Remgro, the investment holding company managed by the Rupert family, has been a stalwart in the Sanlam Private Wealth Equity portfolio for many years. While shares in the Stellenbosch-based investment behemoth have historically traded at an average discount of 15% to their net asset value (NAV), the current discount of 45% is the largest it has been in over a decade, providing investors with an even better margin of safety. We recently added to the share in our clients’ portfolios.
Remgro is an archetypal South African investment holding company with a history that dates back to 1940 when it was founded by Dr Anton Rupert as a tobacco company named Voorbrand. Over the decades, Remgro has evolved from its tobacco origins, unbundling its investment in British American Tobacco in 2008.
Today, Remgro is recognised for its diversified portfolio of investments spanning multiple industries, including financial services, healthcare, consumer products, industrial, infrastructure and media. Its largest holdings (as a percentage of NAV) are Mediclinic (31%), OUTsurance (16%), Community Investment Ventures Holdings (CIVH) (9.5%) and FirstRand (7%), giving investors access to strong companies and exposure to assets expected to benefit from improved South African economic growth.
DISCOUNT TO NAV
Beyond the benefits of diversification to remain competitive, Remgro exhibits low financial risk given its net cash position. What is particularly appealing is that these strengths are currently available at the largest discount to NAV in over a decade, providing investors with a considerable margin of safety. While holding companies normally trade at a discount to NAV, Remgro’s discount has expanded significantly, growing from around 15% to 45% in recent years.
Several factors have contributed to this widening discount. One reason is overall investor scepticism towards South African equities due to the country’s challenging operating environment. Issues such as slow economic growth, political uncertainty and structural challenges have resulted in reduced investor confidence, impacting the valuations of companies inextricably tied to the South African economy.
Another contributing factor is the illiquidity of Remgro’s underlying investments. Over the past few years Remgro’s composition of NAV has shifted toward unlisted assets – these increased to 65% after the conclusion of the Heineken-Distell reorganisation and the Mediclinic buyout. The unlisted holdings, such as Mediclinic, CIVH and Heineken Beverages (5% of NAV), are not as easily tradable and have been exposed to poor earnings and corporate action costs.
Both the Heineken Beverages and Mediclinic businesses have seen their valuations decreased on the Remgro books due to poor performance. In addition, the corporate action between CIVH subsidiary Maziv (the parent company of Dark Fibre Africa and Vumatel) and Vodacom has been delayed.
Vodacom’s planned acquisition of a 30% to 40% stake in Maziv and subsequent capital investment were set to drive growth and reduce debt within Maziv, while further increasing Remgro’s net cash position. This deal is currently with the Competition Tribunal, with a judgement expected soon. The uncertainty around this issue and a spate of poor earnings from large underlying investments have further added to the discount.
REMGRO WELL POSITIONED
We believe that with the earnings base now reset lower and asset valuations more accurately reflecting reality, combined with positive signs in the operating environment, Remgro is well positioned to benefit from an improving South African economic cycle and lower interest rates giving credence to a narrowing discount.
In addition, the contribution of listed assets to NAV dropped from 78% in 2015 to 33% currently. We view this decline as a positive outcome. Remgro recently sold its holding in Momentum, with more sales in the listed portfolio on the cards. This, combined with positive capital allocation decisions, could see a further narrowing of discount to NAV.
In the meantime, the high discount has provided a good margin of safety for investors, and has in addition provided discounted exposure to high-quality companies such as OUTsurance and FirstRand – supporting our holding of Remgro in our clients’ portfolios as we wait for the underlying investments to deliver better earnings growth over time.
