Still profits to be made
As long as BAT stays above £18/share…
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