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The Investment Case – RMB Holdings Ltd

Will the listing of MMI herald something new?

ORAPA – RMB Holdings is an interesting sort of animal. As a pure holding company, it has no significant operations of its own. Its profits are generated solely though its interests in other companies.

Its predominant holding is in FirstRand Limited, of which it owns 32.3%. In turn, FirstRand’s interests include First National Bank, Rand Merchant Bank and Wesbank.

Momentum also fell within the FirstRand stable until it was unbundled to merge with Metropolitan. The combined company, MMI Holdings, lists on the JSE on Wednesday, December 1. RMB Holdings is the largest shareholder in the newly listed entity with an 18% interest. This will be increased to 25% over time.

RMB Holdings also owns 26.7% of Discovery, an effective 61.7% of OUTsurance, and 79.6% of RMB Structured Insurance.

“Most of the value of RMBH is made up of listed shares (93% of the net asset value – NAV),” explains Sanlam Investment Management (SIM) Senior Portfolio Manager Patrice Rassou. “Of the remainder, OUTsurance is the key asset.”

History

In 1977 GT Ferreira, Laurie Dippenaar and Paul Harris started a small financial structuring house called Rand Consolidated Investments (RCI). Eight years later, RCI merged with Johann Rupert’s Rand Merchant Bank, and adopted the latter’s name.

In 1987, RMB Holdings was constituted as the holding company for the expanding Rand Merchant Bank. The company was listed in 1992 through a reverse takeover of Momentum Life.

RMB Holdings was merged with Anglo American’s disposed financial interests in 1998. A new holding company, FirstRand Limited was created to house the newly-established group. RMB Holdings retained around a third of FirstRand’s issued share capital.

Discovery Health was started from within the RMB stable in 1993, and OUTsurance was formed in 1998.

Dividends

RMB Holdings’ policy is to pay over to its shareholders all dividends received from FirstRand. Dividends from its other holdings will be paid over to shareholders as long as they are not required to support new investments.

While RMB Holdings’ total dividend (final plus interim dividend) for both the 2008 and 2007 financial years was 141.5c per share, this dropped to 99c per share in 2009. At the announcement of its latest annual results to June 30 2010, RMB Holdings announced a recovery in the dividend payout to 124c per share. This equates to a dividend yield around 3.5%.

Which funds hold this stock?

RMB Holdings has enjoyed a rather mixed assessment by South Africa’s leading unit trust fund managers over the last 12 months. Both of the two leading equity financial funds over the last three to five years have reduced their exposure to the counter. From being the Nedgroup Investments Financials Fund’s sixth largest holding in December 2009 at 5.1%, the stock is now the smallest holding in the portfolio at a fraction under 1%. The Coronation Financial Fund has cut its weighting from 4.5% to 3.1% over the same period.

Of the five top-performing general-equity funds, four had exposure to RMB Holdings in December last year. The Prudential Equity Fund has since sold out of the counter completely and the Allan Gray Equity Fund has reduced its exposure from 0.8% to 0.1%. The Kagiso Equity Alpha Fund and Absa Select Equity Funds have however, kept their exposures stable around 2.3% and 0.1% respectively.

Conversely, amongst the four leading value funds, two have shown interest in the stock during 2010. The Nedgroup Investments Value Fund, which is one of the top 20 unit trusts over the last five years, has maintained its holding at around 4.5% of the fund. The RMB Value Fund, from holding no shares in December, now assigns 3.1% of the fund to RMB Holdings.

To see which funds are buying and selling the counter, visit Moneyweb’s Unit Trust Portfolio Tool.

Why would an individual consider investing in this company?

RMB Holdings provides access to a number of quality businesses at, traditionally, a slight discount to its “intrinsic value” – the market value of the underlying assets. Discovery and OUTsurance are market leaders in their respective fields, FirstRand is an entrenched financial services player, and MMI promises to be a notable competitor in the assurance market.

All of these companies have strong cash generation capabilities and offer positive returns to shareholders. The high level of stability provided by FirstRand also means that RMB Holdings has the balance sheet to be able to focus on growing its base of investments.

What risks does this company face?

The risks to RMB Holdings are very much tied up with those facing FirstRand, which represents the majority of its intrinsic value. Primary among these is the group’s unclear strategy for expansion into Africa, which is its best prospect for growth.

As RMB Holdings looks to expand its investments, it is also likely to be faced with the twin problems of finding suitable targets within the financial services sector and the importance of paying the right price at the right time for those it does identify.

Where does this company’s growth potential lie?

The group’s management has stated its intention to split the company into two components – banks and insurance. This could give investors a clearer motivation for investing in RMB Holdings rather than FirstRand.

“With its 32% effective stake in FirstRand, the banking entity will offer control (together with Remgro), and potential corporate activity could be struck by buying this stake directly from the founders,” says SIM’s Rassou. “The insurance part will be a more diversified holding of Discovery, OUTsurance, RMB Structured Insurance and MMI. There are many permutations, and investors who want a broad exposure to financial services may feel that there is optionality in investing in RMB Holdings.”

RMB Holdings has also indicated an interest in pursuing investments in which their shareholders would not readily be able to invest themselves. This suggests a focus outside of the JSE.

For more, visit Moneyweb’s click-a-company profile on RMB Holdings Limited.

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