Compelling on paper, but in a slow market
The discount the share prices of many investment companies offer to the sum-of-the-parts of their portfolios often provides much intrigue for market watchers, especially when that discount is particularly large.
Everybody loves a bargain, and when a big discount can even mean access to assets for free, punters can get excited.
The problem with investment trusts is that most are structured for the long haul. The primary aims would be to secure solid (above average) and sustainable long-term returns from a well-diversified basket of investments capable of generating sufficient cash flows to underpin a consistent dividend policy.
Unlocking value is often not foremost on the minds of directors or prime movers of investment trusts.
Though Trematon is one of
the smallest investment companies on the JSE, the discount placed by the market on its underlying investments is one of the largest. At the time of writing Trematon was trundling along at 276c on the exchange. It represents a more than 40% discount on the stated intrinsic NAV as at the end of February of 482c a share.
The big discount is curious, since Trematon’s value is underpinned by a slab of conservatively valued property investments in the form of the Club Mykonos Langebaan resort, Aria Property Group, the Resi Investment Group and other residential property ventures. The collective value of the property holdings is R538m — which is just over half of the roughly R1bn valuation placed on Trematon’s entire portfolio.
These property investments equate to around 250c a share, which is a serious chunk of the
ruling share price. Trematon, which has been selling off some of its more mature property assets, also sits on cash of R96m, which represents another 45c a share.
So one way of looking at the value proposition is that investors are getting Trematon’s biggest investment — a controlling stake in private schools business Generation Education (valued at R287m or 132c a share) for free. What’s also thrown in gratis is the stake in UK-based property development financier Ask Partners (valued at R86m) and other investments (worth a collective R32m).
On paper, this is a compelling value proposition, with an added attraction of dividend payout for the full year.
However, the market — while acknowledging the value — is not seeing a “trigger” being pulled at Trematon for the foreseeable future. The slow local property market probably precludes Trematon spinning off and listing its property assets. It also seems unlikely that buyers will be lining up to pitch attractive offers for all or portions of the property portfolio.
The private education assets are being developed cautiously and it will be some time before there is sufficient critical mass for Trematon to contemplate spinning the business off.
The prime movers at Trematon — executive director Allan Groll and CEO Arnie Shapiro — are also unlikely to pursue any radical action to unlock value in the short term.
All things considered, IM suspects Trematon will continue to trade at a 35% to 40% discount to the intrinsic value of its portfolio for the next few months. It seems unlikely that the discount will widen or the NAV be seriously eroded. Investors able to exercise patience might consider accumulating stock at current levels.
IM would treat Trematon as a property-backed option on private education — a view that might be reinforced if the Generations School business can fortify early profits and show further development initiatives at the August year end.
A bigger picture might even be for a larger investment entity (Brimstone or HCI spring to mind) to advance on Trematon, which has a market capitalisation of less than R600m.