Portfolio changes could make all the difference

arking back to the days of the old Rembrandt Group, investment company Remgro has always provided much comfort to shareholders by way of the four Ds — being diversified, dependable, dividend paying and deal driven.

For decades, Remgro has been a reliable and low-risk builder of shareholder value, as well as a consistent dividend payer through thick and thin — as was the former Rembrandt.

Though best known for its incredible success in the tobacco sector (its operations now form part of British American Tobacco), Remgro has had a big hand in building up valuable businesses like Distell, FirstRand, Discovery, Outsurance, Mediclinic International as well as technology winners such as Vodacom, Fundamo and, most recently, fibreoptics businesses Dark Fibre Africa and Vumatel.

These days a fifth D could be added to the other four — discount. That discount, IM contends, relates to market perceptions that further value unlocking could be prolonged and that the group now lacks an investment that is capable of shooting the lights out.

Remgro, like most investment trust-type counters, has always traded at a discount to its intrinsic NAV. The discount really takes into consideration factors like illiquidity in underlying investments, the potential for management to take a strategic misstep or even a potential overvaluation of an unlisted investment.

Remgro’s discount — thinking back to the years that the late, great Thys Visser was at the helm — traditionally veered

Haround 15%-20%. These days that discount is considerably larger, despite recent efforts to unlock value by the unbundling of the stake in Rand Merchant Bank Holdings (RMBH) and more of the group’s investments being unlisted.

Remgro CEO Jannie Durand seems acutely aware of the lingering (and frustrating) discount, and looks determined to enforce structural changes that should markedly enhance value for shareholders.

Experienced market watchers, of course, will know that the wheels turn slowly at Remgro, and perhaps even advise that it’s not worth holding one’s breath for the next valueunlock exercise.

IM, on the other hand, reckons Remgro will have a more effective portfolio structure in the next 18 to 24 months. Right now the company sits with the pesky problem of a double discount on its holding in insurance and financial services hub RMI Holdings. RMI itself trades at a substantial discount to the value of its underlying investments in assurer MMI, Discovery and Outsurance.

A logical step would be for Remgro to follow up its RMBH unbundling by also unbundling its stake in RMI. RMI, in the hands of Remgro shareholders, might ratchet up its efforts to unlock value … perhaps unbundling its stakes in MMI and Discovery and separately listing Outsurance.

More important for Remgro is that the balance between listed and unlisted investments becomes more compelling.

With RMI out of the picture, more focus will fall on superb unlisted holdings like Community Investment Ventures Holdings (CIVH, housing fibreoptic gorillas DFA and Vumate), industrial gases business Air Products, aluminium extrusion company Wispeco, energy group Total SA, undersea cable specialist Seacom and spreads business Siqalo Foods.

There is also Remgro’s sizeable exposure to Chinese businesses via several specialist investment funds. Remgro will provide the only access point to these unlisted enterprises — some of which (specifically CIVH and the Chinese investments) could become huge cash-flow generators and value enhances in the years ahead.

Another potential shift to monitor in the months ahead is a possible buyout offer for RCL

Foods, of which Remgro already owns 80%. It would make perfect sense for Remgro to take out the remaining minority shareholder in RCL, then separate out or sell the inconsistent poultry operations and look at merging in Siqalo Foods to create a compelling grocery brands giant.

Realistically speaking, IM thinks investors might first see Remgro move to unlock value from its holding in unlisted company Kagiso Tiso Holdings. It is valued at about R1.89bn and holds stakes in broadcast group Kagiso Media, services group Servest and MMI. It might not be a huge value uplift, but will signal Remgro’s intentions to move and shake with its current portfolio.

IM would then recommend that risk-averse investors who still believe the SA economy can make a steady recovery look at Remgro at current levels. Even if the value unlock is slow, the cash-generative portfolio of investments should at least deliver better returns and dividends in the short to medium term. ●

“Another potential shift to monitor in the months ahead is a possible buyout offer for RCL Foods