PICK OF THE MONTH

The latest financial report from investment vehicle Reinet, controlled by the Rupert family, does not offer many reasons why the market should close the discount the share offers on the latest net asset value (NAV) figure.

Reinet’s last-stated NAV, as at end-March, was about R78bn or R397 a share. That means — at the time of writing — Reinet’s shares are offering a more than 40% discount on that NAV.

In reality the situation is more fluid. The share price of British American Tobacco (BAT), which represents just over half of Reinet’s portfolio value, has shed about 15% since the close of the financial year. That might imply the “real” or updated discount is closer to 35% — but Reinet has just concluded a rather aggressive share buy-back that, strictly speaking, should enhance NAV.

There’s not much else aggressive or adventurous unfolding at Reinet. It remains a vehicle steered cautiously in order to preserve capital.

Executive chair Johann Rupert writes that “with rising debt levels, global uncertainty and political divisions in both the US and Europe, finding good opportunities for investment can be a challenge and protecting the downside becomes more important”.

But in the past financial year there was a commitment of €217m to existing investments including Pension Insurance

Corp (PensCorp), Trilantic, Snow Phipps, Prescient China Equity Fund, and recent positions in Chinese ride-hailing service Grab and RLG Real Estate Partners.

RLG is arguably the most interesting diversion by virtue of the substantial additional tilt of €57m by Reinet.

RLG is a property fund which is managed by a subsidiary of another Rupert family controlled entity, luxury brands conglomerate Richemont. RLG invests in and develops real estate properties, including luxury brand retail developments in prime international locations. “The property investments … will become more visible to investors who still regard Reinet as merely a proxy for BAT

At the end of March Reinet’s investment in RLG was carried at €81m (R1.3bn) — making it one of the bigger holdings in the group’s sprawling “private equity and related partnerships” segment of the portfolio. Aside from the additional investment, Reinet reported that RLG showed a sprightly €18m increase in the value of the underlying properties.

So not only is RLG a serious piece of the “private equity and related partnerships” portfolio, but it is also the star in this hub. It looks a more inspired investment than Reinet’s early foray into distressed property after the 2008 global crisis, when it acquired US land and mortgages. With GAM Real Estate Finance Fund and developer Soho China, the combined value of Reinet’s property investments tops €215m (R3.5bn).

These property investments represent only 4.4% of the total portfolio value at end-March. But if the big investments in BAT and PensCorp are stripped out, then real estate investments represent roughly 20% of the rest of the portfolio.

This development is important because the property investments — along with larger fund investments in Trilantic Capital Partners, the various Chinese investments and the Snow Phipps funds — will become more visible to investors who still regard Reinet as merely a proxy for BAT.

The tobacco giant’s dominance in Reinet’s portfolio is gradually being filtered out … not only because of ongoing diversification but also the stubbing out of BAT’s share price over the past 12 months.

At the end of March BAT represented 52.2% of Reinet’s NAV against 62.4% in the previous year. When Reinet reports its NAV update for the end of June, BAT — which Rupert still regards as “an attractive long-term investment” — could slip below 50%.

While Reinet’s investments in property and specialist funds will chip away at tobacco’s dominance, the big factor in shedding the BAT proxy tag remains PensCorp. This specialist pension fund insurer represents about 30.6% of Reinet’s portfolio.

It is proving a robust performer, and there is a view that Reinet’s valuation of the business is conservative. There could be a big value unlock if a larger financial services entity coveted PensCorp’s niche.

But even if Reinet’s portfolio balance does change to reflect a better spread of more significant investments, the market is unlikely to whip up too much enthusiasm for the stock in the short to medium term.

That probably suits Reinet in its share buy-back endeavours, and may offer a chance for patient investors to lock into a cash-generating, low-risk portfolio at a wide discount.