Despite the famous faces involved, Remgro is a difficult one.
The good news stories in the portfolio are inevitably offset by problems elsewhere. The portfolio is incoherent and too diversified, with investors required to simply trust that management will allocate capital successfully. With the intrinsic NAV (iNAV) per share up just 1% in the past year, that’s not going well.
As with all investment holding companies, performance at Remgro is best assessed using iNAV. This is Remgro’s view on what its portfolio is worth, which is important when there are unlisted companies in the stable.
It’s easy to just add up the value of listed stakes based on current share prices, even if there are debates about whether current share prices are reasonable. As for the unlisted stuff, there’s far more room for discussion (and outright argument) over whether management is too optimistic in its view on valuation.
Most investment holding companies trade at a discount to NAV, driven by a combination of holding company costs (like director remuneration) and scepticism over valuations.
As at June 30, Remgro’s book value was R113bn and its iNAV was R139bn. There’s a significant difference here, a result of Remgro’s portfolio having a mix of subsidiaries, equity-accounted associates and investments held at fair value. The accounting may get complicated, but the principle is that Remgro isn’t able to apply accounting rules that are in line with how the market might look at an investment holding company, hence the need to focus on iNAV per share and compare this to the share price.
Another nuance is whether you are using the share price as at the reporting date, or only after the numbers are released. Remgro uses the share price as at reporting date to calculate a discount to iNAV per share of 45.8%, higher than the 40.8% of the previous year. Using the price at the time of writing and comparing it to June 30, the discount to iNAV is 37%.
You have to be very careful with this number, as we are now more than halfway through Remgro’s interim period and the Remgro share price has rallied sharply in recent months. The discount isn’t necessarily lower than before if the market is no longer working off June 30 information.
[Outsurance] is becoming an even larger portion of the group and Remgro shareholders are enjoying the ride
There is little point in spending time on the long tail of assets in Remgro, unless you have a particular interest in things like Invenfin or Seacom. Those assets combined are just 1% of iNAV before tax. Instead, the focus needs to be on the key investments, such as Mediclinic (28.4% of the group).
The appeal of that asset remains a mystery, with the value having dropped by 13.8% in the past year. Hospitals aren’t growth assets and they don’t seem to be great “stay-rich” assets either.
Another major problem is Heineken Beverages, the hangover of the Distell deal. The valuation is down 43% in the past year, with management promising the market that the original investment thesis remains intact. With such a shocking start, the growth from here would need to be extraordinary just to end up with a reasonable investment outcome.
Neither of these assets explains why Remgro has had such a strong rally recently. The likely source of the rally is a combination of improved valuations as interest rates globally have started to ease, along with observable growth in key assets like Outsurance, the current superstar in the stable and the second-largest exposure (15.2% of total).
The value increased 36.6% in the past financial year and the momentum has been exceptional since Remgro’s reporting date, with the share price up a further 32% since the end of June. This investment is becoming an even larger portion of the group and Remgro shareholders are enjoying the ride.
The third-largest exposure is to RCL Foods, which included the right to receive shares in Rainbow Chicken upon the unbundling. Though the Rainbow Chicken share price has been under pressure since the unbundling, things are better in the poultry industry and load-shedding remains in the rear-view mirror, so there’s a decent chance of ongoing growth there.
The argument in favour of Remgro would be that you’re getting great assets like Outsurance at a discount — except you’re not. You’re getting that asset plus a lot of stuff you probably don’t want, along with the risk of more Distell-level mergers & acquisitions.
When the best story in the group is another listed company, why not just buy that one directly and avoid all the costs, complexities and other exposures in Remgro? It all feels too hard.
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