THE GOOD AND THE BAD
Has Remgro’s ‘evolution towards improved asset scarcity’ with an increased unlisted portfolio been a success?
The newfound heavy bias towards unlisted investments in Remgro’s investment portfolio was supposed to give the group a “scarcity value”.
That’s because large investments such as liquor conglomeration Heineken Beverages South Africa (Heineken Beverages), private hospitals group Mediclinic International, fibreoptic specialist Community Investment Ventures Holdings (CIVH), industrial gases business Air Products and food business Siqalo would be accessible to investors only via Remgro.
Remgro’s three biggest unlisted investments have seen significant ownership change. Mediclinic has a new strategic equity partner in the shipping conglomerate MSC, the old Distell liquor business is now in the hands of Dutch beer giant Heineken and CIVH is hoping to get telecoms giant Vodacom on board as a strategic shareholder.
The group has previously had success in such shifts, remembering how tobacco business Rothmans International was merged into British American Tobacco for a warm value blaze (before this interest was unbundled in 2008).
It’s early days for the new structures at Mediclinic, Heineken Beverages and CIVH. But opening numbers on the scoreboard don’t read reassuringly at all.
Air Products and Siqalo (which owns spreads brands such as Flora, Rama and Stork) performed admirably, chipping in R284m and R237m to Remgro’s headline earnings for the interim period ending December. But the bigger constituents — Mediclinic, CIVH and Heineken Beverages (see page 20) — were ominously underwhelming. Mediclinic — valued at R43bn — saw its donation to headline earnings down 22% at R566m, while debt-laden CIVH — valued at R13bn by Remgro — reduced its contribution to just R6m.
Ironically it was two of Remgro’s JSE-listed investments that were the showstoppers in terms of profit contribution and value enhancement in the interim period. RCL Foods, which is in the throes of a value unlock effort via an unbundling of the now profitable Rainbow Chicken, was the biggest earnings contributor with R577m. Innovative insurance business Outsurance’s contribution was up 6% at R429m, but market movements increased its portion of Remgro’s intrinsic NAV to almost R20bn.
Opportune Investments CIO Chris Logan believes Remgro scored an own goal in what has been termed the “evolution towards improved asset scarcity”. He points out that the group has increased the unlisted portfolio from 33% at the end of June 2022 to about 74% at the end of 2023, “but now [has] far less transparency and a lumbering unlisted hulk like Mediclinic, whose margins are under pressure, at 33% of the portfolio”.
“Unsurprisingly, analysts are questioning Mediclinic’s valuation even after a R4.2bn reduction [in value].”
The Mediclinic quandary is difficult to resolve, and could weigh on sentiment for Remgro for the foreseeable future. At Remgro’s investor presentation, long-time Remgro analyst Rey Wium of SBG Securities asked whether the heady p:e multiple applied to Mediclinic suggested stronger earnings growth in future. Remgro CEO Jannie Durand responded: “If you look at a point in time, this implies there will be some margin improvement with all the plans we have in place. So, absolutely yes ...”
Improvement is long overdue. Logan calculates that Mediclinic’s return on invested capital is only 4.2% — less than half that of RCL Foods, which has traditionally been regarded as the laggard in Remgro’s portfolio.
For a longer-term perspective, at the 2022 Remgro AGM chair Johann Rupert was asked why Remgro effectively paid a premium to buy out minority shareholders at Mediclinic when it could have bought back its own shares at a large discount. Rupert argued that Mediclinic shareholders could take their buyout proceeds and buy Remgro shares at a discount. “That’s what sophisticated investors would do.”
So far, that would not have been a rewarding exercise. But at the same meeting Rupert did note that “we would not be such a big shareholder if I did not think Mediclinic had a good five years ahead”.
Logan has a different view, believing the road ahead would be a lot brighter if Remgro delivered on value-unlock possibilities at Mediclinic. “For instance, should Mediclinic’s Swiss and Middle East interests, which constitute over 65% of its ebitda [earnings before interest, tax, depreciation and amortisation], not be IPOed, which will maximise value? Spire Healthcare hospital group for instance, in which Mediclinic still has a 29% interest, trades on a 36 times earnings multiple on the London Stock Exchange.”
Causing almost as much consternation among investors is Remgro’s 57% stake in CIVH which holds the Dark Fibre Africa (DFA) and Vumatel fibreoptic operations. Vodacom is poised to invest into CIVH to form the new-look, well capitalised Maziv fibreoptic offering but the deal has been stymied by the competition authorities. Remgro seems hopeful they can be placated, and a deal finalised before midyear.
But if the deal is delayed further or, worse, completely blocked, there could be nasty implications for CIVH and Remgro.
At the investor presentation there were even questions around whether CIVH which is premised on democratising the internet by providing cheap and fast connectivity was “ex-growth”. Remgro executive Pieter Uys conceded there had been a change in subscriber behaviours with market penetration below 40% of the fibreoptic network.
He reckoned market penetration could be moved to 60%, but added that a capital-constrained CIVH had slowed its network buildout and was focusing, for now, on mining the infrastructure already in the ground.
While the reduced capital expenditure will help CIVH’s balance sheet, the effect on the fibreoptic rollout is plain to see at Vumatel with 109,240 homes passed in the six months to end-September 2023 compared with 234,000 homes passed during the comparative period in 2022.
A breakdown of CIVH’s numbers shows that in the six months to end-September, DFA, which caters mainly for businesses, upped revenue 3.4% to R1.34bn with operating profit down 5.3% at R613m and headline earnings 27% lower at R270m. Vumatel, which serves mainly households, had a sprightly 11% jump in revenue to R1.82bn with operating profits coming in 8% higher at R610m. Headline earnings were R99m in the red after accounting for higher interest charges. The total interest bill for CIVH was a not insubstantial R896m.
Still, Uys maintained: “I have not seen this is an ex-growth business. The potential is still there, especially in the home and small business markets. We will continue to develop that.”
Uys also mentioned a “Plan B” if the strategic plans with Vodacom go awry. “The worst case is that we come to shareholders [for fresh capital] next year. It’s not an immediate requirement, but the Vodacom deal is a year later than we expected.”