This article was first published in The Moneyweb Investor. Read the magazine here.
Nestled among the Stellenbosch vineyards and surrounding mountains is the hotseat of Remgro, the Rupert family’s diversified investment company which is a staple in many investment portfolios.
Investors choose it largely because it has historically traded at a discount to its net asset value (NAV) and because they trust and admire the investment experience and expertise of chairman Johann Rupert, and CEO Jannie Durand. Investors also like Rupert’s other investment vehicles – Richemont (luxury goods) and Reinet (an investment company largely reflecting British American Tobacco).
But the share price and dividend performance of all three can arguably be described as “slow and steady”.
Just kilometres away in the much less beautiful industrial area of Parow, you will find Christo Wiese, whose investments in Steinhoff, Brait and Shoprite, among others, have yielded spectacular growth for investors.
Perhaps the comparison is unfair – they are not pretending to be similar investment propositions and Wiese does not offer entry points for groups of his investments. But one cannot help but make the comparison.
Remgro’s long-term view means very little happens in its portfolio from month to month while investments in Wiese’s companies provide the excitement of constant dealmaking and the prospect of significant increases in value.
Of course, investors do not have to choose between them. But the comparison begs the question of whether an investment in Remgro is worthwhile.
The group invests in more than 30 companies made up predominantly of listed investments, including RMBH, FirstRand, Mediclinic, RCL Foods and Distell.
Unlisted investments, including Unilever South Africa, Kagiso Tiso Holdings, Total South Africa, PGSI, Seacom, Sabido, Saracens and Blue Bulls are small in comparison and are a mixed bag in terms of returns. According to the 2015 annual report, unlisted investments accounted for 19% of Remgro’s NAV.
Remgro itself says that fundamental to the sustainability of growth and wealth creation are:
- Remgro’s size and influence which enables it to acquire significant stakes in entities big enough to have a material effect on results.
- A strong financial position which enables it to make new investments or increase its stake in well-performing investments, or fund growth opportunities through shareholder loans.
- The ability to add value to investments due to its skilled and experienced executives.
These are the reasons investors like Remgro and, according to its 2015 annual report, NAV has increased by a compound annual 20.3% since October 2008 while its internal rate of return is a compound annual 27% over the same period.
But recent results show that in the six months to December, Remgro’s total earnings decreased by 22.5% to R3.34 billion while net asset value (at March 11) was R297, an increase of just 2.8% from June 30 2015 and well above the share price then of R247.
Food, liquor and homecare contributed R1.2 billion (up over 28%) to Remgro earnings, while healthcare (Mediclinic) grew substantially, but banking’s contribution increased just 2.9% to R1.4 billion.
Among unlisted investments, Total made a small contribution while Remgro’s share of KTH losses amounted to R260 million. Seacom reported a headline loss of
R111 million and eMedia’s contribution to headline earnings dropped 75% to R11 million.
Deals during the period included Remgro’s effective funding of Mediclinic’s acquisition of Spire, and SBG Securities said in a recent equities research report that Remgro could embark on its first equity raise in modern history to increase its holding in Distell, pay back debt and have R8 billion available for future investments, so it cannot be said there is a lack of activity on Remgro’s part – but it does move slowly.
The Distell opportunity arises from the Competition Tribunal’s ruling that SABMiller dispose of its 26.4% holding in Distell as a condition of the AB InBev merger.
Remgro has a pre-emptive right to buy SABMiller’s stake in Distell, requiring about R10 billion, in SBG’s view, to raise its stake to 57%.
An investment in Distell could be opportune given the recent sale of KWV to Vivian Imerman’s Vasari group for R1.15 billion, which is sure to result in some competitive energy in the sector. But whether this is enough to excite investors is debatable.
36ONE analyst Daniel Isaacs says the individuals involved in Remgro are “top class”.
“But having said that, the majority of its investments are listed, so investment in Remgro comes down to what sort of discount you are getting.
“I still think it is worth the investment. There is a great team and if you can get a decent discount and like the investments they have made, it is attractive.”
Asked about the investment propositions for Remgro, Richemont and Reinet, Isaacs said that with regard to Richemont, investors should be aware that luxury has come under tremendous pressure globally. Reinet is essentially tobacco, and he would rather buy BAT directly.
What is worth considering, however, is that if South Africa is downgraded and the rand slumps, Remgro would benefit through its exposure to Mediclinic as the majority of its operating profit is not rand-denominated. But there would equally be weaknesses in the portfolio, specifically its financial investments.
Momentum SP Reid head of research Stephen Meintjes said with a current discount to NAV of 17.9% (before potential capital gains tax) and 15.2% (including CGT), there is reason to invest.
“There are some investors that hold the view that it should be trading at a premium because they are such competent investors.”
Yet, the share is not at a premium, indicating a buying opportunity.
Despite the differences between Remgro and investors like Wiese, investors do not necessarily think dealmaking and excitement are reasons to back one rather than the other.
Meintjes said Remgro’s investment strategy was conservative compared with Wiese’s, and while it was true there were some “big moves” recently in terms of Wiese’s investments, “some eight years ago Rupert made some pretty big moves” unbundling Richemont and subsequently forming Reinet, so Remgro is not incapable of providing exciting investment opportunities.