Discount on shares of ARC reflects unease
Some in the market believe that African Rainbow Capital (ARC) could be the Remgro of our times: a stable, deep-pocketed anchor investor, with impeccable empowerment credentials to boot. If so, it’s not a view that has captivated many retail players in the market yet, if the company’s share price performance is anything to go by.
While its intrinsic net asset value as of end-December was R8.79, from R8.46 at listing in September, ARC’s shares on the JSE have steadily fallen to their present level of R6.65, implying a discount of about 32%.
While all investment holding companies tend to trade at a discount to net asset value, like Remgro itself, the extent of the discount implies a certain level of unease. Perhaps it’s the wide array of unlisted investments, where investors must take the management’s word on how they arrive at their valuations.
In its results ARC defines fair value “as the price that would be received for an asset in an orderly transaction between market participants”. That is easy enough for listed investments. For its unlisted portfolio, ARC says the primary valuation methodology will be the income approach, discounted cash flow and comparisons against a market approach “where appropriate”. Here, there is much room to be subjective.
ARC says the general partner, a wholly owned subsidiary of Patrice Motsepe’s Ubuntu-Botho Investments, “will use its judgment to select the valuation technique most appropriate for an investment”.
Still, in its short listed life ARC has attracted some fairly prominent shareholders, such as Old Mutual Global Investors, Absa Asset Management, Mazi Capital and Abax Investments.
Investors irked by the larger discount that RMB Holdings (RMH) offers on its underlying investments, mainly banking giant FirstRand, probably won’t want to dig deeper into the financial statements for the six months to end-December. Much has been made of RMH’s tilt at building a meaningful property hub, an initiative that would give the holding company a rationale for its continued existence.
But the interim results show that the property investments posted a loss of R15m and, more worrying, that the book value of these real estate aligned positions have been reduced from R972m in 2016 to R743m.
The small print states that the value of the property investments were (re)stated after an impairment amounting to R174m of (unnamed) associates in the interim period.
Frankly, that’s a hefty impairment relative to the value of the property investments. If an impairment of similar scale was reported in a listed property venture, shareholders might have hit the roof.
Fortunately for RMH this setback in the property thrust won’t really show up or cause too much dismay, not with the portfolio value still firmly hitched to the 34.1% stake in FirstRand. RMH directors argued earlier in March that the recent widening of the discount was “not a structural deviation from historical performance and can be attributed to changes in liquidity and volatility patterns on the JSE”.
Then again it’s difficult not to sceptically view an impairment that represents almost 20% of the value of the property book value. Certainly one might argue, even at this early juncture, that it’s understandable for some market participants to discount RMH’s ambitions to build a R10bn property hub.