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Renewed interest in RECM & Calibre

As the preference share-based investment company announces a jump in NAV.

CAPE TOWN – The preference shares in investment company RECM & Calibre spiked in trade on Wednesday and continued their momentum into Thursday following a very encouraging trading statement. The company announced that it expects its net asset value (NAV) per share to increase between 44% and 54% from last year.

The share price jumped from a little over R12.50 per share on Wednesday morning to close a R15.49 per share on Thursday (up 3.27% on the day). The price of the preference shares had been trading flat for the year to date until the announcement.

The company is a closed-end vehicle with access to permanent capital that investors can access through its variable rate preference shares. The capital allocation decisions are taken by Piet Viljoen and his team at RECM.

The announcement caught the market by surprise, as the company’s NAV was only up 2.2% in the first half of the year. However Viljoen explains that the increase was predominantly due to updating the valuations of their holdings.

“Around 70% of what we own is unlisted and un-traded, but because we are an invested company we have to put a fair value on those investments,” he says. “Last year we were still in the process of acquiring them, so we kept them at book value. We couldn’t continue with that as accounting standards don’t allow it, so we’ve now placed a conservative fair value on those assets and this is the outcome.”

Viljoen adds that they have also increased their holdings in a few of their investments, and the vehicle is now fully invested.

The company holds minority interests in a selection of listed small cap shares, including Transhex, ELB Group, KWV, Sovereign Foods and Conduit Capital. According to Brad Preston, portfolio manager at Mergence Capital, that portfolio is flat on average over the last six months. 

The majority of RECM & Calibre’s assets are however in unlisted investments. Here it takes more meaningful private equity-type ownership stakes to partner with management teams and support growth.

“The main unlisted investments are a holding in a leveraged vehicle, Fledge Capital, which has a stake in Dischem and a 20% stake in Goldrush, a bingo and limited payout machine operator,” says Preston. “At their last interims RECM & Calibre reported that Goldrush had grown revenues by 60% and profits by over 700% for the first nine months of 2014.” 

The growth in the RECM & Calibre portfolio might also surprise those market watchers who are aware of how RECM’s open-ended unit trusts have been struggling over the last while. However, Preston points out that the portfolio is very different to what one would find in RECM’s unit trusts. As most of the fund is held in unlisted investments, it is a very different proposition.

Viljoen also believes that the closed-ended nature of the vehicle allows it to implement its value philosophy optimally.

“To be a real value investor, you require the permanent capital of closed-end funds,” Viljoen says. “Over the last while everybody knows that value investors have struggled and clients have been disappointed with short-term returns.

“In that environment sometimes you become a forced seller as investors withdraw their funds, and that’s what has happened. Value investors have become forced sellers as clients have departed and so that has pushed their holdings even cheaper than they were.” 

RECM & Calibre will release its audited annual results before the end of June.

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