Despite an illustrious track record as illustrated by Remgro’s motto of “Creating Shareholder Value Since 1948” South African investment holding companies have with a few notable exceptions become value traps for investors with ultra wide discounts to net asset values, which in the cases of outliers like Grindrod and African Rainbow Capital now exceed an astonishing 70%.
Notable exceptions would include the likes of RMB Holdings which after decades of creating value and treating shareholders well elegantly unbundled itself as a consequence of its widening discount in what RMB termed a “natural evolution”.
The pain of this derating affects the economy generally, as holding companies are an important channel to mobilise capital for startups and growth opportunities. When trading at big discounts their opportunity to raise fresh capital is constrained and if cash rich they should reduce capital via value enhancing sharebuybacks, a strategy currently being successfully employed by Zeder.
The reform starved SA economy has obviously played a part in this derating, but scratch under the surface and one realises that many SA holding companies are also in need of urgent reforms.
Misaligned remuneration where insiders do very well while shareholders suffer has often become the order of the day. Illustrating this vividly is the current furore around ARC Investments which since listing in 2017 has lost 64% of its value, but has a management fee over the past year which equates to an astonishing 7% of its market cap. ARC is now holding a rights issue at a 74% discount to its net asset value with 27% of the proceeds or R205 million going to settle outstanding fees.
Even the few holding companies that have performed very well in terms of growing their net asset values are tarnished with big discounts.
Sabvest is an excellent case in point which has grown its net asset value at a compound average growth rate of 20% per annum over the last five years. Yet despite this exemplary performance, a well-positioned portfolio and a costly scheme to improve demand for its shares, Sabvests discount to net asset value has increased eightfold from 7% in 2014 to 56%.
Factors contributing to Sabvest’s derating are widespread in the SA investment holding sector being:
- Failing to align incentives with shareholder value. Sabvest has ignored the lessons of likes of notable performers such as Amazon who align their employees remuneration to long term value creation by share based compensation that vests over an extended time period and which encourages employees to think and act like owners. Instead cash based directors fees at Sabvest have escalated at a compound average growth rate of 18.4% over the last five years, dramatically outstripping the shareprice and resulting in directors fees as a percentage of market cap nearly doubling from 1.5% in 2014 to 2.7% in 2019. At the 2.7% level Sabvests directors fees are 90 times the level of those at Remgro.
- Maintaining artificial control. In May Sabvest replaced one perpetual dual class structure with another ensuring its charismatic founder had unfettered control. Sabvest ignored studies from the likes of the US Securities and Exchange Commission, the CFA Institute and Harvard Law School which found that perpetual dual class share structures or “forever shares” destroy value and create “corporate royalty” that should at best only be for a limited period while founders are at the peak of their powers. Founders like Jeff Bezos and Bill Gates are held up as leading without artificial control and with shareholdings which have declined over time.
In conclusion SA investment holding companies need to urgently reform by adopting aligned compensation which encourages employees and officers to act and think like owners as opposed to rent seekers, and by abandoning discredited control structures which make them impervious to challenge. Sabvest with its founder having unfettered control and a 39% economic interest is ideally positioned to seize the initiative and start a process which leads to a renaissance in this important sector.
Chris Logan CSA