Viljoen’s deep-value gems
Investors should pay close attention: RECM & Calibre’s portfolio may be heavily undervalued
RECM & Calibre (RACP), the investment company spearheaded by fund management personalities Piet Viljoen and Jan van Niekerk, is building a compelling proposition of unlisted assets. Clearly, some people get it — which is why its preference shares listed on the JSE have soared 57% over the past three years.
Still, formulating an accurate valuation remains tricky. Most of the JSE’S large investment counters base their underlying value on listed investments. Think of Remgro (which includes Mediclinic, RCL Foods, Firstrand, RMI, Distell and Grindrod); Brimstone (Oceana, Life Health and Sea Harvest), PSG Group (Capitec, Curro, Zeder and PSG Konsult) and Hosken Consolidated Investments (Tsogo Sun, Niveus and Deneb Investments).
Investors can easily gauge the value in these counters, as they can track the fortunes of the underlying listed companies or, in the case of PSG, it makes an extra effort to communicate by sending out daily updates on its sum-of-theparts value.
On the other hand, there are a few investment companies which focus instead on unlisted companies. Brait (with unlisted holdings in Virgin Active, Premier Foods, Iceland and New Look) is the best known — but there are others, like Sabvest (which has a large stake in unlisted specialised textile manufacturer SA Bias Industries as its anchor holding) as well as RACP.
RACP is probably the most interesting of those with an unlisted bent. Viljoen’s dogged “deep-value” investment philosophy was scoffed at three years ago, but it’s back in vogue.
At its AGM last week, RACP disclosed its latest net asset value (NAV) of R27.58/share.
Viljoen said its unlisted investments comprised a chunky 70% of that NAV. In calculating the NAV, Viljoen said only the listed investments were revalued and the unlisted investments would be revalued only for the interim results (due for publication in October).
This leaves plenty of scope for speculation around what is a more realistic NAV for RACP.
The main listed investments include mainly Sentula Mining (soon to be reconstituted as an investment company as Unicorn Capital Partners), diamond miner Trans Hex Group, ailing Distribution & Warehousing Network (a recent investment through a rescue rights offer) and insurance company Conduit Capital. Listed investments made up less than a quarter of the R1.4bn NAV.
Viljoen acknowledged the trouble with valuing these sorts of companies. “Most of our NAV is invested in businesses that are young and growing rapidly. Valuing such businesses with any accuracy is not easy, and requires a high degree of judgment. We therefore tend to err on the side of caution, building in a considerable margin of safety.”
One of the most promising of its unlisted assets is a 57.9% stake in alternative gaming group Goldrush, which specialises in limited payout machines (LPM), electronic bingo terminals (EBT) and sports betting. Viljoen says RACP uncovered this gem quite by chance while researching another gaming counter — a contact at the gaming board happened to mention it.
It’s a gamble that seems to be paying off. While it cost RACP around R387m to buy its stake, that is now valued at R816m.
But the gut feel is that even this value is conservative, when seen in the context of recent deals when Tsogo Sun and Sun International bought various gaming assets.
Reassuringly, Goldrush – which should be a reliable cash-flow generator — makes up almost 58% of RACP’S portfolio.
The remainder of the unlisted portfolio is an interesting mix. It has a foothold in private education through College SA, a minority stake in services specialist Excellerate, hunting and camping retailer Outdoor Investment Holdings, diamond miner West Coast Resources and an asset-rich and cash-flush mystery package with La Concorde (which was the old KWV).
College SA is an instructive case. Though Viljoen said it was in a strong growth phase, RACP values it at book value — even though the market is according heady ratings to other private-education ventures such as Curro and Advtech. “Given some of the valuations we have seen for similar businesses in the marketplace, we regard organic growth to be a sensible course of action for College SA,” he says.
Viljoen describes RACP’S listed investments as “deep-value” situations subject to “severe discounting” by the market. “It is not unreasonable to think that the ‘fair value’ of these investments, as indicated by their market price is not fair at all,” he says.
In what seems to be a thinly disguised swipe at Brait, he noted recent instances where investment companies had aggressively valued their assets. “This was all done at ‘fair value’ as approved by auditors — and ultimately led to disappointing results for their shareholders.” Viljoen referred to Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, who said the key to a happy life was to have low expectations. “Our valuation methodology builds in low expectations – or a wide margin of safety. This means our shareholders can sleep well.” He argues that RACP’S recent deals to sell its stake in the recently listed retailer Dis-chem and poultry group Sovereign, as well as the sale of KWV’S liquor assets, were all deals clinched at prices well above RACP’S stated fair values. “Our current portfolio undoubtedly contains more such gems,” he says.
There is another intriguing development at the company: RACP has invested R40m in a “deep-value” fund managed by RECM — the fund management company founded by Viljoen.
It was done by injecting smaller investments into the fund — most notably unlisted agribusiness KLK as well as listed counters including forestry group York, engineering group ELB and property group Putprop. Viljoen argued that deep-value situations “tended to become more attractive as the economic cycle worsened, and momentum investors (in this case index funds) got the bit between their teeth.”
When the cycle turns, it’s exactly these firms that could prove to be winners.