Some 21 years after the start of the century, there are now fewer holding companies on the JSE today than there were in the two decades leading up to 2000.
Unfortunately, the problem of their shares trading at a discount to the market value of their underlying investments remains after all these years.
Nobody has come up with a plan to convince shareholders that large holding companies are actually valuable and deserve more credit.
The only tried-and-tested method to unlock the trapped value is distributing the shares in the underlying companies directly to shareholders.
While an unbundling of listed subsidiaries immediately unlocks value for shareholders by closing the gap between market prices and net asset value (NAV), holding companies often have reasons not to go this route.
Prosus and Naspers
A striking example of the problem is the billions of dollars trapped in the large investment that Naspers and Prosus own in Tencent.
Recent figures show that Prosus is trading at a discount of 47% to the value of its underlying investments and net cash, while Naspers is trading at an even bigger discount to its interests.
Prosus issued a comprehensive calculation of its NAV when it published its interim results. At the end of September 2021, the market value of its listed investments amounted to $177.8 billion, with Tencent amounting to $164.3 billion of this. Its unlisted investments were valued at $37.8 billion, and it held net cash of $3.1 billion.
The total NAV per share was R2 299 per share, compared to the closing price of R1 230 per share on the JSE at the time.
While unbundling Tencent would net shareholders a cool R1 000 per share, the total amount of ‘hands-off’ value of this is astounding: R1 535 billion.
Naspers was trading at R2 565 at end-September, compared to its NAV of R6 325 per share. Naspers noted that this calculation is based on the NAV for Prosus and not the latter’s share price.
Naspers and Prosus are not keen to unbundle the Tencent stake, stating time after time that Tencent remains an investment with good prospects. It is also important to have the assets and clout of such a big investment behind Prosus in its aim to grow its diverse interests in consumer internet businesses.
A look at Prosus’s annual report and subsequent interim results shows that the group’s new interests are still very much developing – and its takes very long and costs a lot of money.
Remgro management has probably heard the unbundling argument more often and for much longer than they care to.
Its listed investments (such as Mediclinic, RCL Foods and RMI, as well as a bit of FirstRand and British American Tobacco) and unlisted assets (including Total and PG Glass) have been discounted by investors for ages.
At the end of the last financial year, Remgro was trading at a discount of 35% to its NAV, according to a calculation included in its results for the year to June 2021.
However, Remgro restructures its investments from time to time and has unbundled underlying holdings several times.
The first and most prominent was the listing of Compagnie Financiere Richemont in 1988. At the time, Richemont shares were distributed to shareholders. Remgro also moved its interest in British American Tobacco (BAT) around to give investors more direct access and to minimise any discount within a holding structure.
BAT shares were distributed to shareholders in 2008 and BAT SA was listed as a separate entity on the JSE. Remgro also loaded Reinet Investments (Reinet) with a bit of BAT shares and offered investors the opportunity to invest in Reinet in 2008.
Reinet is also still trading at a discount to its NAV.The balance sheet at the end of September 2021 put the NAV at €25.95 per share compared to the share price of €16.20 then.
Remgro unbundled its interest in the Trans Hex diamond mine in 2010 and its Rand Merchant Bank Holdings shares in 2011.
Dawid Meades, veteran financial writer and stockbroker, says one must remember that Remgro used to have an even more complex holding structure years ago – with no fewer than four listed holding companies, excluding the listed operating investments within the then Rembrandt Group.
“There were a lot of holding companies at the time,” says Meades, now consultant to Millhouse Wealth. “The large mining houses can all be regarded as holding companies who held interests in their listed operating mines, while Anglo American held a big portfolio of industrial assets as well.
“These holding companies were all disbanded, with only a few still remaining,” says Meades.
He says control or investment structures also existed between banks and life insurance companies, while Barlow Rand and Anglo American Industrial Corporation (Amic) were examples of industrial holding companies, mostly always trading at discounts to their NAV.
PSG Group can be regarded as the newest holding company on the block, but one that is seen to grow value aggressively and unlock it for shareholders.
Still, investors are not willing to pay the full price for management’s skills and track record.
PSG traded at a discount of 27% last week, according to the daily update of its NAV (available on its website).
PSG has unbundled as much of its portfolio as seemed appropriate from time to time. It holds only small interests in Capitec Bank, Zeder and Curro, and a larger interest in PSG Konsult.
Interestingly, the PSG share price jumped to a new high in May 2020 when it announced the unbundling of 28% of the shares it held in Capitec, retaining slightly more than 4% of the bank.
It is difficult to gauge whether holding companies offer opportunities for investors or not. Buying something at a discount is attractive, except when the prospect of selling it a discount is unavoidable.
However, stockbrokers trading for their own accounts, private investors and active fund managers have been making money from investing in holding companies for ages.
Tracking changes in the discounts of holding companies over time – buying when high and selling when narrowing – delivers low-risk returns.
Then there is the sudden windfall when a holding company does distribute some of its interests to shareholders.
Listen to Simon Brown’s interview with Schalk Louw from PSG Wealth Old Oak in this MoneywebNOW podcast (or read the transcript here):