Logic has its limits for bag of hived-off bits

HOSKEN announced a restructuring yesterday that was warmly received by the market, presumably in the hope that more is to come. The company has a strong track record, but is a strange beast, even for an investment holding company. Its investments range from the extremely small to the very large, from gambling to media to manufacturing to mining.

Like all such companies, it trades at a discount to net asset value. The problem is that it is not only doing so, but it is almost impossible to tell how big this discount is because so much of the company’s valuation is based on management’s own valuations. Yet it does seem that the company has a good eye for an opportunity, despite some real disasters, such as clothing group Seardel and possibly also the exhibitions division.

The good news is that the group is making some effort to hive off divisions, which could help close the net asset value gap. The bad news is that very little seems to connect the bits that are being hived off. Out are slot-machine business Vukani Gaming and the Bingo company, which is still tiny. Also into the new company, to be called Niveus, will go Hosken’s investment in wine group KWV and Formex, makers of catalytic converter components.

The motivation is that these companies are getting lost in the greater group, and that they have good growth potential. That logic is unimpeachable. The industrial logic of the new company is, well, a mystery. about 20 years, some state-owned enterprises and government departments have become risk averse to local manufacturers.

The group cites Prasa’s low local content threshold of 0%-40% over the first three years of its 20-year, R123bn procurement programme. It says this means the agency can opt to fully import motorised coach products in this initial period, despite DCD already being able to make a bogie with 85% local content. The upshot, says DCD, is that Prasa has been inconsistent on what the value of local content means to it.

But it is not the only state agency to fall foul of this “touchy-feely” problem. DCD adds that although it had the capacity to build about 95% of the heavy engineering requirements of coal-fired power stations in 1985, this has now dropped to 65%.

But MD Rob King says the group has been asked to provide “virtually nothing” to Eskom for Medupi and Kusile. Instead, imports in this regard have been large enough to negatively affect SA’s balance of payments. King now fears South African industries will be left out in the cold on infrastructure projects such as renewable energy, along with initial railway spend.

Dave Marrs edits Company Comment (marrsd@bdfm.co.za)