The all-in-one share Remgro has been performing very well and holds great intrinsic value. Schalk Louw explains why this share is an excellent investment for the long term.
iwill never forget how revolutionary Pantene 2-in-1 shampoo (shortly followed by the well-known Dimension 2-in-1 shampoo) became in the late 80s. Before then, you were forced to purchase shampoo and conditioner in separate containers if you needed those products. The invention of 2-in-1 shampoo wasn’t only a matter of convenience for consumers, who could now enjoy both products in one bottle, but it also meant that they could save money in the process.
In the same way that we had to purchase shampoo and conditioner separately before the 80s, many investors looking to buy shares are still made to believe that if they don’t have enough capital to distribute over more than one or two shares, their choices are limited to unit trusts and more recently, exchange-traded funds (ETFs) only. But this is completely inaccurate. In fact, there are several other options available to such investors. A holding company is a lot like 2-in-1 shampoo: in one bottle (share) you can have exposure to several listed and unlisted companies. This type of company, as its title suggests, is the holder of several other companies.
Remgro remains one of the best-known South African holding companies and due to the amazing value that these types of companies currently offer, I would like to focus your attention on Remgro this week.
Remgro was founded in the 1940s by well-known entrepreneur, Dr Anton Rupert, made its initial appearance as the tobacco company, Voorbrand, and later became known as Rembrandt Group. Rembrandt was listed on the JSE exactly 60 years ago this year, and made its debut as Rothman’s International on the London Stock Exchange (LSE) in the 1970s. In 1980, Rembrandt decided to separate its South African interests from its offshore interests, which led to the rise of Richemont. Since then, the company has been restructured several times, and it has distanced itself from quite a few companies in the process, of which the most famous transaction has to be the unbundling of British American Tobacco Company (BAT) in 2008.
There was great concern that Remgro wouldn’t be able to keep up its successful run after this unbundling, but these rumours were unfounded as Remgro not only managed to outperform the FTSE/JSE All Share Index by 20% since the BAT unbundling in 2008 (28 October 2008 to 18 May 2016), but when compared to the South African General Equity Unit Trust Sector, of the 78 funds available, only 36One, Foord, NGI Prive Wealth and PSG Asset Management managed to outperform Remgro over the same period.
Today, Remgro consists of eight listed companies, which make up 80.2% of the holding company, along with quite a few unlisted companies. Its largest holdings can be found in the local and LSE-listed MediClinic, RMB Holdings and RMI Holdings. Both RMB and RMI are holding companies in their own right and, in turn, own several well-known companies and banks, including Discovery, FNB, MMI and Outsurance.
What probably attracts me to Remgro the most is its discount to intrinsic value. Because more than 80% of Remgro is listed, it makes it easy to monitor when the company offers more value compared to other times. At current market prices, Remgro’s net asset value (intrinsic value) per share amounts to R310, while the share price is trading around R235. This not only means that you’re getting more than one product in one bottle, but also that you get ‘310ml’ for the price of ‘235ml’.
Since 2010, Remgro has traded at an average discount to intrinsic value of roughly 14%. This discount now stands at 30%, its widest levels in six years, which looks very attractive to me, even at these uncomfortably highpriced JSE valuation levels.
Remgro is a fantastic company with a long and rich profit history. As a Western Province and Stormers supporter, I could only wish that it owned more than its current 24.9% holding in WP Rugby, versus its 50% holding in Blue Bulls Company. Irrespective of my rugby interests, however, Remgro remains an excellent value proposition over the long term.