Are the JSE’s handful of investment companies going the same way as the dinosaurs, and can investors make a nifty return from a possible extinction event?
These are questions being bandied about after the bold — and unexpected — decision by PSG Group to dismantle itself by unbundling most of its listed holdings and pitching shareholders a cash offer for the remnants of the portfolio.
PSG has probably been the most successful investment company on the JSE over the past 25 years. The group listed more than 15 companies on the JSE — including Capitec Bank (surely the best business success story of the past 20 years), private education ventures Curro and Stadio as well as agribusiness investor Zeder, wealth management conglomerate PSG Konsult, Pioneer Foods (which was sold to PepsiCo in 2019) and farm services company Kaap Agri.
With such a sterling track record of building successful businesses, why would PSG want to break up and walk away from the JSE? Quite simply, the market no longer holds a candle for investment companies, and most trade at discounts of more than 30% to their intrinsic or net asset value.
As PSG CEO Piet Mouton noted succinctly: "Our investment model [and those with similar structures] has fallen out of favour globally. The ever-increasing discounts at which listed holding companies trade now negate the biggest benefit of being listed — which is to use your scrip to acquire businesses and to raise equity funding in the capital markets to enable you to acquire businesses and support your underlying investments."
Another problem was that investors might have found it more attractive to create their own customised PSG portfolio — for example, investing in PSG Konsult, Kaap Agri and Stadio and not investing in Zeder and Curro, or following other combinations involving the group’s listed subsidiaries.
PSG’s proposal to unlock value for shareholders was made relatively simple by the fact that the bulk of the portfolio value resided in listed counters such as PSG Konsult and Curro. With a good deal of value unlocked by unbundling various listed stakes, the R23 a share offer for the remnants of PSG’s portfolio won’t cause too much consternation among shareholders.
PSG was also smart in that the offer was effectively structured as a "take it or leave it" package. In other words, shareholders cannot accept the unbundling option and reject the cash offer, and have to vote on the proposed transaction in its entirety. It seems unlikely that shareholders would vote to retain the listed status quo (and its dastardly discount) — even if it’s obvious the founding shareholders of PSG will retain some gems in businesses like Zaad (the promising seed business) and retirement home developer Evergreen.
No doubt other investment companies would have taken note of PSG’s bold proposals — knowing full well that at their next AGMs there would doubtless be questions around following PSG’s example.
The problem is that not too many — if any — investment companies on the JSE can really follow PSG’s bold shift, at least in the short term. But they can — and must — take steps to start unlocking some of the value and to retain a vestige of relevance.
Leaving aside African Rainbow Capital — which IM believes is still in its formative phase — and Ethos Private Equity — which will in any event score from the Brait effort — let’s look at four of the JSE’s most popular investment companies.
REMGRO
Investors who have watched Remgro since its previous iteration as Rembrandt will know that the corporate cogs turn very slowly. Some regard Remgro as boring and staid, and have openly questioned its continued existence. But when value is unlocked at Remgro it has usually been quite significant — and often unexpected — like when Remgro offshoot VenFin sold its valuable but heavily discounted stake in cellular services operator Vodacom.
In the past 15 years there have been important shifts in Remgro, which have included the unbundling of its large stakes in British American Tobacco and, more recently, RMB Holdings.
Remgro has a stated preference for holding unlisted assets, which has fuelled speculation that it might also unbundle its holdings in private hospitals group Mediclinic and assurance clusters MMI and Discovery (which are already part of a restructuring at Remgro-controlled Rand Merchant Investment Holdings).
There is also a suspicion that Remgro might look to pitch an offer to minority shareholders in RCL Foods, then take the business private to facilitate a merger with unlisted Siqala Foods, which Remgro acquired from Unilever several years ago.
If Remgro could unhitch is portfolio from its mainstay listed investments, the market would be presented with an investment company with an array of interesting unlisted investments. These would include a food cluster — which would comprise a serious grocery brands basket, from pet food to bread and snacks to spreads — as well as profitable positions in classy industrial businesses like industrial gases business Air Products, energy group Total SA and aluminium products specialist Wispeco. The unlisted gem, however, would be the fibre optic hub held under Community Investment Ventures Holdings — most notably Dark Fibre Africa and Vumatel. This, coupled with a 25% stake in undersea cable business Seacom, gives Remgro a fantastic technology allure.
And then there will also be — if all the conditions of the proposed Distell sale are met — an influential stake in unlisted Heineken SA, which will be a formidable business in the beer, cider and affordable wine segments in Africa.
A counter holding unlisted investments in cash-generating technology, food, niche industrial and mainstream beverages businesses will no doubt be attractive to investors who would probably have no other way of accessing these companies. It would be very surprising to see the market apply a 30% discount to such a structure.
HOSKEN CONSOLIDATED INVESTMENTS (HCI)
Following PSG’s example of unbundling all its listed assets would be impossible for HCI, with a large chunk of debt at the centre.
Besides, ensuring appropriate levels of empowerment at a number of key investments would also be a big consideration. That said, HCI carries possibly the biggest discount of the better-known JSE investment companies — probably because the market has a tough time getting its head around the group’s so-called growth assets in platinum and oil and gas exploration.
These growth assets involve holdings in companies listed offshore, like Platinum Group Metals Ltd and African Oil. Recent shifts in the relevant commodity markets and discoveries — in the case of the oil and gas exploration interests — have piqued the interest of speculators in HCI.
With the share price giving a discounted value of mainly the listed investments — Tsogo Sun Gaming, Tsogo Sun Hotels, broadcast group eMedia, Frontier Transport and industrial hub Deneb — the mainstream market has not really latched on to the potential of HCI’s growth assets.
If HCI — as has been suggested — sells its platinum and energy positions to eager buyers, then there is the potential for not only culling debt but also having a little bit of a war chest for new acquisitions … or buying out minorities in tightly held subsidiaries like eMedia, Frontier and Deneb, possibly even Tsogo Sun Hotels.
A debt-free HCI with strong cash generation from its gaming, transport, broadcast and unlisted coal mining assets would be a serious dividend payer, and would still be able to scout for new investments. Of course, while Tsogo Sun Gaming dominates the portfolio in terms of value and cash flow generation, the risk will remain that HCI still gets perceived — unfairly, IM thinks — as a proxy for the listed gaming business. It would take a bold move to shift that perception.
SABVEST CAPITAL
This relatively small investment company has a track record that spans decades, but it is only in recent years that the market has started to take a shine to the share.
Though Sabvest presents the only point of entry to a good number of cash-generative and steadily growing operations, the market still applies a discount of more than 30%. These unlisted investments include SA Bias Industries (valued at R800m), DNI-4PL Contracts (R864m), ITL Holdings Group (R588m), Masimong Group (R213m) and Apex Partners (R240m).
The market also seems to ignore CEO, founder and main shareholder Chris Seabrooke’s enviable track record of capital allocation, and that there has been a steady flow of dividends in the past decade. IM presumes investors are slightly cynical about the valuations applied to the unlisted positions — especially since the nitty-gritty financial information on these companies are not exactly offered in too much detail.
In terms of a value unlock, one might expect Sabvest, in the shorter term, to exit some of its listed positions — which include fast-growing financial services business Transaction Capital (which has been gradually sold down already) and information storage business Metrofile.
If more detail is supplied on the larger investments (as detailed above) in the unlisted portfolio, then it’s possible that the market — armed with information to make a better (rather than bitter) assessment of value — could buy into Sabvest with more vigour. Of course, selling one of the unlisted investments at a value better than reflected in Sabvest’s financials would be an even better development in terms of gaining the market’s trust around unlisted valuations.
BRAIT
The value-unlock effort is officially on record at Brait — which is made up of two remaining investments in fitness and wellness chain Virgin Active and consumer goods conglomerate Premier Group.
Brait wants to list out part of its holding in strong-performing Premier, which would be an attractive listing were it not for the effect on input prices for food manufacturers stemming from the war in Ukraine.
Premier is a major bread producer, and wheat price hikes could crumble margins. Of course, there are other possibilities for Premier Group — like merging with another food player (Libstar, for instance, would be a nice fit with little operational overlaps). A listing or a sale/merger at Premier would leave the market to ponder the much-maligned Virgin Active investment.
In 2019 — before Covid — Virgin Active generated earnings before interest, tax, depreciation and amortisation (ebitda) of about £100m (R1.5bn). It might not reach that level again in the next financial year, but £80m-plus would certainly give credence to Brait’s heady valuation of the investment.
Significantly, retail tycoon Christo Wiese recently invested more than R1bn in Virgin Active after its merger with the Real Foods Group.
The market remains sceptical of Brait’s value-unlock efforts. But should the Premier listing enjoy some success and Virgin Active show it is advancing steadily back to its R1.5bn ebitda target, the tide of sentiment could turn quickly for Brait’s share price.
One presumes that once sustainable profit momentum is achieved at Virgin Active, Brait might take advantage of strong sentiment for gym groups internationally and list the business on an international bourse.
*The writer owns shares in HCI and Sabvest and is a perennial dabbler in Remgro
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