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‘even better margin of safety’
Dec 07, 2016
Since the unbundling of Richemont and British American Tobacco, Remgro has focused mainly on investing in South African financial and industrial assets. The Stellenbosch-based investment behemoth has been very active of late in terms of investments and corporate action, recently raising R9.3 billion through a deeply discounted rights issue.
Remgro’s listed investments contribute around 78% of the company’s NAV. One would expect that the 22% unlisted portion would be trading at a discount to its asset value, as there are several variables affecting the price of these unlisted investments – whereas listed assets are more fairly priced due to the efficiency of a liquid market.
In recent years, Remgro has added to the listed portion by increasing its stake in Mediclinic and the addition of Grindrod in 2011. The group also spun off its food-producing unlisted investments, TSB Sugar and Zam Chick, in combination with listed asset Rainbow Chicken to create the newly listed RCL Foods, which contributed to the decrease of the unlisted portion.
The investment group’s annual results to 30 June 2016 show that NAV increased over the reporting period by 6.1% to R306.44 per share. Earnings decreased by 26.4% and headline earnings per share decreased from 1 555.0 to 1 143.9 cents – mainly the result of once-off events including Mediclinic’s Al Noor Hospitals Group transaction amounting to R788 million.
Remgro’s unlisted assets performed well during the year under review. The value of the group’s significant minority stake in Unilever showed a marked increase to R10.65 billion from last year’s R8.7 billion, while fibre-optic cabling specialist CIV Group and industrial chemicals company Air Products also saw an increase in intrinsic value. The investment group’s stakes in unlisted empowerment group KTH, undersea cable specialist SEACOM and industrial products specialist Wispeco also edged up in value.
Remgro’s listed equity portion declined by R6.5 billion, mainly on the back of the weaker share performance by Mediclinic and RCL Foods as well as the group’s financial interests in FirstRand, Rand Merchant Bank and Rand Merchant Investment Holdings, which have been under pressure since speculation started about South Africa’s possible credit rating downgrade to junk status.
We believe that Remgro’s results on an earnings basis are distorted, as a result of the significant once-off events during the year under review. At Sanlam Private Wealth, we prefer to look at the group from a NAV to share price valuation. Historically, the share has tended to trade at an average discount of 15%, and the current 18.25% discount to NAV is highly attractive compared to its own history.
It should be noted that during the financial year, the group’s debt increased significantly due to the Mediclinic transaction. Debt levels are still relatively low compared to the market average debt to equity ratio, but one must believe they won’t be gearing up significantly in the shorter term. The R9.3 billion of new equity raised through the rights issue added 10% to the asset value. The cash has reduced the debt to equity ratio to 17.22% compared to 19.32% before the rights issue – the cash on the balance sheet is now R14 billion.
Indications are that Remgro will acquire Anheuser-Busch’s 26% stake in Distell, which at current prices will cost the group around R9.9 billion – close to the value raised by the rights issue. Remgro CEO Jannie Durand has made it clear that if the price is right, the group will likely buy the stake.
Mediclinic, which currently accounts for 42.41% of Remgro, will be a key driver of the group’s performance going forward. FirstRand will also be of crucial value as, along with Rand Merchant Investment Holdings, it accounts for about 20% of total value. The unlisted investments are continuing to perform above expectation with a 2016 NAV increase of 15.5%, and we believe this will underpin further NAV growth.
The risks for Remgro remain South Africa’s sluggish economic growth and currency headwinds, but conversely, rand strength will be relatively beneficial for the group. It is difficult to gauge the influence of the Rupert family in accessing new investment opportunities and in controlling the overall Remgro portfolio. As chairman Johann Rupert nears retirement, we expect his influence on the strategic direction of Remgro to wane.
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