Still prof­its to be made

As long as BAT stays above £18/share…

Finweek English Edition - - Companies & Markets - VIC DE KLERK

IN­VESTORS – es­pe­cially “as­set strip­pers” – can still earn be­tween R10 and R15/Rem­gro share over the next two to three weeks from the un­bundling of the group. Reinet, the new in­vest­ment branch of Rem­gro, will be listed as early as 21 Oc­to­ber and we ex­pect a price of at least R20/share. Heavy­weight Bri­tish Amer­i­can To­bacco (BAT) will be listed on the JSE on 28 Oc­to­ber at a price of prob­a­bly not less than R275/share. The price of the much smaller Rem­gro, with a net as­set value of around R100/share, should be at least R70/share on 28 Oc­to­ber. To­gether, that gives a value of R195/Rem­gro share, about R15/share more than the cur­rent R180.

The only thing the in­vestor must do is think for him­self and then fol­low the pro­ce­dure of a typ­i­cal pri­vate eq­uity fund that buys a con­glom­er­ate, di­vides it up into por­tions and then sells the as­sets sep­a­rately. Oth­er­wise, you only have to rely on the fact the com­po­nent parts are worth more sep­a­rately than the in­vest­ment com­pany, whose shares al­ways trade at a dis­count to the un­der­ly­ing value.

The un­bun­dled value of Rem­gro shown in the ta­ble.

Profit per 100 Rem­gro shares is R1 000 plus, or about 5% re­turn on cap­i­tal for an in­vest­ment of 30 days – def­i­nitely worth­while for the as­set strip­per.

is in­ter­est in Medi-Clinic. Dis­tel and Rain­bow’s con­tri­bu­tion will each be just more than 5%, while the bal­ance of the as­sets – about 40% of the to­tal – con­sists mainly of un­listed in­vest­ments and cash.

It’s a bit of a hotch­potch of as­sets and is cer­tainly worth more in the eye of the be­holder than for an in­vestor in the share. For that rea­son the dis­count at which the as­sets trade on the JSE could be as much as 30%, which is why we’ve es­ti­mated that the leaner Rem­gro will trade at R70/share.

If the price of the new Rem­gro is lower – or, to put it dif­fer­ently, if the dis­count is 30% or more – in­vestors who now hold shares di­rectly in FirstRand (cur­rently trad­ing at 1560c/share) should con­sider con­vert­ing their FirstRand into the new Rem­gro. Half of the lat­ter’s in­creased new in­ter­est of about 30% of its as­sets in the FirstRand group is via RMB Hold­ings, which is al­ready trad­ing at a dis­count to its ma­jor as­set, FirstRand. The dou­ble dis­count could per­haps be just enough to jus­tify such a switch.

Re­mem­ber: this is solely an ex­er­cise in as­set strip­ping and an op­por­tu­nity to feel like one of the big guns just for a lit­tle while. Go and look at Pretty Woman again. Re­mem­ber the dan­gers? For ev­ery pound that the price of BAT falls – for ex­am­ple, again back to £17 – means about R6 in Rem­gro’s share price and re­duces the profit from the un­bundling by so much it hardly be­comes worth the trou­ble.

Just re­mem­ber there are quite a few risks as­so­ci­ated with that trans­ac­tion, the great­est be­ing un­doubt­edly BAT’s share price. Things don’t look good on the in­ter­na­tional share mar­kets and even BAT’s share price, which sells cigarettes (nowa­days largely in de­vel­op­ing mar­kets, such as Rus­sia), can fluc­tu­ate widely. At the time of writ­ing, BAT was trad­ing at £18/share. That’s slightly lower than the £18,60 of just be­fore the big mess in the United States but still con­sid­er­ably bet­ter than the £17 of a few weeks ago. At £17/share there’s very lit­tle, if any, profit in the as­set strip­ping of Rem­gro.

Reinet’s price could be sub­stan­tially more than R20/share. The price was sim­ply cal­cu­lated on the strength of Reinet’s hold­ing of BAT shares. Reinet’s own prospec­tus will be avail­able on 11 Oc­to­ber and af­ter that date a more ac­cu­rate cal­cu­la­tion will be pos­si­ble. How­ever, Reinet doesn’t rep­re­sent a large enough share of the trans­ac­tion to make any real dif­fer­ence.

The third large un­cer­tainty is Rem­gro’s share price without BAT. FirstRand and RMBH to­gether, for a to­tal weight of about 30%, is the most im­por­tant as­set in the re­main­ing Rem­gro. Bank shares are cur­rently hav­ing a tough time un­der sharp sell­ing pres­sure and that neg­a­tive mood could lead to the new, leaner Rem­gro per­haps trad­ing at less than R70. That of course cre­ates a new op­por­tu­nity for in­vestors in FirstRand; but more of that later.

The in­vest­ment in Im­pala Platinum – that sec­tor is also un­der con­sid­er­able pres­sure – will con­trib­ute about 9% to the new Rem­gro’s as­sets, about the same as Rem­gro’s

Source: Ya­­nance

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