The announcement by RMB Holdings (RMH) that it intends unbundling its 34.1% stake in FirstRand has largely been welcomed by local asset managers. The holding company notified the market on Tuesday that it intends distributing this stake to shareholders at some point next year.
“I believe the RMH board made the right decision in deciding to unbundle their FirstRand stake, given that the existing structure adds no value to shareholders,” says Meyrick Barker, investment analyst at Kagiso Asset Management. “Since announcing their expansion into property RMH has, at times, traded at up to a high teen percentage discount to its FirstRand shareholding.
“This decision will help to unwind the current discount and is positive from the perspective of RMH shareholders.”
More than 97% of RMH’s net asset value (NAV) is attributable to its stake in FirstRand. The remainder is its R3.5 billion property portfolio.
The stock has therefore largely been treated as simply an alternative entry point into the banking group. However, the holding company discount attached to RMH has meant that there is unrealised value in this structure.
“The restructuring does away with a structure that was no longer necessary from RMH’s perspective,” says Victor Mupunga from Old Mutual Wealth Private Client Securities. “Despite the initial concerns about an increased large block of tradeable shares coming onto the market for FirstRand, over time it is positive, in our view. There will be a ‘single entry point’ for investors seeking FirstRand exposure and increased free float, which is positive.”
Liam Hechter, a fund manager at Anchor Capital, agrees.
“Effectively RMH was trading at a 9% discount to its position in FirstRand, so shareholders in RMH should realise that between now and the time the unbundling happens,” he says. “That doesn’t mean that RMH must go up. FirstRand could also come down. But they should see that discount unlocked.”
Impact on FirstRand
Shareholders in FirstRand have also welcomed the announcement, even though the banking group’s share price traded lower on Thursday.
“FirstRand’s share price might be under pressure over the short term due to the unbundling process,” says Sophié-Marié van Garderen, portfolio manager at Truffle Asset Management.
“[However], over the longer term we see this as a positive as the combined distributions from RMBH and Remgro would significantly increase the free float [of FirstRand] in some of the key indexes.”
This will make FirstRand both more liquid, and potentially more attractive to foreign shareholders.
While there may be extra volatility in the FirstRand share price in the short term, longer term investors could see this as presenting attractive entry points.
“There might be temporary periods of weakness, but our view is that the fundamental value of the business won’t change,” says Hechter. “So if there is an overreaction it would probably be a buying opportunity.”
Alongside RMH’s announcement, Remgro also indicated that it would be distributing its stakes in RMH and FirstRand “in full or in part”. Remgro holds an effective interest of 28.2% in RMH, and 4% of FirstRand.
There is potentially more of a short-term opportunity here to realise value than in RMH, since Remgro was trading at a 32% discount to its NAV at the time the announcement was made.
“Over time Remgro has been trading at an average discount of 17% to its sum-of-the-parts value, so there is a lot of value to be unlocked there,” says Schalk Louw, portfolio manager and strategist at PSG Wealth. “That is what I will be watching over the next few months.”
The decision from Remgro has also been seen as a positive signal that the management teams of local holding companies may be growing more proactive in unlocking value, given how the discounts to NAV of many of these entities on the JSE have opened up over the last few years.
“This might spur some other management teams to try to be creative in realising value for shareholders,” says Hechter.
“Remgro itself has other pockets in their portfolio that they could realise,” he adds.
One of those might be RMI Holdings, which itself came out of RMH.
“I think this is extremely positive,” Louw agrees. “The big question is who is going to follow suit. Will there be more companies that say we should look at unbundling our holdings as well?”
Once RMH has distributed its FirstRand stake, the company also intends to sell its property portfolio and ultimately delist from the JSE. This is also somewhat of a recognition that its intention to diversify its assets hasn’t been successful.
“Since 2016, RMH attempted to diversify its assets by pursuing property development ventures using debt against its FirstRand shares as collateral,” explains Renier de Bruyn, investment analyst, at Sanlam Private Wealth. “While RMH’s management had ambitious plans to eventually grow the property business to around 10% of its market cap (R10-R15 billion), perhaps a more cautious outlook on the property market together with a widening of holding company discounts has led the board to question whether the potential upside from new investments justifies the price of a holding company discount, which was around R13 billion prior to the announcement that they are planning to unwind the holding company structure.”
For Mupunga, it appears that RMH was hindered by the size and success of its exposure to FirstRand.
“We have seen this with a few holding companies – it is difficult to diversify your portfolio when your largest exposure company performs well,” says Mupunga.
“For example, PSG/Capitec and Naspers/Tencent,” he points out. “The success of these key holdings means that any meaningful diversification comes by way of a large acquisition, which has its own risks.”
Hechter has similar views.
“For RMH to have added material value, the amount of execution risk that would have been introduced because of the size of the transaction would have been so much bigger,” he says. “So it was maybe a victim of how big FirstRand became over the years, and how difficult it became for management to do something material.”