ANOTHER HANGOVER FOR REMGRO
The investment house has been hammered by overpaying for Heineken Beverages and Mediclinic. After 65 years of reliable performance, is it now at risk of enduring a lost decade? Is it time for chair Johann Rupert to shake things up?
Stellenbosch-based investment house Remgro, long regarded as a redoubtable store of value and the share that every South African should own, looks down and out these days.
The threadbare local economy has admittedly stymied growth prospects. But questions around whether the JSE’s best-known investment company is in structural decline are increasingly audible. Unlike the “old days”, when the reliable tobacco business or the RMB Holdings financial services hub churned out compelling cash flows, Remgro’s central value proposition suddenly seems at risk of not holding.
Shane Watkins, CIO of All
Weather Capital, says a sober and objective examination of Remgro’s performance over time is telling and damning. “The key takeaway is that Remgro has underperformed the JSE Capped Swix all share and the normal JSE all share index over 10 years, five years, four years, three years, two years, one year ... and even this year to date.”
Watkins says Remgro management previously defended its underperformance on the market — claiming it was because the market benefited from the outsize positive contribution of Naspers. “This is not borne out by the facts. Remgro has significantly underperformed many ‘SA centric’ names such as FirstRand, Shoprite, Bidvest and Sanlam over most of the time period referred to.”
The Remgro share — offering investors exposure to health care, telecoms, top consumer brands, financial services and industrials — has, arguably, never been cheaper. But few market watchers are seeing value in buying a recovery story, with Remgro facing some stiff challenges in rebuilding and unlocking value for shareholders.
Long-time shareholders are asking more bluntly if chair and de facto controlling shareholder Johann Rupert needs to “kick arse” at executive level.
One notes: “We can’t afford another lost decade.
It’s a difficult situation. But Rupert, as we have seen at recent AGMs, tends to protect his executive.”
Watkins believes that Rupert has pretty much absolute control of who is appointed and how the company is managed. “He will not allow the narrowing of the discount to intrinsic net asset value [iNAV] to be a key performance indicator of Remgro management. With the discount to NAV being near to 50%, this is hugely value-destructive.
“While we must all applaud the achievements of the Rupert family over time, if we are honest about the situation as it stands, it is beginning to feel like their influence is now a negative factor.”
Perhaps the first subtle shifts are happening at Remgro. Last Friday Carel Vosloo, a former Rand Merchant Bank executive, was appointed as an alternate executive director to Remgro CEO Jannie Durand. Some believe Vosloo is being groomed as CEO.
A key board change might be long overdue. John Slauck, a director at Integrated Managed Investments, suggests Remgro has, in recent years, become a confused outfit, with a collection of uncorrelated businesses with no clear focus. “It needs to be more
focused. Sell the small noncore segments and unbundle the listed businesses that they don’t see as core.”
Remgro is not renowned for dealmaking binges. Two of its biggest recent transactions have been too rich by far in terms of price premiums. The consequent hangover has been particularly nasty — especially the latest round of dealmaking involving the creation of African liquor giant Heineken Beverages SA. The sudden value spill at Heineken is most concerning, especially since many detractors felt that Remgro let go of its shareholding in Distell to beer giant Heineken at less than frothy value.
The group, in the six months to endSeptember, suffered a stomach-churning writedown in Heineken Beverages’ value. This setback came after the group had barely started recovering from a costly deal at another important investment, Mediclinic International — an event that should have hammered home lessons in the folly of overpaying for assets.
In short, Remgro last year switched its major shareholding in JSE-listed liquor group Distell — which owns best-selling brands including Savanna, Hunter’s, Klipdrift and 4th Street, for a significant minority stake in an enlarged Heineken Beverages. Remgro’s latest accounts show the 18.8% stake in Heineken Beverages was written down from about R12.5bn at the end of June 2023 to
R6.8bn at the end of December 2023.
To make matters worse, Remgro is battling to get its fibreoptic cable subsidiary CIVH — which owns the Dark Fibre Africa and Vumatel businesses — across the line in an important deal with telecoms giant Vodacom (see page 22).
So, after 65 years of reliable performance, superb value creation (including inspired involvement in the creation of cash-spinning ventures such as Richemont, FirstRand, Vodacom and British American Tobacco) and a long string of unbroken dividends, Remgro looks at risk of enduring another lost decade.
Falling short
Over the first three months of this year Remgro has shed a quarter of its value on the JSE, taking a market value hit of more than R20bn. To give some perspective, that R20bn-plus hit is more than the collective market capitalisation of the JSE’s next two biggest investment holding companies — Hosken Consolidated Investments and ARC Investments.
Unfortunately, Remgro opted to buy its own shares back between mid-June and early August last year, buying back almost 6.6-million shares in two exercises that were executed at average prices of R154.62 and R154.40. With the drifting in and around R120, more questions will no doubt be asked about prudent capital allocation.
The share price is one thing, but the critical measure for any investment holding company is the discount the market applies to the intrinsic value of underlying assets. Generally speaking, the wider the discount, the less respect the market has for the group’s ability to allocate capital and unlock value. A wide discount also questions the value the group places on its holdings.
Remgro is trading at an eye-popping 50% discount to iNAV — a dismissive markdown not usually associated with the group. In the past, it traditionally traded at a discount of 15%-20% — though this had widened to 25%-35% in the past 10 years as investors morbidly mulled over the capital allocation missteps at Mediclinic.
Remgro finds itself in a deep discount pickle at a time when the Financial Times reports that hedge funds are pouncing on investment trusts in the UK attracted by share price discounts of between 9% and 17%.
Asset manager Craig Butters argues that though many investors focus on the discount to iNAV (“which will work one day when value is realised”), for now the performance of the underlying assets is far more important as a share price driver.
He says the decline in intrinsic value was clearly not expected and spooked investors. “This has been the theme from the likes of [other investment companies] Ethos and Brimstone. It seems Remgro is no different.”
Butters also notes that consumer brands conglomerate RCL Foods was the biggest contributor to headline earnings
— but is only a fraction of the intrinsic value of Remgro’s investments in Mediclinic and insurance business Outsurance. “It just feels like everything is out of kilter to me. The high value assets are not performing or contributing at all.”
But he adds that “the flip side to this is that if one can see some sort of earnings visibility or bounce from Heineken Beverages, Mediclinic, Outsurance or CIVH, then this could be an excellent entry point into Remgro.”
Asief Mohamed, CIO of Aeon Investment Managers, says Remgro’s strategy execution has fallen short of expectations over many years. “This underperformance may be a result of several factors, including weak governance oversight, a lack of board independence and limited stakeholder inclusivity.”
He says Remgro’s management has repeatedly attributed the company’s mediocre performance to various external factors. “However, a comparison with other South African corporations that have navigated similar challenges suggests Remgro could have achieved better outcomes.”
Grasping the nettle
Officially, Remgro still presents a stoic front. In his formal interim commentary Durand argued that despite the evident challenges and the negative performance, the results are reflective of a point in time.
“As long-term investors, we avoid static evaluations, especially during periods of consolidation. We believe in the value that will be created through the evolution of our portfolio and, as a matter of priority, we remain focused on implementing interventions to improve performance at our core assets.”
But Chris Logan, CIO of Opportune Investments, suggests Remgro should grasp the nettle. “Remgro shareholders have suffered a double whammy of a decline in Remgro’s iNAV and a material widening in Remgro discount to iNAV to a historically high level.”
He adds: “At the same time Remgro has become far harder to analyse as the unlisted component has increased from 33% of iNAV at June 30 2022 to 74% at December 31 2023, with the dramatic increase in unlisted holdings not leading to improved asset scarcity as Remgro originally motivated to investors.”
Logan says there are undoubtedly opportunities to unlock value. “But the market is ignoring these opportunities, possibly because Remgro has not been forthcoming in respect of these valueunlock opportunities.”
Without a material improvement in the Remgro share price in the near term, Logan says it seems reasonable for shareholders to request a strategic review aimed at driving value creation.
Durand says growing underlying earnings, cash flows and iNAV will ultimately narrow the discount. “It’s up to the market to evaluate us ... though we do acknowledge the past six months was not good enough.”