Take it easy

Don’t read too much into un­bundling

Finweek English Edition - - Creating Wealth - VIC DE KLERK vicd@fin­week.co.za De Klerk holds shares in Rem­gro.

ANY PO­TEN­TIAL short-term profit still to be made out of the for­mal un­bundling of Rem­gro into Reinet and Bri­tish Amer­i­can To­bacco is be­ing sig­nif­i­cantly blown up by the rand ex­change rate, which weak­ened dra­mat­i­cally last week in par­tic­u­lar. The most im­por­tant as­sets – in fact, the only as­set in the un­bundling of Rem­gro – is the group’s 10,7% in­ter­est in BAT, which has long been listed on the Lon­don Stock Ex­change.

Over the past few weeks, along with the world’s fi­nan­cial credit cri­sis, BAT’s Lon­don price weak­ened from £19,30 to £17,05 at the time of writ­ing. That would have meant a loss of R14,50 in Rem­gro’s as­set value if the rand ex­change rate had re­mained un­changed from the level of £1/R14 in mid-Septem­ber. That fall in the price of BAT would have eroded the ma­jor por­tion of the pos­si­ble R15 profit from the clos­ing of the dis­count on Rem­gro’s as­set value we ex­pected in the Fin­week of 9 Oc­to­ber 2008.

Luck­ily for Rem­gro in­vestors, the rand re­cently weak­ened sub­stan­tially and was trad­ing at around £1/R18,00 at the time of go­ing to press. That fall in the value of the rand more than com­pen­sates Rem­gro share­hold­ers for the fall in BAT’s share price.

Cal­cu­la­tions there­fore show if the dis­count on Rem­gro’s other as­sets fall some­what from the cur­rent 30% plus there may be an­other R10 to R15 of ex­tra value in Rem­gro, thanks to the un­bundling.

How­ever, in­vestors are urged to ex­er­cise

cau­tion and to re­mem­ber the at­ti­tude to Rem­gro and Richemont and all the pub­lic­ity sur­round­ing the un­bundling can eas­ily weaken to dis­ap­point­ment of “buy the ru­mour, sell the fact” af­ter the un­bundling.

There are sev­eral warn­ings about that. First, the cur­rent price of R177 for Rem­gro is partly jus­ti­fied by the ex­tremely weak rand due to the on­go­ing sharp fall in the share prices of JSE-listed min­ing giants. That could again be at­trib­uted to the credit cri­sis that just re­fuses to dis­ap­pear, de­spite all the fuss by the world’s fi­nance min­is­ters and re­serve banks.

If things per­haps re­cover later, the rand will also strengthen: and re­mem­ber that both BAT and Reinet’s share prices will be closely linked to the fluc­tu­a­tions in the rand’s value.

The next dan­ger is the big fuss now be­ing made around the Ru­pert name, as if es­pe­cially Jo­hann Ru­pert thought up the whole un­bundling of Rem­gro him­self. Re­mem­ber, it’s the planned change in leg­is­la­tion of Sec­tion 1929 com­pa­nies in Lux­em­bourg, where R&R Hold­ings SA, the ve­hi­cle through which Rem­gro and Richemont hold their in­ter­ests in BAT, which vir­tu­ally forced the un­bundling on Stel­len­bosch. Don’t give too much credit where none is due.

Nat­u­rally, every­one makes in­vest­ment mis­takes – even the fa­mous War­ren Buf­fett is hu­man. For ex­am­ple, Rem­gro de­cided last year to ex­change its al­lo­ca­tion of 27m Dis­cov­ery shares – which it re­ceived from its di­rect in­ter­est in FirstRand af­ter it had un­bun­dled Dis­cov­ery – for 21m RMBH shares.

Mean­while, Dis­cov­ery’s price fell from R26,77 to the cur­rent R24/share, but RMBH’s share price is down from R33,94 (at which Rem­gro did the swap deal) to R23,30.

In­vestors must be es­pe­cially cau­tious about the ex­ces­sive op­ti­mism sur­round­ing Reinet. The in­vest­ment group is kick­ing off with a large in­ter­est in BAT and a lot of pos­i­tive hype about the qual­ity of the in­vest­ment’s man­age­ment. That’s all good and well. How­ever, big­ger names than Ru­pert, or even Buf­fett, in golf­ing terms re­cently missed sink­ing short “in­vest­ment putts”.

Give Reinet a miss if its share price cooks up too much over the next few days. Re­mem­ber, for the short term BAT is now merely a bet against the rand ex­change rate. And a fi­nal word of ad­vice: don’t for­get BHP Bil­li­ton is now trad­ing at 50% lower than its high­est level. BAT has only fallen by 11%.

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