Reinet Investments, the Rupert family-controlled offshore vehicle, has been in smouldering form of late — at a time when it is lightening up on its long-held tobacco habit.
Instead, it is bumping up investment in its second-biggest asset, the UK’s Pension Insurance Corp (PensCorp).
Reinet stands in stark contrast to the rest of the JSE’s large investment holding companies.
Remgro, also controlled by the Rupert family, is down 9% over a year, PSG Group is down 12% and Hosken Consolidated Investments is almost 27% lower.
Reinet, on the other hand, has gained more than 50% over a year, and a recent spurt has helped the share touch a record R308.85.
There are two obvious factors in its renaissance: the strong recovery in the value of its investment in cigarette giant British American Tobacco (BAT), and the recent conclusion of an aggressive, well-timed share buyback exercise.
BAT’s share price, on the London Stock Exchange, gained about 11% between end-August and end-December — a performance reflected in Reinet’s JSE share price gain of 13% over the same period.
But Reinet also hosted an important extraordinary general meeting last week, which hints at a longer-term structural shift at the company. Until this rally, Reinet was one of the Rupert family’s more lacklustre forays.
Shareholders voted in favour of changing its prospectus to delete the paragraph "Limits on Illiquid Securities" — which essentially restricted investments in illiquid securities to no more than 50% of Reinet’s net assets.
This allows an investment in an illiquid "key asset" to represent up to 50% of the portfolio’s total assets, and also means that all other assets must remain below 30% of total assets.
This might seem like an innocuous bit of tinkering, but it could alter perceptions that Reinet is merely a function of BAT’s share price movements and dividend flows.
The amendment had scarcely been passed when PensCorp announced proposals to issue up to £750m of new equity to support continued growth in the pension risk transfer market. If Reinet — which holds a 43.72% stake in PensCorp — follows its rights, it could fork out at least £328m, and possibly much more if it underwrites the offer.
But it would be surprising if Reinet does not heartily back PensCorp.
Brexit notwithstanding, the group had a strong 2019, exceeding previous records with £7.2bn of new business signed for clients such as BAT, Marks & Spencer and Somerfield.
In its latest trading update, PensCorp noted the pension risk transfer market remained "exceptionally buoyant" with total liabilities insured also reaching a new high in 2019.
PensCorp is also "in exclusivity" on nearly £3bn of pension derisking transactions and is eyeing a market-wide pipeline of new business worth more than £40bn of pension scheme liabilities
Reinet has, for some time now, been lightening up on its BAT stake.
And when it first proposed the amendment, chair Johann Rupert pointed out that since listing in late 2008 the company had sold more than 16-million BAT shares for total proceeds of €720m, and made new investments of €2.4bn.
The shift is even more apparent in Reinet’s just released management statement for the third quarter to end-December.
It offloaded 2.6-million BAT shares in the quarter (to raise €98m), while the value of its holding in PensCorp increased by an eye-popping 25% over the period.
This means Reinet’s BAT investment (which at one stage accounted for 85% of NAV) now represents only 45% of the portfolio value, with the PensCorp holding representing 37%.
This should snuff out lingering notions that Reinet is purely a proxy for the tobacco giant.
The updated valuation of PensCorp also takes into account Reinet’s estimate of the insurer’s embedded value of £4.2bn (as at end-September) as well as valuation multiples drawn from industry data and a discount of 10% (for the illiquid nature of the investment).
The estimated fair value of PensCorp also increased by €79m due to the strengthening of sterling against the euro during the quarter.
And its latest trading statement could show a further value increase on the cards.
Just how Reinet will wield its new portfolio flexibility will be fascinating to see over the next few months. If BAT shares continue to rally there may be a temptation to sell another tranche or two and use the cash to fund the growth opportunities at PensCorp.
If Reinet does follow its rights, its holding in the specialised insurance business will almost certainly surpass BAT — something that would require the market to adjust its valuation models quite drastically.
At last count Reinet’s inferred NAV (taking in the latest BAT share price movements) sits at about R90bn, compared with a JSE market capitalisation of around R60bn.
That’s a discount of 33% on the net value of Reinet’s total portfolio.
The future looks good.
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.