Still a rid­dle

Ex­change Rem­gro rather than BAT for more Reinet

Finweek English Edition - - Openers - VIC DE KLERK

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.

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