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RMI Holdings shares leap on unbundling announcement

Shareholders will end up with a direct holding in Discovery and Metropolitan, meaning that they will be left with a direct stake: CEO Herman Bosman.

FIFI PETERS: Shares of Rand Merchant Investment Holdings, RMI, leapt over 16% on the JSE today after the company announced big changes. These changes include unbundling its stakes in Discovery and Momentum Metropolitan, as well as raising R6.5 billion on the market in a rights issue. We have the CEO of RMI, Herman Bosman, on the SAfm Market Update to explain exactly what the company is planning to do.

Herman, thanks so much for your time. I know that CEOs don’t often look at their share price, but you must have a warm and fuzzy feeling just looking at how the market has responded to the news that you brought today.

Read: RMI to unbundle Discovery and Momentum Metropolitan

HERMAN BOSMAN: Yes, Fifi. Indeed, and thanks for having us on the show. Of course it’s a positive endorsement of the strategic direction we are taking. On the one hand we are expecting something to this effect, having spoken to 10 of our shareholders representing just over 70% of our shares, and they were all very supportive – and you see the indication of their support in our announcement.

We had had an indication that we were on the right track. I guess the market is a more visible and more tangible endorsement of that, and I think it’s made even more positive by the fact that we’ve – because of a variety of market dynamics – had quite a tough market overall for equities today.

FIFI PETERS: Indeed. Actually rightly so, given what is happening with the potential default of a property company in China that sent all forms of ripple waves across the market. The fact that you stand out so strongly does indicate an endorsement, Herman. But let’s just talk about exactly what you have brought to market in terms of the changes.

Starting off with the unbundling, take us through this process and exactly what you’re hoping to achieve.

HERMAN BOSMAN: The process is a fairly simple one to the extent that we own approximately 25% in each of Momentum, Metropolitan and Discovery. We then go through a process of taking our 25% stake and acting as a conduit to actually convey these shares, push them through RMI into the hands of our shareholders, so they will end up with a direct holding in Discovery and Metropolitan in the same proportion as they hold in us.

It means that what they will be left with is a direct stake, and I guess that leads to one of the first things that we are trying to achieve, which is that, to the extent that investment-holding companies have continued to trade at a discount to NAV over the last five or six years, we are saying that direct ownership for our shareholders will probably be more efficient so there are no friction costs involved in the interim or conduit structure in the meantime, or in the middle of these two things. That’s the first process.

If we only did the unbundling our shareholders would have ended up with a disproportionate shareholding in the two companies.

The fact of the matter is that in the past we have raised debt to make certain investments, including in Discovery and Hastings (Direct), our UK short-term insurers, and the Discovery and Momentum stakes we hold act as collateral for our lending, or for the banks lending to us.

You can imagine that before the banks want to see their collateral being unbundled and distributed in the way I explained, they actually want to see a lending base to us that’s more commensurate to our reduced asset base. So before the unbundling we will raise money from the market. We will have that, so to speak, in the bank, and we will then be able to distribute these two stakes that I described earlier. So all in all a relatively simple process.

What are we trying to achieve? I guess on the one hand we are very excited about our longer-term future as a more focused investment company. We will have to start off with two unlisted short-term insurers in our portfolio, and these two, OUTsurance and Hastings, have also shown not only that they are growing in difficult market times, but they’ve also shown that they have discernible IP that we think can be applied across a wider portfolio; and this is in fact what they’re doing. They are cooperating with each other, both in South Africa and the UK, as well as in Australia, to have this network of collaborative non-competing short-term insurers in our portfolio. That’s in the longer term.

FIFI PETERS: Sure. The growth of OUTsurance and Hastings in the short term, or in terms of the [annual results] that you have released, does reflect how well these companies have been able to do – unlike, for instance, Discovery and Momentum, which were hit quite hard by the pandemic. Nonetheless, why are you choosing to do this now? And what degree or impact has the pandemic had on the timing of this deal?

HERMAN BOSMAN: I guess I’ve described how we think that the current portfolio of short-term insurers is ready to have the focus and the laser shone on them in terms of performance, as well as cooperation and collaboration. So that’s the first, call it, timing milestone that we wanted to achieve – and of course the fact that we delisted Hastings last year.

We want to have a portfolio of unlisted short-term insurers.

The second point around timing is, once we achieved that milestone, then we had to think how Covid impacts our timing on the unbundling of the two life insurers. The important thing is that they are well capitalised, they are strongly independent and sustainable. But at our very core we are supportive long-term shareholders, and we did not want to leave the fray in the middle of the most tumultuous time of Covid.

So I guess we believe that we are through that. We believe the companies [are] well reserved for hopefully the last of the serious Covid waves. And then I think the point is that we always were backing (up) a bit to say there’s such a long lead time to these processes. As you can see from the timetable, it would be six months from now until we actually distribute. So you have to take a long longer-term decision or something where you could have many factors impacting it. I think we based it on let’s go get to the milestone with the short-term insurance; let’s get through the worst of Covid and let’s then make sure that our two life insurers are well positioned, which we are very confident they are.

FIFI PETERS: So essentially are you saying that you could have announced this deal to market earlier, had it not been for the pandemic?

HERMAN BOSMAN: I guess the fact is that we’ve been thinking about the so-called discount to underlying value which is the short-term benefit that you see in the market today. That’s something we were reluctant to accept. Why is that? I think we have the reputation in this market to build businesses for the long term. We were partners to Momentum, FirstRand, Discovery and OUTsurance – and it takes patience. You go through dips and waves in terms of the ability to withstand the time of building a business.

We were reluctant to give up on that because we do feel that there’s a role to play for an investment-holding company such as ours.

But I guess after five years of trying a variety of things to see whether we could bring it more in line with NAV, we probably had to accept that we were not going to see mean reversion to what tended to be companies trading relatively close to par.

In that regard we are not even the worst-affected by it.

Be it as it may, I guess we could have gone a bit earlier. But then I think the first milestone that I described was that we also wanted our short-term insurers to get to a state of maturity and evolution (where we would be) ready to announce this.

FIFI PETERS: What then are the plans for this next chapter that you are opening, as it were, in terms of what you’re looking to do with your unlisted portfolio in the insurance and the property sector?

HERMAN BOSMAN: I guess the first thing is that both OUTsurance and Hastings have very exciting growth plans. We see at this stage, for example, their gross written premium running ahead of their profit, which means that you’re investing for the future and you’re getting up to scale, you’re getting up to maturity of risk books. So we are very happy with the growth profile of these two businesses.

The second thing that that we have is that they are very cash-generative; they pay out about 80% of profit and they have a dividend yield of between 4% and 5%. That’s a great position – to have a company that’s producing real cash, but also at the same time growing. So I guess in a nutshell, or as a starting point, we are very proud and very happy with the quality of our portfolio.

The next iteration would be, as I hinted, also to work on this collaboration. For example, OUTsurance runs a 600-person call centre in Centurion for Hastings. Hastings has taught us so much about bodily injury, which is a new business line for us in Australia and so forth. So the second iteration is for us to have a network of non-competing short-term insurers in the portfolio.

And then I guess the third one, which we will be very circumspect and selective about, is to ask if there are other local champions, other real winners in shorter markets elsewhere in the world to whom we could be the long-term partner.

FIFI PETERS: So how much have you set aside in terms of a budget to fund this future path?

HERMAN BOSMAN: We haven’t really set a budget. I guess for us the triangle that we want to operate in would first be that we want to stay within strategy, which I think we’ve been quite clear on. The second one is we expect certain financial return dynamics. We want businesses we invest in to be EPS (earnings per share), earnings-accretive within three years. So that I guess is the next block.

And then the other one in terms of our debt profile is we want to stay within in a certain amount of gearing, and stay an investment-grade borrower. So if you triangulate those and you think about the cash generation that’s coming out of OUTsurance and Hastings, we will probably generate quite significant capacity over time. But I don’t think we want to start with here’s the capacity, let’s find a place to invest it in. To a hammer everything looks like a nail. I think we would rather start the other side with saying, what are the local champions and where would they fit into the collaboration network, and let’s see whether we can make an approach there. But nothing is chasing us in that regard.

FIFI PETERS: On your debt, currently sitting at around R11.8 billion or so, you’re looking to raise about R6.5 billion in the market. How much of that is going towards lowering your debt?

HERMAN BOSMAN: We are going to use all of that.

FIFI PETERS: Alright. And then afterwards, the remainder – is that a level that you’re comfortable with, or would you be looking to lower it further, and over what timeframe?

HERMAN BOSMAN: We will be sitting at a gross debt of around R6 billion. Our lending banks are very happy with that. We are still investment grade. The point then is when we’re comfortable with our debt levels and have cash generation from our businesses, the first thing is we want to target a 50% payout ratio in dividends to our shareholders.

Thereafter we will assess the use of proceeds in three ways. Do we need anything to assist OUTsurance or Hastings with some of the expansion plans? Two, do we want to reduce debt further? And three, are there investment opportunities? If we do not have applications in those three areas, we will again revert to our shareholders with special dividends.

FIFI PETERS: All right, Herman, thanks very much for your time. We’ll be watching the new growth path for the company very closely, and hopefully keeping an [eye] on that.

That was Herman Bosman, who is the CEO of RMI.

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Not the best sub-heading that I have seen:
“Shareholders will end up with a direct holding in Discovery and Metropolitan, meaning that they will be left with a direct stake”.

End of comments.

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