Com­pelling on pa­per, but in a slow mar­ket

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

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.

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