Remgro’s slow-burn value unlock

Remgro’s transition away from its listed portfolio is not going to be easy, or quick.

The best-known investment holding company on the JSE, like its peers, trades at a hefty 30%-plus discount to the intrinsic value of its portfolio.

For its shares on the JSE, things have looked up of late and the stock is almost 47% ahead over one year. But over three years that gain dwindles to 16.7% and over five years it’s a paltry 6.25%.

In Remgro’s case most of its portfolio is in large listed investments such as private hospitals group Mediclinic International (worth R22.5bn, or about 19% of the portfolio), the soon-to-be-dismantled insurance hub Rand Merchant Investment Holdings, or RMI (R21bn or 17.6%), liquor group Distell (R12bn or 10%) and RCL Foods (R9bn or 8%). And though no longer deemed strategic, there is still a substantial holding of 183-million shares in banking group FirstRand, worth about R14bn.

This means investors might prefer to hold the listed portions directly, or even customise their own "Remgro portfolio" with different weightings. PSG, which also held the bulk of its investments in the listed environment, was particularly frustrated by this quandary and recently opted to unbundle the majority of its listed holdings, buy the remnants and delist.

But Remgro isn’t following this route.

Instead, it’s emphasised building a bigger slab of unlisted investments. This would, in most instances, mean Remgro would be the only entry point to some top-quality, cash-churning assets across a variety of industries. The pressure to do so — and provide detail — is mounting.

Yet CEO Jannie Durand remains cagey. Asked at last week’s investor presentation for more specifics on the company’s plans, he said: "We can’t reveal what we are planning, but there are plans in place. I’d rather leave it at that … it is difficult to make comments as some issues are confidential or at conception stage and may not come off."

Durand also stressed the need to be cautious around buying assets — presumably a reference to taking out minority shareholders in certain investments.

"One must always be careful of overpaying for assets. You never really recover your entry price and your IRRs [internal rates of return] are forever actually under pressure. We need to be very cautious in how we do it. Taking out minorities does not always make sense financially."

It seems safe to assume Durand is talking about RCL Foods, where Remgro speaks for 80.4% of the issued shares. He’s probably justified in fretting about overpaying for assets in this instance. While RCL enjoyed a strong six months to end-December, with headline earnings up 26% at R519m, the business is likely to face some serious headwinds as higher input (mainly wheat) and logistics costs affect trading in the second half and into the new financial year.

For a start, it’s unlikely that RCL can pass on increased costs to cash-strapped consumers, which will put serious pressure on its margins. The war in Ukraine compounds the problem, with 20% of RCL’s wheat supply sourced from Russia and 5% from Ukraine.

"Management are working hard to find alternative sources, but the business will start feeling pressure in August and September," Durand told investors.

On a six-month basis, RCL’s share price is still up nearly 10%, but there has been a dip of more than 15% in the past three months. With the bakery and poultry businesses likely to feel big pressures — and probably Vector Logistics too — there is no predicting how low the share price might sink in the months ahead.

Though Remgro will bide its time with RCL, there is logic in merging it with spreads business Siqalo Foods to create a bigger grocery brands basket and extract additional efficiencies.

In the interim, there are some gentle shifts in the portfolio.

In November, Remgro sold its investment in Grindrod Shipping for a not-too-shabby R1.19bn. Venture capital subsidiary Invenfin sold off its 50.5% stake in digital media sales specialist Ad Dynamo for an undisclosed sum, and then — surprisingly — sold a third of its investment in mobility and delivery platform Bolt Technology for R179m. The Bolt deal effectively covered Remgro’s initial cost of investment.

It invested too: another $7m in Asia Partners (taking the total to $18m with a fair value of $24m). It ploughed a further R89m into the Pembani Remgro Infrastructure Fund, where the cumulative investment tops R541m and the cumulative distributions to date are a handsome R341m.

As things stand, 55% of Remgro’s portfolio is now represented by just four listed investments: Mediclinic, RMI, Distell and RCL (more like 65% if the FirstRand stake is chucked in).

If Heineken’s takeover of Distell passes muster with the regulatory authorities and if Remgro ends up holding unlisted shares in Heineken SA (and whisky and gin hub Capevin), then this ratio will shift closer to 45%.

Unbundling the holding in Mediclinic would make a substantial difference to the listed/ unlisted balance, but so far Remgro executives have played down this possibility.

For those investors taking the long view, the most reassuring action is unfolding at Community Investment Ventures Holdings (CIVH), which houses the fibre-optic businesses Dark Fibre Africa, Vumatel and SqwidNet. This 57% stake is Remgro’s third-biggest investment, with a value of R15bn that represented 12.6% of the portfolio at the end of December.

A proposal by Vodacom to inject R6bn and sell the Vodacom fibre network to CIVH could change Remgro’s valuation of CIVH, Remgro chief investment officer (and former Vodacom CEO) Pieter Uys said — but there is "still a long road to deal closure".

So what next?

Remgro sits with net cash of just under R1bn — not exactly a huge haul. It has a fair whack of head office costs and needs to earn a chunk of interest to cover that in a tax-efficient manner. The late, great Thys Visser, a former Remgro CEO, always spoke of the cash pile as an insurance policy that ensured Remgro never had to waver on its dividend policy.

Fortunately, Remgro does have a store of near-cash investments, notably its holding in FirstRand as well as legacy stakes in British American Tobacco and Reinet Investments. It could also cash out of smaller investments, for example its 100% stake in perennially profitable aluminium products group Wispeco (worth more than R1.4bn at a p:e of just over five times), listed logistics group Grindrod (R900m-plus) and even a 24.9% stake in Total Energies. The 44.1% holding in small business financier Business Partners and 30% stake in undersea cable specialist Seacom might be harder to flog, while the significant minority holding in broadcast group eMedia Investments might be deemed strategic.

Remgro might also be disinclined to let go of its 50% stake in the dependable industrial gases business Air Products (worth R4.6bn), but there would certainly be no shortage of buyers.

A cash-flush Remgro might bring worries of a lazy balance sheet. But Durand, citing the proposed Vodacom/CIVH deal, said that if the group found itself awash in capital "that we don’t need" then share buybacks and special dividends would be considered.

In short, Remgro is a slow burn — unlike PSG’s spectacular value blow-up — but still a good option for investors with low-risk, long-term horizons.