The presence of billionaire Patrice Motsepe as chair and former Sanlam boss Johan van Zyl as joint CEO means that the moves carried out by African Rainbow Capital (ARC) are closely watched.
But despite the presence of two such heavy-hitters, along with joint CEO Johan van der Merwe, ARC has comprehensively failed to ignite market excitement since listing at R8.30 a share in September 2017. It’s now trading at R4.20 — a drop of 49%. And even though ARC puts its NAV at R9.74bn — a gain of 2.5% in the year to end-June — its market capitalisation is half that, at just R4.4bn.
Inevitably, Van Zyl says it is "not a one-day game".
Lack of investor appreciation hasn’t stopped ARC, which is the vehicle for Motsepe’s Ubuntu-Botho Investments, from spending money.
In the year to June, ARC invested almost R1.2bn in acquisitions, leaving it with R725m in cash.
It is already clear which will be the most successful businesses in the stable: data network operator rain and the app-based TymeBank. Rain, for example, last week leapfrogged its larger peers to launch a commercial 5G network, partly due to its access to commercial quantities of data spectrum.
Protea Capital Management CEO Jean Pierre Verster points out that ARC management is encouraged to grow NAV: every year, it takes 1.25%-1.75% of the asset value as a fee off the top. Verster would like to see value realised through corporate action, such as listing rain.
The mark-ups in the value of ARC’s strong businesses were offset by a fair-value write-down of R480m in the Kropz Elandsfontein phosphate mine. This looked like a great investment as it is close to the west coast while its competitor is well inland at Phalaborwa, but the phosphate market has been poor.
"The market price is controlled by Morocco, where there is a glut of phosphate," says Van Zyl. "We revalued the business based on a price of $90 a ton and it is currently $130 a ton."
The other disappointment was Bluespec, on which ARC took a R239m write-down. As well as owning the Daytona sports car dealer, it controls the majority of panel beaters in Gauteng and has large chunks of the Durban and Cape Town market. Van Zyl says there were fewer claims as people are driving less, partly because of Uber.
ARC’s selling point has been the benefit it confers as a permanent black-controlled shareholder. It’s been able to acquire shares at a discount in exchange for providing these BEE benefits. It bought shares in Afrimat, for example, at R16 when the price was R22 with a three-year lock-in. That share price is now R30.
There are two distinct streams in the ARC business: the diversified industrial investments, which include sectors such as telecoms, business process outsourcing, mining, agriculture and property; and small private equity opportunities through Fledge Capital. If the competition authorities permit, Fledge will make a substantial profit from the sale of the WeBuyCars website and app to Naspers.
But it is in financial services where ARC should have a future as a coherent business. It is the second-largest shareholder in Alexander Forbes, and after converting its unlisted Alexander Forbes Ltd shares to Alexander Forbes Group Holdings shares in February 2020 it will own 21% of the listed equity. It also owns 30% of Rand Mutual Holdings which administers workers’ compensation claims. And it has a 10% interest in AfroCentric, Discovery’s largest competitor in medical aid.
The potential for ARC’s financial services sector should increase substantially if the authorities allow it to take a 25% stake in Sanlam Investments. It will then become the largest black-controlled asset manager, including both the active Sanlam Investment Management and the Satrix index products.
ARC owns a quarter of African Rainbow Life, which is a subsidiary of Sanlam. Denker Capital portfolio manager Jan Meintjes says this will be an aspirational business, offering not just funeral policies but more sophisticated life cover and critical illness policies.
But it’s not clear, at this stage, if some of its other financial businesses really fit, like mortgage originator ooba.
And while TymeBank is on track to hit 1-million customers by year-end, ARC plans to cut its holding in the venture.
Van Zyl has promised that the ARC portfolio will be optimised to unlock its current discount. Among the options: a split of the portfolio into two listings, as well as unbundling of some of the assets.
The big question is: what to do with rain?
ARC will likely want to keep its hands on the asset, not least because of the growing synergies between telecoms and banking.
Though rain is billed as a data-only service, it will offer voice once it has enough towers for national coverage. "But our focus will be on people who need fast internet speeds as we roll out the first 5G network," says Van Zyl.
Alistair Lea, who runs the Coronation Smaller Companies Fund, says he is not keen on diversified investment companies, particularly those that invest in listed companies, as they inevitably trade at a discount. "An exception would be Rand Merchant Investment Holdings, as it is the only way to access the exceptional Outsurance."
Meintjes says discounts have been widening at most investment companies. Take PSG’s agricultural specialist, Zeder, which has seen its discount widen from less than 5% three years ago to 30% now.
Meintjes says that investors in ARC should be patient and be prepared to see the discount unwind over five years. "It is not like Brait, which has limited choices because of its debt." And Motsepe, unless he is bluffing, still has full confidence in the ARC management. Even so, Denker is not a shareholder in ARC and argues that value can only be unlocked seriously once rain and TymeBank are established enough to list in their own right.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.