Race for shares
Remgro leading Richemont by a short head
REMGRO OR RICHEMONT? Which is the better route for getting to British American Tobacco (BAT)? That was the investment question many analysts puzzled over during the past week. The balance is tilted slightly in favour of Remgro Treasury, which has opened the door to “international double dipping” but only very slightly, as the share is still trading at a discount of about 15% to its net asset value.
More than half of those net assets comprise its interest in BAT. And since the interest could be directly in the hands of the shareholders in October, there should be no discount on it. Remgro without BAT is therefore trading at a discount of nearly 30% to its other assets – and that may be too much.
No, not necessarily, is the reaction of many analysts, if you look carefully at Remgro’s remaining portfolio of boring South African assets.
Of those, the biggest is the interest in RMBH/FirstRand, followed by a small 4,4% interest in Impala Platinum. Both can be bought on the JSE by investors themselves. Its larger direct interests – such as its 100% of Transvaal Sugar, 74% of Rainbow Chicken and 46% of Medi-Clinic – don’t really excite anybody.
Nor has Remgro’s current management done anything recently to make investors sit up and take note. The unbundling of BAT was forced by changes in the tax status in Luxembourg rather than dynamics in Stellenbosch. For that reason the current large discount of as much as 25% on Remgro’s SA assets is probably justified. The possible “green energy giant” that could arise from Remgro’s interests in Transvaal Sugar and 25% in Total SA, even though the latter is reasonably valuable in its own right, is a dream for the very distant future.
Unlike Remgro, which is purely an investment company, Richemont offers investors the benefits and dynamics of an operating company. After the unbundling of its interest in BAT to its shareholders, Richemont is still one of the world’s largest specialist manufacturers and distributors of luxury goods. Its market is free of sub-prime complaints and ailments, but if UBS, the world’s largest welfare manager, carries on making such a mess of things even the money of the rich could dry up.
However, Richemont remains an excellent operating company and few investors have made a mistake by buying the share through the thick and thin in the world economy.
The answer to the question of whether you should get to BAT via Remgro or Richemont is therefore simple: it really doesn’t matter – as long as you make sure that you do get to BAT.
Reinet, the new investment company directly under the control of the Rupert family, could also be interesting for the future. The fund is kicking off with 10% of Remgro’s and Richemont’s existing shares in BAT, a good deal of foreign cash (euro) and hopefully a new dynamic management that will notice good opportunities.
Current investors in Remgro and Richemont can also exchange their allocation of BAT shares for larger interests in Reinet. But it’s better not to do so. Rather sell what’s left of Remgro after BAT has been unbundled, or use new money to buy the listed Reinet.
SA investors pay large fees to asset managers to look after their investments overseas. That may be unnecessary now that BAT will soon be readily available on the JSE.
The first graph shows the value of an investment in BAT in August 2003. It would now have increased by 200%. Neither the FTSE 100 nor the Dow Jones was able to achieve a total increase of 50% over those five years. Asset managers are usually quite happy if they can beat the increase in the FTSE 100.
Over the past few years resources shares, headed by world leader BHP Billiton, fared exceptionally well and beat returns on, especially, financial shares by far. However, BAT stood up for itself against BHP Billiton (see graphs).
SA investors don’t need any special knowledge to invest in BAT, which is listed on the JSE. Access to the views of the world’s leading investment analysts about the company is free and readily available (see table).