Still a riddle
Exchange Remgro rather than BAT for more Reinet
THE UNBUNDLING of British American Tobacco out of Richemont and Remgro over the past fortnight hasn’t yet done much to unravel the discount at which – especially Remgro, now 27% – is trading against net asset value.
However, shareholders are in fact better off, in two respects. The total value of their new interest in BAT, Reinet and Remgro is substantially more than the approximately R175 at which Remgro was trading prior to the unbundling. The good increase in BAT’s share price from around £15 to £18 on the London Stock Exchange and the simultaneous fall in the value of the rand created more value for investors than the reduction of the discount Remgro is trading at.
The current share price of the new investment vehicle Reinet – currently trading at 1270c, a discount of just more than 20% of its NAV – is something of a disappointment. To date, Reinet’s only asset is its interest in BAT. Against the cash in its balance sheet there’s a debit entry. Reinet will soon be conducting a rights issue of apparently four new shares for every five already issued.
Existing investors – the rights aren’t transferable – must use some of their BAT shares to take up the new Reinet shares. For Reinet’s rights issue to be successful, they’ll have to offer the new shares at a discount of as much as 10% on Reinet’s current ordinary free rand price.
After all, investors won’t exchange their BAT for Reinet if they aren’t offered a small incentive, such as another further discount on the current discount of around 20%.
Investors will have to consider very carefully next week whether they want to take up Reinet’s offer to exchange new shares for BAT. It may perhaps be a far better option to sell the new Remgro, with its rather uninteresting portfolio, and use the rand income to buy ordinary Reinet shares with ordinary rand on the JSE.
Keep your BATs. They’re a good international investment.
The discount of around 20% at which Reinet’s ordinary shares are trading against BAT, its only asset, leave a somewhat strange taste in the mouth. The discount shouldn’t be so big. The management agreement between the Rupert family and Reinet just looks a bit too fat.
That view may be completely wrong. The Rupert family’s entire BAT interests have already been transferred to Reinet. That’s a substantial sum in the company, which the Rupert family feels it will be able to manage so successfully it will fare better than BAT over the long term. That’s difficult to say for a group that hasn’t yet shown its management style in the current market but is still enough of a challenge so that investors shouldn’t sell their Reinet shares now, especially not at the current 20% discount.
The current asset value of the remaining Remgro is calculated by PSG’s Bernardt van der Linde at between R84 and R89/share. The reason for the difference is because Van der Linde also played around a bit with the values of the unlisted investments in Remgro to make provision for the recent general fall in listed share prices.
Remgro was trading at R65/ share not long ago. That’s a discount of 25% to 27% on the group’s NAV – a big discount and shows clearly that Remgro’s remaining assets no longer impress investors.
The table shows Remgro’s current assets. We compared them with a few good ordinary quality shares.
Investors must decide for themselves whether they’re excited about the Remgro portfolio. The substantial discount on Remgro’s shares may mean it’s not a good idea to sell the shares now. Van der Linde’s sums show Remgro could return a profit of about 750c/share from its current portfolio. That puts the share on an earnings multiple of 9 – which isn’t bad but nothing to write home about.
The new Remgro has now lost BAT, which was one of its major sources of cash. That means its future dividend policy might be stingy and investors will probably be lucky to receive more than 350c of the 750c/ share profit as a dividend. That’s a possible cash return of just more than 5%/year. Not bad, but definitely nothing exceptional in today’s market.
Richemont is a specialist company in the market for luxury to very luxurious goods. That market has its own characteristics, including probably more stable but somewhat lower growth than other SA companies, such as SABMiller, MTN and even Naspers, can achieve in their concentration on emerging markets. The luxury goods market has shown previously it’s reasonably free from the effects of recessions and credit crises. That’s why Richemont remains a good, newgeneration rand hedge. But compare the portfolios and decide for yourself.