Remgro’s radical revamp

The investment company is pushing hard to change the composition of its R120bn portfolio, writes

Remgro, the venerable investment trust and probably the share every South African should own, could look a very different — and arguably more compelling — beast in five years’ time.

Though older market hands will caution that the wheels tend to move slowly at Remgro (and its predecessor Rembrandt), there is certainly enough evidence that a radical revamp of the Stellenboschbased group is already well under way.

Remgro is pushing hard to change the composition of its R120bn portfolio, putting a clear emphasis on holding mainly unlisted investments. Remgro traditionally held a portfolio of mainly listed investments — with its mainstay investments being private hospitals group Mediclinic International, liquor group Distell, consumer brands conglomerate RCL Foods, insurance hub Rand Merchant Investment

Holdings (RMI) (since broken up and unbundled) and banking group FirstRand.

In recent years Remgro have developed some rather interesting unlisted positions in the form of Community Investment Ventures Holdings (CIVH) — an investment company holding fibreoptic specialists Dark Fibre Africa and Vumatel — as well as spreads business Siqalo Foods (which was previously owned by Unilever). At the end of

June 2022 these two unlisted investments accounted for roughly 17% of Remgro’s intrinsic value.

But there are other unlisted investments that must be tallied up too — most notably undersea cables business Seacom, industrial gases business Air Products, energy giant TotalEnergies, small business development specialist Business Partners and aluminium shaper Wispeco, as well as a handful of investment funds. If these are added to CIVH and Siqalo, unlisted investments shift to around a third of Remgro’s intrinsic value. Clearly

Remgro cannot be regarded as an unlisted investment play.

Still, if Remgro unbundled all its listed holdings, the remaining unlisted portfolio would most certainly be coveted by the market. PSG, another Stellenbosch-based investment counter, recently unbundled most of its listed investments to shareholders — but the remaining holdings in unlisted ventures did not justify maintaining the JSE listing (though some may disagree).

Remgro is trying another tack. Officially the group refers to “portfolio optimisation through execution of transformative corporate actions” and “value unlock through disposal of noncore assets”.

At the time of writing, Remgro was still in the throes of two key transactions. The first involves the buyout (in partnership with shipping giant Mediterranean Shipping Co, or MSC) of minority shareholders in Mediclinic, which will then be delisted from the JSE. The second is selling its anchor shareholding in Distell to brewing giant Heineken. Remgro will retain a shareholding in an enlarged Heineken South Africa as well as niche liquor group Capevin (which will specialise in gins and fine whisky brands). The stake in logistics group Grindrod was recently unbundled.

The collective value of the Mediclinic and Distell stakes at the time of going to press was about R47bn. If this number is worked back into the unlisted portion of the portfolio, Remgro’s investment profile is radically changed. With Mediclinic and Heineken (plus the much smaller Capevin stake) taken private, the unlisted portion of Remgro’s portfolio shifts from around 33% to roughly 70%. This will give Remgro additional appeal as effectively the only entry point to some excellent unlisted investments. With two new international strategic partners in MSC and Heineken, both Mediclinic and Distell could find a new lease of life with further corporate action a distinct possibility.

Of course, there is the prickly matter of valuations. Unlisted investment valuations will now be undertaken by directors rather than the market. One can almost certainly bank on Remgro’s disclosure on its most significant unlisted

“Of course, there is the prickly matter of valuations

holdings to be detailed and relevant, which should give investors sufficient information to test directors’ valuations.

There are other permutations in Remgro’s quest to offer a mostly unlisted investment bouquet. Remgro already owns a commanding 80.3% stake in RCL Foods — which owns well-known consumer brands such as Sunbake bread, Yum Yum peanut butter, Nola mayonnaise, Ouma rusks, Selati sugar and Rainbow Chicken, as well as an array of best-selling pet food brands and Vector Logistics.

RCL is reworking its corporate recipe to focus on higher-margin grocery brands. This has already resulted in the separation of the poultry business, which IM reckons might be subject to a management-led buyout or unbundling, as well as the slating of Vector Logistics for sale. The fate of the sugar business looks less clear, and perhaps might still form part of a new-look RCL. In any event, a slimmed-down RCL would surely be ripe for a buyout offer from Remgro, which could look to merging RCL with its substantial Siqalo spreads business. If RCL was delisted and tucked away in Remgro, the group’s unlisted portfolio composition would be well over three-quarters.

Then Remgro will no doubt also look to clean up some of its smaller listed holdings. The most significant would be the remaining stake in First Rand, which Remgro has been selling down gradually. The FirstRand stake is worth a not insubstantial R7bn, but will probably be used for currency as and when Remgro has an opportunity for deal-making.

More intriguing is what Remgro intends for the various assurance/insurance company stakes it received in the break-up and unbundling of the old RMI. Remgro — at the time of writing in early February — now sits with stakes of about R5.5bn in

Discovery, R1.95bn in Momentum Metropolitan and almost R16bn in Outsurance.

Remgro has already slotted its 2.5% stake in FirstRand, 7.7% stake in Discovery and 8.6% stake in Momentum Metropolitan under “portfolio investments ”— a euphemism for saying these are noncore and likely to be sold off at some stage. Presumably Remgro can let most of its FirstRand stake go on the open market and would easily find strategic investors keen on the significant minority positions in both Discovery and Momentum Metropolitan. There is also a 0.1% stake in British American Tobacco (BAT) that could raise a fair bit of cash in a hurry.

Remgro’s 30.6% stake in Outsurance will probably be retained. No doubt the inventive insurer still has its growth attractions, and Remgro’s “kingmaker” stake might prove very valuable in years to come should any suitor come calling.

Ultimately within five years Remgro might well have more than 90% of its portfolio in unlisted investments, with the only listed positions being Outsurance and the indirect stake in television broadcast group eMedia Holdings.

At the time of writing Remgro was attracting a 40% discount on IM’s estimated intrinsic NAV of R229 a share. That is a wide discount on a well-diversified, high-quality, cash-generative portfolio that might well only be accessed through Remgro in future.

Readers may do well to look at the dividends from the existing unlisted portfolio to better grasp the reassuring cash flow attributes of these assets. Collective distributions from unlisted interests — mainly Siqalo, TotalEnergies and Air Products — were close to R2.5bn for the past three financial years. This number will be hugely bolstered when the CIVH fibreoptic interests have completed their rollouts.

Some argue Remgro should be narrowing down its investment focus, focusing only on the larger investments. There have been suggestions that the portfolio should comprise the holdings in CIVH, Mediclinic, Heineken South Africa, RCL/Siqalo and Outsurance, as well as the Invenfin venture capital portfolio.

Remgro’s “smaller” industrial interests, arguably, won’t ever move the needle. It’s debatable whether it makes sense to lump these — TotalEnergies, Air Products and Wispeco, as well as almost forgotten holdings in Caxton & CTP and PGSI — into a new vehicle that could be separately listed. The market’s interest in industrial counters seems rather limited at the moment, at least judging by the ratings accorded to perennially profitable counters such as Invicta, Hudaco and Argent.

Significantly, none of the industrial interests has been lumped into the portfolio investment category, which suggests Remgro still regards these interests as core. Whether Remgro clings to its investment in other funds —

such as the China-focused vehicles, KTH and Pembani —

will also be interesting to gauge. Market watchers have been slightly puzzled by these fringe forays, with most wondering why Remgro —

with a long track record of successfully backing ventures — is backing other investment managers. None of these fund investments has proved too much of a distraction, though.

Whatever the case, Remgro currently looks a interesting proposition for longer-term investors with lower risk profiles. There is the growth potential of the CIVH assets and the new Heineken venture, coupled to the dependable returns from Mediclinic, RCL and Outsurance. A discount of

40% should be enticing for investors that believe

Remgro’s proposed unlisted bias will come to the fore sooner rather than later.

It is instructive to note that smaller investment group Sabvest Capital — which has a mostly unlisted investment portfolio — has seen its share price narrow its gap on the last stated NAV to less than 15%. Admittedly, the share price might be accounting for a higher NAV number for the end-December reporting period, but Sabvest’s discount is nowhere near as wide as Remgro’s.

IM recommends accumulating Remgro, and with a fair bit of vigour too. ●

Remgro’s 30.6% stake in Outsurance will probably be retained