Vunani Capital Partners (VCP) is a mind-boggling story. Not too many years ago it formed part of JSE-listed financial services company Vunani. But the market went out of its way not to accord any value to the investment portfolio.
So Vunani spun off VCP. However, it opted not to list VCP on the JSE but rather on the empowerment-focused Equity Express Securities Exchange. This was probably a good move, with the JSE now applying hefty discounts to even the biggest, enduring investment companies like Remgro and Hosken Consolidated Investments (HCI) — and even bigger discounts to empowerment investment counters such as Brimstone, ARC Capital and African Equity Empowerment Investments.
At the time of writing VCP was trading at a premium to its last stated NAV of 180c a share, something that has not been seen on the JSE since the heady days of the PSG Group.
Of course, readers will immediately question IM slapping a “buy” recommendation on VCP. Smart investors don’t usually buy investment companies at premium prices — and, in this instance, it’s a very large premium.
In the case of VCP, one might look past the NAV number and pay attention to the cash flows/dividends being generated by the company’s coal mining investments. The company equity accounts much of the earnings from its investments, where it has “significant” influence. In the interim period VCP earned a not insubstantial R70m from dividends received from its investments in associates.
Yes, it has been a golden period for coal mining, with the ongoing global energy crisis — which is unlikely to stabilise until hostilities cease in the Ukraine. So one might reasonably expect another strong showing from the coal interests in the second half, and perhaps stretching out across the next 18 months.
To illustrate just how much the huge increase in energy prices benefited VCP, it’s worth noting that the interim earnings number of 47c a share is markedly higher than the nearly 30c a share earned in the full year to end-February 2022. Remembering that VCP earned about 19c a share of its previous financial year’s earnings in the second half, it would not be surprising to see full-year earnings topping the 75c a share mark.
Admittedly, the coal sector may not always burn this bright — and, in fact, some green-minded investors maintain this might be coal’s last hurrah before renewable energies start replacing so called dirty energy. Investors may even look at the share price of Thungela — the poster child for coal’s resurgence — as evidence that the sector might start cooling off.
But on this score, VCP has indicated that it intends mobilising its significant cash flows from its coal interests to acquire stakes in renewable energy businesses. Some deals are expected to be executed in the second half with the emphasis on a portfolio of renewable projects rather than a single big bet.
VCP also wants to play a role as a consolidator in what is now a fragmented renewable energy market in South Africa and Southern Africa. With some capital to burn, the ability to step in as a funding partner would certainly open a few doors for VCP with fledgling renewable outfits.
One key question is what would happen if VCP were bid for its coal mining interests. There are several midsize coal enterprises — HCI Coal and Salungano spring to mind — that might want to bulk up operations for the future. Would VCP cash out for a good price at a high point in that commodity cycle, or hang in for the longer term’s cash flow underpin? Nice quandary, in any event. The official word is that VCP is unlikely to make new mining investments, save for investing in its existing coal interests.
Meanwhile, quietly in the background, VCP’s property, fintech, technology and gaming investments are also finding traction. VCP’s commodity trading segment is a dark horse, and more than doubled its profit contribution in the interim period, with the main activity centring on boron.
Of particular note is that VCP’s gaming segment — which comprises five licences in Zambia, Zimbabwe, Ghana, Cameroon, Tanzania and the DRC — could be further expanded across African markets. The company wants positive cash flow from all its licences in the next 12 months.
All in all, VCP is a nice little alternative — with a high yield to boot — to the handful of investment companies available on the JSE.
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