BAT still safest and best
Now time for Reinet shareholders to show their cards
THE TOTAL DISCOUNT on the net asset value of the old Remgro didn’t fall at the time of British American Tobacco’s unbundling. Despite expectations, the compulsory unbundling of BAT due to proposed legislative amendments in Luxemburg hasn’t yet unlocked part of the discount for shareholders. The one old Remgro has now produced is three investment opportunities offering investors three clearly different opportunities.
BAT is safe, steady as a rock and in no danger of being exposed too much, if at all, to the current global credit crisis. In fact, in London – rising entirely above all the stories about empowerment, simplistic exchange controls and even legislation concerning smoking – BAT still attracts a perfect rating from the 11 recognised international analysts.
Admittedly, the perfect rating of 1 (1 = buy, 3 = sell) did fall slightly recently, to 1,3, because there could possibly be future sales pressure from SA on account of BAT’s second-rank status as an inward listing on the JSE.
The consensus view of the 11 analysts is that for 2009 BAT will declare a 90,5p dividend. Its current share price on the London Stock Exchange is 1700p for an excellent forward dividend yield of 5,3%. That’s much more than can be earned on British Treasury bonds and sometimes it looks as if BAT is even safer than Britain’s Treasury. The recommendation is clear: hold on to what you have and buy even more. Make BAT the cornerstone of every well-managed portfolio in SA.
Reinet, with its current rights issue, offers a large variety of opportunities. At this stage it seems as if investors prefer Reinet’s offer of obtaining new shares in the company by exchanging some of their BAT for the shares. But that’s by no means clear-cut. If you’re a long-term investor with a bit of surplus SA cash, it may perhaps be a better option to sell your allocation of Reinet rights (JSE code REIN) rather than using your precious BAT to take up new Reinet shares.
But remember that Reinet’s asset value – and this consists largely of BAT shares – is currently 1380c, while its shares are trading at only 875c on the JSE. That’s a huge discount of 37%. It’s therefore far cheaper to obtain a large exposure to BAT by simply taking ordinary rand and buying Reinet shares.
There are two risks – which could also be opportunities. With an investment directly in BAT you know how much dividend you’ll receive every year. Once the dividend has been declared to Reinet, the management team appointed by Johann Rupert can do all sorts of things for Reinet. One is to take the dividend they receive from BAT and use it elsewhere, rather than giving it to shareholders. Reinet could even sell its interest in BAT and buy into another company. That could be good or bad, hence the current huge discount of 37%.
But if you don’t have full confidence in the new asset managers appointed by Reinet, don’t sell your interest in it just yet. Wait a few weeks: the 37% discount will probably fall to not more than 30%, perhaps even 20%, once all the uncertainty about the complicated conversions is over and done with.
Thebe Securities calculates the net asset value of the leaner Remgro currently at R95. It could be somewhat lower if a few realistic adjustments are made to the value of certain unlisted assets. Remgro is currently trading at 6970c on the JSE, a discount of 27% to its net asset value. Even that discount should come down later to 20%, or even fractionally less.
Currently, it’s unclear what Remgro’s plans are. With its portfolio of assets containing considerably more financial shares and considerably fewer resources than Satrix 40, it now looks as if it could again beat the Satrix 40.