Searching for gold at the end of this rainbow

African Rainbow Capital Investments (ARC) trades at an eyepopping 63.5% discount to its last stated intrinsic NAV of R11.55 a share.

The discounts of investment holding companies have widened markedly in recent years — but ARC’s stretch between share price and intrinsic NAV is long by any standards.

There can be a handful of reasons that a share price offers a big discount to intrinsic NAV. The assets in the portfolio are vastly overvalued, or the capital allocation prowess of the asset manager is open to question.

Then investors will typically also ask about the chances of a value-unlocking opportunity in the foreseeable future.

These questions are particularly pertinent for ARC, which has an investment portfolio that might be far too sprawling for some punters. By IM’s count, ARC holds more than 40 investments across financial services, mining, telecommunications, property and other sectors.

Some of the holdings will, frankly, never move the needle at ARC. The big bets lie in telecoms business Rain, banking business Tyme and the Kropz phosphate mining venture.

The bulk of the portfolio — including the aforementioned big three — is made up of unlisted investments. That means ARC places a value on these assets — and, judging by the share price discount, these are measures that the market vehemently disagrees with at this juncture.

For the most part, large segments of ARC’s portfolio are still being built up. There were significant additional investments in Kropz, Tyme and Rain during the past interim period.

A discernible theme is the slow formation of a financial services hub within ARC. The group speaks of “collaboration within the financial services ecosystem ”— which follows the integration of Sanlam Investment Holdings and

Absa Investments, as well as the integration of Retail

Capital into TymeBank

(among other shifts).

ARC’s financial services hub now accounts for 34% of the portfolio value (from 27%) last year.

The centrepiece of the financial services segment is Tyme, which is gaining encouraging traction with a 37% year-on-year growth in customers to 8.5-million as well as (more importantly) increased activity per customer. Tyme Global is showing promise too, with a 2-million customer base in the Philippines only a year after launching.

Telecoms business Rain, which represents 27% of the portfolio, was valued up by more than R300m (including an additional investment of R81m) to more than R4.8bn. That means the stake in Rain is worth about 85% of ARC’s market capitalisation — presuming an investor thinks the valuation of the telecoms business is realistic.

ARC said the hike in Rain’s valuation stemmed from the business “progressing past the significant net cash outflow”, and the subsequent launch of RainOne.

Rain was predicted to achieve earnings before interest, tax, depreciation and amortisation of about R2bn for the year ended February

2024.

The big investment in the interim period was the additional R379m advanced to Kropz.

Some punters might be critical of hurling further (and significant) capital at this specialist mining venture.

Kropz owns two phosphate assets, Elandsfontein in South Africa and Cominco in the Republic of Congo. While the fundamentals of the fertiliser and phosphate markets seem sound, the ramp-up of mining and processing operations at Elandsfontein has fallen behind schedule.

ARC disclosed that the Elandsfontein mine made only 103,500t of sales over the interim period, missing production targets — adding, ominously, that performance remains inconsistent.

Elandsfontein is installing additional modifications to increase throughput and will hopefully achieve breakeven during 2024.

The Kropz investment is valued at R2bn, a measure the market might take issue with considering the sluggishness at Elandsfontein.

At this juncture, there seems little incentive to rush into ARC — other than if the discount markedly widens as it did just before the release of the interim results.

The portfolio is wideranging, with a mixture of solid and exciting (read: higher-risk) positions. Tidying up the sprawling portfolio probably won’t unlock significant value, and in any event sale proceeds will probably be earmarked for reinvestment or for building out key assets.

Longer-term investors, though, could do worse than stick ARC in the bottom drawer — as long as they are comfortable that the share price does offer an attractive discount on a realistic intrinsic NAV.

Perhaps a useful exercise is imagining the reaction of today’s cynical market to a proposed listing of the major investments in Rain, Tyme and Kropz. Would a plus-R11 a share intrinsic NAV still stack up?