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Remgro and Reinet are two investment companies controlled by the Stellenbosch-based Rupert family.
IM reckons their performances in 2018 could be markedly different.
Aside from sharing the same controlling shareholder, there are a number of similarities between the companies. Both of their share prices reflect a significant discount to the intrinsic value of the underlying investment portfolio. Deal flow is slow and the portfolios are managed conservatively.
Both companies have a diversified portfolio — but both also have one large investment that is far bigger than the other portfolio components.
The major differences are that Reinet is primarily focused offshore, whereas Remgro has a distinctly local bias (albeit with some rand hedge attributes), and Reinet pays an annual dividend that is not exactly generous, while Remgro pays (growing) dividends twice a year at a fairly decent yield.
At this juncture, IM would prefer to go short on Reinet, even though the firm is structured as a proverbial fortress against capital depreciation.
It is difficult not to view Reinet as anything more than a proxy for British American Tobacco (BAT), which represents nearly 70% of the investment portfolio.
BAT, which now pays quarterly dividends, will probably perform steadily in the year ahead. But its strong dividend flows don’t pass into the hands of Reinet shareholders, as the company needs a serious chunk of these distributions to fund ongoing investment commitments in private equity and specialised funds, as well as to pay the fees due to CEO and asset manager Johann Rupert.
Reinet does appear to have uncovered a gem of an investment in UK-based financial services specialist Pension Insurance Corp. But it might be some years for the value in this promising investment to be unlocked — either through corporate action or a listing on the London Stock Exchange.
The remaining bits and pieces in Reinet’s portfolio don’t appear — at least according to the latest management statement — to be racking up scintillating performances. In fact, most of the fund-based investments look worryingly mediocre, though things could always change over the longer term.
Overall, with a stronger rand environment likely in 2018, IM believes Reinet’s share price is likely to drift.
Remgro, on the other hand, looks set for a more eventful year, with a number of its investments poised for action.
Remgro’s initial recovery could be spurred by an improved performance from private hospitals group Mediclinic International, which has been dogged by setbacks in its Middle East operations.
It seems likely Mediclinic will show an improved profit performance this year, which should push the share price up from levels that currently heavily discount the company’s longer-term growth strategy.
There may also be further corporate action from Mediclinic that could renew market enthusiasm for the share.
IM also believes that there could be action at Remgro’s consumer brands subsidiary, RCL Foods, both from an operational performance perspective and from possible corporate action.
RCL has underperformed most of the food counters on the JSE, but it should show a smart recovery in the financial year ahead after right-sizing its core poultry business. If the recovery is only half as convincing as that achieved by JSE "big bird" Astral Foods, then RCL should show a much fatter bottom line.
RCL also looks poised to make acquisitions that will diversify its food basket away from its old poultry core.
The company has a number of platforms that it could build on to ensure more dominant market positions and more succulent margins. A logical starting point would be to reverse the spreads business acquired by Remgro from Unilever into RCL Foods.
A potential curve ball could come into play if the RCL Foods share price continues to trade at prevailing poor levels. This could result in Remgro — which has bulked up its holding in RCL by buying shares in the open market — deciding to pitch a takeover offer to minority shareholders. This would add some appeal to its smaller, unlisted investment portfolio.
Remgro also looks likely to play a more active role in driving strategy at liquor group Distell, which recently underlined its high-volume/mass-market pitch by selling off French cognac brand Bisquit.
Remgro might also unlock value by cleaning up its portfolio by disposing of peripheral investments — most notably profitable industrial businesses such as Wispeco, Air Products, PGSI and even the interest in oil group Total SA.
The fate of the majority stake in highly profitable fibreoptic specialist Dark Fibre Africa is also intriguing. Last year there were rumours it could be sold, but some might hope the business is unbundled to shareholders and listed on the JSE.
IM is of the opinion that a long position in Remgro could be rewarding.
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