PICK OF THE MONTH
“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. ●