Satisfactory, but unlikely to excite

Investment holding companies (holdcos) have for several years been a bit of a swear word among investors.

Discounts to the underlying net value of portfolios have generally widened markedly as investors question capital allocation decisions and weigh up the chances of an inspired value unlock.

It’s not uncommon to see discounts of more than 50% especially among smaller investment companies. That said, the mighty Remgro was, at the time of writing, trading at a 45% discount to its last stated intrinsic NAV though that valuation may come down when it reports results.

Also at the time of writing, the investment community was witnessing a real bloodbath in some of the smaller investment holdcos, with both Brait and African

Rainbow Capital Investments taking a serious pounding. Sentiment has become jaundiced, and even good news (like Brimstone’s debt reduction efforts and Brait’s progress in building earnings before interest, tax, depreciation and amortisation at Virgin Active) is overlooked.

So the covering in this edition of Universal Partners, one of the JSE’s smallest investment counters, is not exactly perfectly timed. With a markedly narrower discount to the value of its underlying portfolio, Universal is a hard sell to prospective investors.

Of course, one must not disparage Universal. The company has done what many holdcos struggle to execute extract value timeously from key investments. Shareholders have reaped dividends in recent years.

Still, some cynics might argue that the discount that the Universal share price offers is not attractive enough, being about 20% off the roughly R30 a share NAV. IM tends to agree; the remaining portfolio is looking solid rather than spectacular.

To date, Universal, which listed in 2016, has invested about £100m in six businesses across health care, human resourcing, financial services and manufacturing.

The first exit came in August 2021, when Universal sold out its stake in electric motor maker Yasa for three times the original investment.

Last year, the group partially exited its investment in UK-based dental practices business Dentex, which was acquired by Portman Dental Care. Universal got back 94% of its invested capital in Dentex in cash. The balance of the proceeds were reinvested in the enlarged Portman Dentex Group, securing Universal a minority stake.

The exit proceeds represented a 10% uplift on the fair value of the Dentex investment and more than twice the cash cost of the investment. So, another nifty (partial) exit.

Portman Dentex is now one of Europe’s largest dental care platforms, with operations in the UK, Ireland, the Nordics, Benelux and France.

While mergers often do bring operational and strategic complications, Universal has reported that Portman Dentex performed ahead of budget for the first quarter of the new financial year and traded ahead of the prior year on a like-for-like basis.

Portman Dentex also acquired three new practices in the UK during the quarter, and now has more than 400 practices. Might Universal regret not opting for a more meaningful stake?

The remaining portfolio is unlikely to excite too many punters. Workwell is a contractor accountancy and payroll solutions company in the UK, while SC Lowy is an investment management group focused on credit investing and lending in Asia, Europe and the Middle East.

Then there’s Xcede Group, a recruitment specialist operating across the UK, Europe, North America, Africa and Asia. There is also a negligible investment in Propelair, which peddles water-efficient toilets but is so far behind the original business plan that Universal has written the investment down to a nominal value of £1.

SC Lowy looks the most interesting of the Universal portfolio, with Workwell and Xcede probably likely to plod along in iffy economic conditions.

Whether there is an appetite for new investments at Universal remains to be seen. That might require a capital raise, which would at least be helped by the shares not trading at too deep a discount to NAV.

There is no hint of strategic changes in the latest quarterly statement, suggesting that Universal will work its remaining portfolio to extract value.

Overall, Universal has performed satisfactorily since its listing, especially for investors who grabbed scrip when the shares dipped below R16 in late 2021. But at the current price, there is really little incentive to scrap for shares save for banking on rand/pound exchange rate weakness.

Some cynics might argue the discount that the Universal share price offers is not attractive enough