CAPE TOWN– Preference share-based investment company RECM & Calibre on Monday announced a 50.5% increase in its net asset value over the year to the end of March. It placed its net asset value attributable to preference shareholders at R834.3 million, up from R554.5 million in 2014.
The jump is however predominantly due to updating the value of many of the holdings in the company’s portfolio. The majority of RECM & Calibre’s investments are in unlisted entities, and last year most of these were kept at book value as they were still in the process of being acquired. The performance of of these underlying businesses has however required that they be re-valued.
In a note to shareholders, management explained that they arrive at valuations as simply as possible. For their listed holdings, they have a market price. For unlisted investments where there is a secondary market, they use that price.
However, for a number of the shares they hold there is no secondary market and that requires making their own assessment of their value.
“We will account for our activities as accurately and conservatively as we can,” management noted. “In some instances, our estimate of fair value does not deviate much from the price we were willing to pay to initially acquire the business. However, some of our investments have shown such strong earnings growth over time, that we have had no choice but to reflect an increased value.”
The company’s largest single investment is its stake in bingo game and limited payout machine operator Goldrush, which it increased to 34.5% over the course of the year. Valued at R313 million, the holding now makes up 30.3% of its portfolio.
RECM & Calibre also has significant diamond mining interests both through listed and unlisted investments. It grew its stake in listed group Trans Hex to 25.0% during the year, and also holds an additional 27.2% of unlisted West Coast Resources, a tailings processing project that was recently acquired by Trans Hex. Together, these make up just under 20% of its portfolio.
In the retail space, RECM & Calibre owns 27.0% of Safari and Outdoor, a hunting and outdoor equipment retailer with stores in Stellenbosch, Pretoria and Rivonia. It also owns an effective 2.5% in Dischem through a leveraged structure, Fledge Holdings. These two investments together are valued at R190 million, or 18.4% of its portfolio.
RECM & Calibre’s other holdings include stakes in listed businesses ELB Group, Sovereign Foods and Conduit Capital, as well as unlisted wine and spirits producer KWV, Northern Cape farming co-op KLK Landbou and industrial services business Excellerate Holdings.
The company’s results also indicated that 1.2% of its portfolio is in ‘held-for-sale investments’. These are small stakes that it is trying to dispose of.
“We completely exited from some holdings where our investment was too small to make a difference, or for various reasons, we couldn’t see an avenue open to acquire a meaningful stake,” management said. “As reported last year, when one exits from unwanted positions, it generally happens that the good ones go first, and the bad ones tend to linger for much longer than you would want them to. Much like those boring dinner guests you should never have invited – and never will again. We are still part owner of three companies in this category and, as is always the case, we ended up keeping the worst for last.”
Over the course of the year, RECM & Calibre invested a net amount R44 million. Although it held R71 million in cash at year end, some of this is already earmarked to fund further investments into existing assets, and so the company has now fully invested the original capital raised.
The case for investment trusts
Writing in a recent note to clients, chief economist and strategist at Investec Wealth & Investment, Brian Kantor, noted that the aim of any closed end investment trust such as RECM & Calibre must be to generate returns above the risk-adjusted cost of capital. This is best achieved through investing in businesses that are either not accessible through the listed environment, or that can be significantly enhanced through the involvement of the investment company.
“Shareholders can hold a well diversified portfolio of listed assets without assistance from the managers of an investment trust,” he said. “The special benefits an investment trust can therefore hope to offer its shareholders is through identifying and nurturing smaller companies, listed and unlisted, that through the involvement of the holding company become much more valuable companies.”
While he was commenting primarily on Remgro, he was supporting a strategy that is also clearly being followed by RECM & Calibre.
“The holding company or trust will actively manage a somewhat concentrated portfolio, much more concentrated than that of the average unit trust,” Kantor said. “Such opportunities to concentrate the portfolio and stay active and involved with the management of subsidiary companies may only become available with the permanent capital provided to a closed end investment trust.
“True value-adding active investment programmes require patience and the ability to stay invested in and involved in a subsidiary company for the long run,” he added. “Unit trusts or exchange traded funds do not lend themselves to active investment or a long run buy and hold and actively managed strategy of the kind recommended by Warren Buffett.”
RECM & Calibre’s preference shares traded slightly lower at R15.70 per share in inter-day trade. They are however up 21.21% over the last year, and 58.42% over the last three years.