Death, taxes and a large discount to intrinsic NAV (iNAV) per share — these are the certainties for local investors in investment holding companies.
There are many such examples on the JSE, though fewer than before. Unsurprisingly, when the market doesn’t reward a particular type of corporate structure, that structure loses popularity.
There’s a simple problem here: for every R1 raised in fresh equity by an investment holding company, the market immediately applies a discount and creates an instant loss of roughly 40% in value — and sometimes more. This makes it nearly impossible for investment holding companies to raise equity, so they must focus on reinvesting dividends and recycling capital.
There are three primary ways to reduce the discount to iNAV. The first is to run a structure with low fees, a concept African Rainbow Capital was averse to (with a predictable outcome). The second is to hold a portfolio of primarily unlisted assets, an approach that Sabvest Capital is perhaps the poster child for — and yet it stills trade at a discount. The third is to sell assets and execute share buybacks, rather than paying dividends or investing in other companies, an approach Remgro is inexplicably uninterested in.
In fact, the corporate narrative makes it sound like dividends at Remgro are practically a human right, let alone a capital allocation decision. In its words, if it doesn’t prioritise the dividend, it would be a “betrayal of the fundamental tenet of the Remgro thesis” — yikes!
There’s also a slide that demonstrates how the discount to iNAV has expanded dramatically from 19% based on June 2019 figures (the last pre-pandemic comparison available) to 44% based on December 2024 numbers. This is despite a significant increase in the percentage of private assets in the portfolio, which in theory should support a lower discount.
The market is sending Remgro a clear message about those assets and the broader portfolio strategy. For some reason, it’s just not listening.
As the quote that is regularly misattributed to Einstein tells us, insanity is doing the same thing over and over and expecting different results. In the strategic priorities slide in the capital markets day presentation, Remgro indicates that share buybacks are on an equal footing with follow-on strategic investments (that is, the opportunity to support existing portfolio companies) and new investments. This is a fundamental error, one that is made worse by putting cash dividends above all these blocks.
If the management team believes in the INAV, then repurchases should be a higher priority than new investments
If the management team believes in the iNAV, repurchases should be a higher priority than new investments. With a discount of more than 40% to the iNAV, Remgro has the opportunity to buy back shares and invest in its own portfolio at a deep discount, achieving a rate of return that should beat anything it can get on new investments — and with lower risk, since it knows its own assets better than anyone.
Therein lies the issue with not undertaking such repurchases: the market interprets this as Remgro having little faith in its own iNAV. Even if we simply consider the gap between a normalised discount and the current one, Remgro could still buy its own assets at roughly 20%-25% cheaper than normal.
The good news is, if you’re buying Remgro at the current discount, potential repurchases are upside optionality. You shouldn’t hold your breath, but one day it might happen. In the meantime, your returns will be defined by the current portfolio, which has financial services, health care and consumer products as its largest exposures.
Based on the capital markets day, Remgro management is deeply focused on extracting value from Mediclinic. Margin improvement is key, though hospital groups remain incredibly good at earning a below-par return on capital. That doesn’t do much to reduce discounts to iNAV.
The other thing that doesn’t help is some of the underlying valuations, like Community Investment Ventures Holdings on an earnings before interest, tax, depreciation and amortisation multiple of 10.1. There’s no perfect peer in South Africa, but that’s a spicy valuation that’s closer to the global peer group than local telecoms players. Such a valuation only encourages a discount to iNAV.
Trading at close to 52-week highs, there’s little to suggest that Remgro is a buy at these levels. If it unlocks the Vodacom fibre deal, that could catalyse some price action, but at the end of the day, this won’t solve the biggest problem: Remgro just doesn’t follow the best capital allocation strategy.
And for an investment holding company, that should be the key selling point. Instead, it’s its downfall.
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