Should the property operation not sink or swim like everybody else? Is it really worth risking R28bn just to protect the property operation from market forces?”
Krige contends that sheltering the small property portfolio with good growth prospects within RMH robs the property operation from reaping the generous rewards of the virtuous cycle.
More succinctly, he asks whether it makes economic sense to fund properties with equity that trades at a discount to intrinsic value.
Putting it out there
Krige adds a thought-provoking point, recalling the days (in the 1980s and 1990s) when Liberty Properties was the undisputed king of the SA property market. Today, he contends, Liberty
Two Degrees is an also-ran with a market cap of R7bn, against R88bn for Growthpoint.
“I believe the poor performance resulted from the complacency of hiding behind mommy’s skirt when it should have been racing against the other kids. Could it be that the wellintentioned shelter turned out to be an expensive folly — [something that] RMH should avoid?”
Whether RMH’S upcoming interim results will provide any reassuring answers to Krige’s pertinent questions remains to be seen.
I would not hold my breath for any tinkering with the RMH structure. But pressure will most certainly mount if the discount widens and the property thrust struggles for traction.
I have seen some [real estate specialists] start in the proverbial ‘garage’ with sticky tape and glue