Much value to be had The as­sets of this in­vest­ment com­pany are sig­nif­i­cantly un­der­val­ued. It is an op­tion for in­vestors look­ing for a safe har­bour in the cur­rent un­cer­tain en­vi­ron­ment.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za is a mar­ket an­a­lyst at IG.

born out of the Com­pag­nie Fi­nan­cière Richemont (CFR) sta­ble, Reinet In­vest­ments SCA was es­tab­lished as a sep­a­rately listed in­vest­ment ve­hi­cle, with the group’s pri­mary as­set be­ing that of the for­mer Richemont’s in­ter­est in cig­a­rette man­u­fac­turer Bri­tish Amer­i­can To­bacco (BAT).

The group has a keen fo­cus on a wide range of as­set classes, in­clud­ing both listed and un­listed eq­ui­ties, bonds, real es­tate as well as de­riv­a­tive in­stru­ments with a view to take on long-term in­vest­ment op­por­tu­ni­ties while plac­ing an em­pha­sis on the pro­tec­tion of share­holder cap­i­tal.

The group trades on a very con­ser­va­tive price-to-earn­ings ra­tio (P/E) of around 5 times, with a for­ward P/E es­ti­mate of around 7 times, although with in­vest­ment hold­ing com­pa­nies it is pru­dent to look at the net as­set value (NAV) as a more mean­ing­ful met­ric in terms of as­sess­ing the value propo­si­tion.

As guided by the group’s most re­cent re­sults, for the year to end March, the Reinet Fund SCA (a wholly owned sub­sidiary of Reinet In­vest­ments SCA) had a NAV amount­ing to €5.2bn, re­flect­ing a yearon-year in­crease of 3%. A rough es­ti­ma­tion re­gard­ing the group’s as­set com­po­si­tion sees the in­vest­ment in BAT at nearly 70% thereof, the hold­ing in the Pen­sion Cor­po­ra­tion (in the UK) is around 17% of NAV and the bal­ance of the un­listed as­sets around 13% of NAV. Net bor­row­ing from medium-term fi­nanc­ing pro­vides about a 5% neg­a­tive con­tri­bu­tion to the NAV fig­ure.

Di­vid­ing the NAV by the num­ber of shares in is­sue and con­vert­ing into a rand value (us­ing an ex­change rate of R17/€) re­sults in a NAV value per share of around R45. The value of the Reinet Fund will vary from that of its par­ent com­pany, Reinet In­vest­ments SCA, when con­sid­er­ing the par­ent com­pany’s as­sets, li­a­bil­i­ties and in­clud­ing amounts payable and re­ceiv­able (from the fund), although it does make up the most sub­stan­tial element of the group’s bal­ance sheet and val­u­a­tion.

Even if the NAV fig­ure is dis­counted fur­ther, the cur­rent share price ap­pears a sig­nif­i­cant un­der­val­u­a­tion rel­a­tive to the wealth of its as­sets. While it is of­ten the case that an in­vest­ment hold­ing cor­po­ra­tion will trade at a dis­count to NAV, the ap­par­ent dis­count for Reinet looks to be be­tween 25% and 30% (de­pend­ing on ex­change rate and cur­rent share price), which is sub­stan­tially larger than that of its sec­tor peers.

As the BAT in­vest­ment ac­counts for slightly more than 70% of the group’s NAV, we can de­duce that the cur­rent share price is es­sen­tially fully val­ued in terms of the BAT hold­ing. This means very lit­tle value has been as­signed to the share price in terms of the group’s un­listed in­vest­ments. Valu­ing the un­listed as­sets does have an air of sub­jec­tiv­ity, es­pe­cially that of a pen­sion fund (Pen­sion Corp), which finds uncer­tainty in terms of val­u­a­tion through be­ing a li­a­bil­ity-driven in­vest­ment as well as be­ing re­liant on ac­tu­ar­ial as­sump­tions. How­ever, we think it is think is un­fair to ap­ply lit­tle to no value on these as­sets.

Reinet In­vest­ments SCA, through the Reinet Fund, pro­vides a de­fen­sive edge in an un­cer­tain mar­ket­place. The qual­ity of as­sets ap­pears sig­nif­i­cantly un­der­val­ued within the com­pany’s cur­rent share pric­ing, which in turn pro­vides a potential ar­bi­trage op­por­tu­nity for the far-sighted in­vestor.

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