AlphaWealth Prime Small & Mid Cap - Mar 19
HOSKEN CONSOLIDATED INVESTMENTS LTD (CODE: HCI) - BETTER THAN BUFFETT? As an empowered investment company under John Copelyn's stewardship, HCI has outperformed both Berkshire Hathaway and PSG (both in ZAR) since the end of the 1999's. This outperformance of Warren Buffett's Berkshire Hathaway becomes more pronounced when you consider that Berkshire does not pay dividends but HCI does.
Arguably the best quality hotel, casino and gambling operators in South Africa (and Africa), Tsogo Sun (code: TSH) is controlled by HCI. While there is a balance of risks and rewards in Tsogo, if we assume that the market is pricing Tsogo Sun fairly (Note: There are good arguments about why Tsogo Sun is actually cheap.), then HCI's market cap is currently trading at a discount to the basic market value of its investment in Tsogo Sun!
Taking out some debt, ignoring tax and one or two other assumptions, HCI's market value of its Tsogo Sun investment is approximately R10.6bn or 12500cps. HCI's own market cap is only R10.3bn with a share price of c.11500cps.Now go and add to this simple sum-of-the-parts the fact that HCI also own a property portfolio worth over R2.8bn, a number of coal mines, a stake in a platinum miner, and controls eMedia (invested in OVHD, eTV and a number of other media assets), Hosken Passenger Logistics (i.e. Golden Arrow Buses), Deneb (industrial, property and consumer good business) and some other minor assets dotted around (even after taking out the debt at the centre).In other words, HCI is very cheap, despite being high-quality and well-diversified with some rather material, flagship assets.Recently, though, HCI has become even more attractive due to a part of their investment portfolio that we had previously given zero-value to. This investment we originally wrote-off is now obviously worth a lot. If not billions of Rands.
HCI has been quietly allocating increasing amounts of capital into an (effectively) controlled offshore business, Impact Oil & Gas Ltd (Impact O&G). The business is an oil exploration group out of the UK with interests in a range of potential oil fields and early-stage/exploration-type hydrocarbon assets. This is exactly the type of business that we prefer not to pay for and get for free in an investment like HCI.
Hence, we gave it a zero value and refused to pay for it (despite HCI allocating about R1bn of capital to it).Interestingly, one of the investments that Impact O&G made was an effective interest of c.5.1% of the Block 11B/12B off the southern coast of South Africa. Yes, this is the self-same field that Total recently announced a major hydrocarbon find that made headline news around the world.
Block 11B/12B is both a material hydrocarbon discovery for the world and a massive boost for South Africa. Our understanding is that it is also only the first hole drilling into this prospect, thus future holes will likely open-up a much larger total resource. By various extrapolations and assumptions, we estimate that HCI's c.2.5% effective interest in Block 11B/12B is worth between R0.8bn to R1.6bn (i.e. between c.+7% to +15% of HCI's entire market cap tied-up in an asset that we and the market were giving zero value to!). While this rough valuation of an early-stage hydrocarbon asset is probably wrong, the fact is that this single investment by Impact O&G should move the needle in terms of HCI and its investment case. It is also worth noting that Impact O&G has a range of other investments beyond Block 11B/12B and some of them (at least on paper) appear to be more attractive assets than this find off the coast of South Africa. In five to fifteen years' time, HCI could well be a significant oil and gas investment on the JSE. It does not hurt that you also get a nice portfolio of hotels, casinos, gaming, media, property and mines, amongst other things, and all this is managed by a fantastic capital allocator with rigorous oversight and possibly a better track record than Warren Buffett.Hence, HCI remains one of AlphaWealth Prime Small & Mid Cap Fund's largest investments and we are increasingly excited about both its prospects & our expected returns.Kind regards,Keith McLachlan, CA (SA)
3.1 The AlphaWealth Prime Small & Mid Cap Fund shall be an equity Fund.
3.2 The primary investment objective of the fund is medium to long-term capital growth, through investments predominantly in equity securities which have a market capitalisation smaller than the company with the lowest market capitalisation in the the FTSE/JSE Top 40 Index. The portfolio may also, apart from listed equity securities, invest in assets in liquid form, participatory interests in collective investment schemes and listed and unlisted financial instruments subject to prevailing legislation, as amended from time to time. At least 80% of themarket value of the portfolio must lie in shares which have a market capitalisation in the FTSE/JSE Top 40 index, or an appropriate foreign index published by an exchange. 100% of share purchases must be in this investable universe at time of purchase.