PICK OF THE MONTH

Financial Mail - Investors Monthly - - Contents - Petri Redel­inghuys

“What stands out is that 34.2% of the to­tal group NAV is in­vested in an un­listed UKbased com­pany called Pen­sCorp

Share: REINET JSE share code: RNI Share price: R336 Av­er­age vol­ume traded: 5.2-mil­lion

Reinet has been a slow burn since it listed in 2008. Re­turns have been steady rather than spec­tac­u­lar (fit­ting the group’s “cap­i­tal preser­va­tion” strategy) and the Ru­pert fam­ily in­vest­ment com­pany now has a net as­set value of about à5.5bn.

Every­body knows Reinet holds a sig­nif­i­cant stake in Bri­tish Amer­i­can To­bacco (BAT), which has prompted some in­vestors to re­fer dis­mis­sively to the group as a proxy for BAT (even though share­hold­ers were dis­con­nected from the cash spin­ning to­bacco com­pany’s gen­er­ous div­i­dends). That is no longer the case.

For some time BAT has not been the ma­jor­ity of the to­tal in­vest­ment port­fo­lio that Reinet holds. It has been the big­gest hold­ing, but not the ma­jor­ity. In fact, BAT makes up (as at the Septem­ber 30 re­sults) 48.6% of the to­tal net as­set value (NAV) of Reinet. The rest is made up of un­listed in­vest­ments. Of the to­tal NAV, about 16% com­prises pri­vate eq­uity in­vest­ments and part­ner­ships scat­tered across the globe, About 1% is in­vested in “di­a­mond in­ter­ests” and an­other 1% is in “US land de­vel­op­ment and mort­gages”.

Those last two are too small to care about re­ally. What stands out is that 34.2% of the to­tal group NAV is in­vested in an un­listed UK-based com­pany called Pen­sion Insurance Corp Group (Pen­sCorp).

Re­cently Pen­sCorp has be­come an in­ter­est­ing fo­cal point. Pen­sCorp ad­dresses a se­ri­ous is­sue in the world of fi­nance — un­funded pen­sion fund li­a­bil­i­ties, which are a grow­ing con­cern for com­pa­nies around the world. In some cases, the de­fined ben­e­fit pen­sion obli­ga­tions that com­pa­nies have to age­ing em­ploy­ees can be big­ger than that com­pany’s mar­ket cap­i­tal­i­sa­tion.

Back be­fore com­pa­nies started do­ing pen­sion and re­tire­ment funds the way they are struc­tured to­day, there were struc­tures that de­fined the ben­e­fits that would be given to em­ploy­ees for the rest of their lives: den­tal and eye care, or on­col­ogy and heart-re­lated care. It stands to rea­son that as med­i­cal in­fla­tion keeps push­ing the prices of these ser­vices and prod­ucts higher, com­pa­nies would not be able to foot the bill for all their em­ploy­ees when they even­tu­ally start to re­tire. Thus, the de­fined con­tri­bu­tion pen­sion and re­tire­ment funds were born — which is how things are done now.

This did not take away the his­toric prob­lem though. The prom­ises were made and put in writ­ing and com­pa­nies are still on the hook for these de­fined ben­e­fit schemes with swathes of pen­sion­ers (baby boomers) ei­ther start­ing or near­ing re­tire­ment. This is a prob­lem and it’s grow­ing.

En­ter Pen­sCorp, an insurance com­pany that is buy­ing the de­fined ben­e­fit pen­sion fund li­a­bil­i­ties from com­pa­nies and then re­plac­ing those pen­sions with insurance poli­cies. It’s pretty com­plex. But in a nut­shell what they are do­ing is tak­ing the reg­u­lar con­tri­bu­tions made by non­re­tired mem­bers of the pen­sion fund, as well as any as­sets that the pen­sion fund might have, and in­vest­ing that in real in­fra­struc­ture (and real econ­omy in­vest­ments) and then writ­ing an insurance pol­icy to the pen­sion holder.

So, the pen­sion hold­ers re­tain their de­fined ben­e­fits, while the com­pany gets rid of the pen­sion fund li­a­bil­ity and Pen­sCorp builds a huge port­fo­lio of as­sets which it uses to un­der­write insurance poli­cies.

In short, Pen­sCorp is solv­ing a prob­lem that many com­pa­nies in the UK have — and is mak­ing a lot of money in the process. Pre­lim­i­nary trad­ing re­sults for 2019 show £40.9bn worth of fi­nan­cial in­vest­ments with £7.2bn of pre­mi­ums earned. Just let that sink in for a bit.

Now here is the ex­cit­ing bit. On Jan­uary 27, Pen­sCorp an­nounced that it will be do­ing a cap­i­tal raise for £750m to raise fund­ing to grow its book. In mid-Fe­bru­ary Reinet con­firmed it had par­tic­i­pated in the rights of­fer to the tune of £438m, and with that in­creased its stake in Pen­sCorp to 46.4%.

An in­ter­est­ing aside is that Reinet has sold off 7-mil­lion BAT shares since the start of the year, and these pro­ceeds were mo­bilised for the Pen­sCorp rights of­fer.

By the next quar­terly re­port de­tail­ing the com­po­si­tion of Reinet’s port­fo­lio it seems safe to as­sume that Pen­sCorp will be the big­gest sin­gle in­vest­ment hold­ing. The mar­ket will need to look at Reinet a lit­tle dif­fer­ently than in the past, and there may be a good deal of scur­ry­ing to re­search Pen­sCorp (which is not listed but does pro­vide com­pre­hen­sive fi­nan­cial re­ports on its web­site).

IM reck­ons that with the shift in the bal­ance of the port­fo­lio, Reinet is a value-filled stock that can be held onto for a long time. ●

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