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RAC fishes in local waters

Believes there is better value and visibility.

This article was first published in the latest issue of the Moneyweb Investor. To read the magazine click here.

As more and more investors join the stampede to lessen their South African exposure and “diversify their risk”, fund management and private equity group RECM and Calibre Limited (RAC) remains committed to its largely local portfolio.

“This is where we think the value is. The rand is cheap and local assets are also cheap, so investors have odds on their side and we also know and understand these assets” says executive chairman Piet Viljoen.

As he said in the annual report, the right way to invest is “to put fairly large sums into enterprises which one thinks one knows something about and in the management in which one thoroughly believes.

“It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” 

Viljoen says that “whenever there’s a trend, you will probably find us not doing that. Lots of financial intermediaries use those words [like diversifying investment to mitigate risk] to do what everyone else is doing so they don’t get in trouble.”

Not so RAC, where the proof appears to be in the pudding. In its latest results, for the six months to September, NAV per share increased 14% to R22.42, against a 1% gain for the All Share index. During the 2016 financial year, NAV, for both the Ordinary and the Participating Preference shares, grew by 6,1% on a per share basis. By comparison, the total return generated by the JSE All Share Index, with dividends included, was 3.2%.  

Longer term, however, at least until the March year-end, it had not met its primary goal – which is to outperform the average listed company.

RAC was established in 2009 as a joint venture between fund manager Regarding Capital Management and private equity firm Calibre Capital. Ordinary shares are held by Viljoen, Theunis De Bruyn and Jan van Niekerk, while prefs have been listed since 2010. Between then and end-March 2016, NAV per share grew 96.6% against the ALSI total return index growth of 129%.

But over the past two years, ever since RAC became fully invested, it has outperformed the index. Its strategy is to buy assets “where size, liquidity, regulations or complexity act as a deterrent to most buyers.” Investments are not sector specific, with the predominant preference being “to partner with good management teams of good businesses for long periods of time.”

The composition of NAV is heavily skewed towards gaming (45.5% at year-end) in the form of Goldrush, the second largest alternative gaming player in South Africa with investments in sports betting, limited payout machines, bingo and casinos. Mining (West Coast Resources and Dinoka, Trans Hex, JB Private Equity Investors Partnership – which owns the listed Sentula – and ELB Group), takes up another 28.5%.

In the six months to September, Goldrush increased underlying profit by more than 20%. RAC and the Hipkin family, founders of Goldrush, agreed RAC could exercise its call option bringing its ownership to just over 52%. The R221 million payment to the family will be settled by R100m cash (some of which is deferred) and 2.2 million RAC preference shares. 

Among mining and engineering investments, Trans Hex returned to profitability. RAC, in concert with entities aligned to Christo Wiese, made an offer to buy out the minorities of Trans Hex, which may then delist.

But while Trans Hex returned to profit, the ELB Group generated R148 million loss.

Apart from the Trans Hex offer, RAC has found itself in the middle of a number of recent corporate actions. It realised its Dis-Chem investment on its listing, increasing its available cash to R372 million, R188 million more than its September valuation, increasing NAV by 3.61c a share.

It sold 75% of its shareholding in Sovereign Foods to Country Bird in the midst of a fight for control of Sovereign and is a shareholder in KWV, which recently sold its operating assets.

Amid ongoing student protests, it has stepped up its investment in College SA, which has over 9 000 students. College SA, through subsidiary Tabaldi Education, has facilitated online access to the final parts of the syllabus at some universities. Recent management developments in house prompted a book build exercise.

When RAC was restructured in 2011, De Bruyn committed to remain involved with RAC in an executive capacity until RAC was fully invested.

De Bruyn has now indicated he wants to return to Calibre. The book build basically involved preference shareholders being asked to pay for RAC to buy back De Bruyn’s shares.

RAC said it would place 1.25 million new prefs at a minimum R26.50 to raise at least R33.125 million to finance its repurchase of 1.25 million ordinary shares from an entity associated with De Bruyn, whose ordinary shares would then be cancelled.

Application was received for only 200 000 prefs. Viljoen says the book build was a mechanism for anyone who wanted to buy a large line of shares. “We decided to do a book build and see if anyone was interested at NAV price, which would be net neutral for the business. Our shareholders didn’t support it, so our company is going to buy the shares at a discount and cancel the shares.”

You have to hand it to Viljoen. In a world where few CEOs say what they mean he is completely straightforward. Take this from the group’s interim results announcement, where he encouraged potential investees to call. “We can’t promise to add management expertise to your business (we most likely have none) but we can promise to be solid partners.”

Or this, from the annual report: “We spend almost no time thinking about the economy, as our managers are more than smart and tenacious enough to deal with the economic challenges and opportunities they face.”

He makes no bones about the fact that an investment in RAC is not for everyone. “Our investment landscape is broad, our capital is patient and we do not plan to pay dividends any time soon. This will remain true for as long as we can find investments that satisfy our criteria,” he said in the annual report.

“Our goal is to make money for ourselves and anyone else who chooses to invest,” he tells Moneyweb Investor. 

This is increasingly through investment in private rather than listed companies. “We have increased our relative exposure to private companies. We prefer these investments. We can get odds on our side, even more because on average they are priced cheaper, we have better access to information than we do in a public company and we can get into controlling or influential positions.”

By the March year-end, over 75% of RAC’s balance sheet was invested in private companies, up from 59% in the previous year.

With NAV being increasingly skewed in favour of gaming, and a large exposure to mining, not to mention its locally flavoured portfolio, one may have the impression that there is some risk in RAC’s investments.

“All investments have risks,” says Viljoen. “Mining is no exception. Even companies that people think don’t have risks have risks. The only way to manage those risks is to have good management in place and secondly to pay less.”

He remains committed to local investment. “We will fish where the fish are. The currency is undervalued and sentiment is negative and we have willing sellers, and lots of companies are finding out they may not have made good offshore purchases.”

The chase is on for South Africans to find offshore investments. RAC will keep fishing in local waters.

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