"Structural deficiencies" was the hand grenade lobbed at executives of investment behemoth Remgro* during last week’s results presentation.
The firm is an old-style investment holding company and retail investor stalwart involved in banking, insurance, health, technology, food and beverages, and industrials. But the share at present attracts a discount of about 25% on its intrinsic NAV.
That gap is now drawing considerable attention from disgruntled shareholders.
While it is on the wide side, it’s certainly not as large as the discounts slapped on other (smaller) JSE investment companies like Hosken Consolidated Investments, Sabvest, Brimstone, Brait and African Rainbow Capital.
But Remgro has a longer track record than most, and over the decades the group has been a bastion of dependable returns. The portfolio has always offered diversity and dividends, but of late the market has become increasingly disenchanted.
The FM would argue there are two investment barbs.
First, more than three-quarters of Remgro’s portfolio comprises listed investments, meaning it is not only fairly easy to replicate the holdings but also to customise the portfolio.
Second, Remgro, in parts, serves as a pyramid holding company. For instance, Remgro holds influential RMB Holdings, which in turn holds a major stake in banking group FirstRand. Remgro is also the anchor shareholder in RMI Holdings, which has sizeable stakes in insurance businesses like Discovery and MMI Holdings. One might even stretch this point to argue that Remgro has a controlling stake in private hospitals group Mediclinic International, which in turn is a major shareholder in London Stock Exchange-listed Spire. Double discounts irk investors in a market looking for efficiency.
Shane Watkins, a director of All Weather Capital, contends that "investors don’t like how Remgro is structured".
At the presentation, Watkins argued that structural deficiencies in the group were behind the discount that Remgro’s share price places on the intrinsic value of its sprawling portfolio.
"These days investors don’t like pyramids at all. They don’t even like two-level pyramids. But in your case you have numerous three-level pyramids."
Earlier in the investor presentation, Remgro CEO Jannie Durand disclosed that the board had discussed the structure of Remgro, and still believed the holding company added value to its underlying investments. "If we don’t add value, we need to reassess our role in that company."
Still, Watkins maintained that management was not recognising or addressing the structural problems that were the underlying cause of Remgro’s share price.
Durand called for patience, stressing that any efforts to resolve structural deficiencies would not happen overnight. "We are looking at it critically. But it would be unfair in an open analysts’ forum to say exactly what would change if we have made any decisions … we are aware of it."
Durand said Remgro did not like the idea of "holding companies on holding companies. It is not ideal, but it’s the structure we’ve got. We need to look at it critically, and fix it."
The "fix" will be intriguing, and probably easier to map out on paper than it is to actually execute.
Durand reiterated that Remgro was actively looking at cleaning up its portfolio. That, however, might refer to smaller investments, like the stake in sports investment business Premier Team Holdings that was sold off recently, and presumably other smaller — mainly industrial — investments like Wispeco, PGSI as well as possibly Grindrod and Grindrod Shipping.
But a much broader sweep might be necessary. Based on Remgro’s stated preference for holding unlisted shares, which would presumably offer shareholders access to investments that cannot be accessed elsewhere, there are a number of options.
The most glaringly obvious would be Remgro buying out minority shareholders at 77.5%-owned RCL Foods, which owns brands like Rainbow Chicken, Selati sugar, Ouma rusks, Nola mayonnaise and Yum Yum peanut butter. Remgro recently acquired a further 7-million shares in RCL for R115m, and the temptation at current depressed share prices must be to accumulate more.
Remgro has played down suggestions of making an offer to minorities at RCL. But it would not cost cash-flush Remgro much more than R2.5bn to pitch a premium-priced buyout offer.
Having RCL as an unlisted investment would have numerous advantages. The business could be restructured, perhaps splitting the commodity-type sugar and chickens businesses away from the more profitable grocery segment. What’s more, the grocery segment could be bulked up by merging it into Siqalo Foods, the R7bn spreads business it bought from Unilever last year. For the record, Siqalo churned about R2.6bn in revenue and managed to post a fat R447m in operating profit in the year to end-June. It looks like a good start under Remgro’s stewardship, with average value market share for spread brands like Rama, Stork and Flora moving up 3.5% to 74.1%.
If the smaller — and highly promising — rooibos tea business BOS Brands is added to the mix, Remgro has the makings of a rather appetising unlisted food brands hub.
A more radical strategy might involve the unbundling of Remgro’s larger (and more mature) investments to its shareholders.
In this regard, Mediclinic — which accounts for about 14% of Remgro’s intrinsic NAV — might be an obvious contender for unbundling. The same might be said for the banking hub (RMB and FirstRand), which accounts for a chunky 38% of intrinsic NAV.
The unbundling of two major chunks of Remgro’s portfolio value would seriously stanch dividend flows — but perhaps the elevation of the more promising unlisted investments will more than compensate in terms of future value unlocking.
At the moment Remgro’s exciting fibre optics investments are buried under the collective weight of the listed investments, not to mention smaller stalwart positions like industrial gases group Air Products, energy group Total SA and undersea cable group Seacom.
If investors are optimistic about a restructured Remgro, the fibre optics cable hub via the 54.4% stake in CIVH is worth a closer look.
The Dark Fibre Africa core increased revenue 23% to R2.4bn with annuity income up by almost 29% in the year to end-March. Earnings before interest and tax were down markedly at R276m after certain one-off impairments on financial assets, but on a normalised basis this number was up 21%.
Most encouraging is that monthly annuity flows have shifted up markedly to R163m (previously R136m). Clearly this is a business at an exciting junction — especially with CIVH now also owning 100% of Vumatel, which adds a further 16,000km of fibre to the home network. At an R8.4bn valuation, the CIVH investment slots size-wise right between Remgro’s investments in Distell and RCL Foods. In other words, it is still too small to be considered a key driver in Remgro’s value proposition. Strip out the banking hub and Mediclinic, however, and CIVH becomes a standout Remgro investment.
In addition, one has to consider how Remgro’s size might limit dealmaking, remembering it would take a significant new investment to move the needle in terms of intrinsic NAV.
Durand said capital allocation and capacity expansion were not high on the agenda at Remgro at this stage.
He conceded, though, there might be companies that are overgeared and offer an opportunity to acquire assets at "good prices".
Intriguingly, Durand disclosed that Remgro had perused 170 opportunities — including ventures presented to its venture capital arm InVenfin — over the past financial year. That suggests Remgro, despite ongoing market criticism, remains a go-to investor for entrepreneurs and seekers of growth capital. That can’t be a bad thing, and hopefully might even help accelerate efforts to find a structure that appeals more to investors.
* The writer holds shares in Remgro
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