Unlisted investments have a chequered history with local investors. Wallet-scorching sizzles have easily outnumbered outright success stories.
Still, a handful of JSE investment companies offer exposure to a wide variety of unlisted stocks, some sturdy long-term performers and others offering exciting early-stage upside potential.
A recent FM cover story detailed investment veteran Remgro’s determined shift to mainly unlisted positions. This development, which Remgro believes will ensure a “scarcity value”, might intensify attentions on JSE investment stocks that offer the only access point to a portfolio of high-quality or, at least, intriguing unlisted positions.
The FM has identified seven such counters — Sabvest Capital, African Rainbow Capital (ARC), EPE Capital Partners, Universal Partners, Trematon Capital Investments, Grand Parade Investments (GPI) and African Equity Empowerment Investments (AEEI) — which offer vastly different risk profiles for investors.
As always, it’s useful to assess the discounts these stocks offer to the intrinsic net asset value (iNAV) of their respective underlying portfolios.
Sabvest, which has a strong cult following, offers a discount of just under 20% to its end-June iNAV of almost R104 a share; Trematon offers a 33% discount to its iNAV of 469c a share at the end of February; EPE shows a discount of almost 50% to its iNAV of R10.66 a share; ARC’s discount is 50% to its R10.06 a share; and Universal Partners has a 30% discount to its iNAV of almost R30 a share.
The discount the holding company trades at is relatively immaterial in terms of value creation over time
— Chris Logan
Chris Logan, CIO of Opportune Investments and a long-standing investment company watcher, is one of the proponents of the recent theory that there is a misguided infatuation with the discount of holding companies.
“In the greater scheme of things, the discount the holding company trades at is relatively immaterial in terms of value creation over time. The key is the growth in underlying NAV,” he says.
So which “unlisted” investment play to buy?
Sabvest
The narrower discount applied to Sabvest might be attributable to the hard yards put in by prime mover Christopher Seabrooke in building a diversified, cash-generative investment portfolio. Sabvest is also ungeared.
To Logan’s point about growing underlying value, Sabvest has delivered an enviable performance. At the interim period to end-June Seabrooke pointed out: “The 15-year compounded annual growth rate in NAV per share to the 2021 year-end was 16.9%, calculated without reinvesting dividends. The compounded annual growth with dividends reinvested was 18.6%.” As for its share price, Sabvest has delivered a compound annual growth rate of 16% over 15 years.
The group’s biggest investments lie in unlisted companies such as technology group DNI-4PL Contracts (worth R1bn), apparel labelling specialist ITL Group (R767m) and textile group SA Bias Industries (R885m).
It also owns BEE counter Masimong Group Holdings (R366m), industrial investment group Apex Partners (R443m), chemicals business Rolfes (R228m) and recently delisted electronics group ARB Holdings.
An interesting food and beverage hub is forming with investments in Sunspray Food Ingredients (R78m), liquor brands group Halewood (R116m) and Classic Food Brands (R9.4m).
The unlisted holdings easily outweigh the roughly R475m value of the listed positions in Transaction Capital, Metrofile and London-listed Corero Network Security.
Sabvest has improved its disclosure on the performance of its unlisted assets. Interim dividends declared by DNI, SA Bias, Apex and Sunspray Food Ingredients topped R80m. More finicky market watchers, however, might still want a little more nuance on the individual operating performance.
ARC
The R13.7bn portfolio is not easy to assess as it spans an array of positions in telecoms, financial services and mining. Most of the portfolio is unlisted, with the notable access points being telecoms player Rain (R3.7bn), TymeBank (R1.44bn) and phosphate mining group Kropz (R1bn).
The large discount is understandable as ARC is still bulking up, meaning the prospects of any value unlock are remote and meaningful dividends won’t flow for a while.
The three big positions account for about 50% of the intrinsic portfolio value (if we chuck in TymeGlobal as well). One might argue investors are getting the smaller investments — which include Fledge Capital, Rand Mutual Holdings, BlueSpec as well as listed holdings Alexander Forbes and Afrimat — for free.
EPE
Some investors regard EPE Capital as a proxy for Brait, but that masks some quality unlisted holdings in the fintech space.
It’s conceivable that EPE will score from a listing of Brait’s Premier Foods or the sale of (all or part) of Virgin Active.
But investors should not look past EPE’s meaningful stake in fintech player Optasia — the old Channel VAS mobile banking business that is worth R765m.
Optasia, says EPE CEO Peter Hayward-Butt, has a growing captive user base of 530-million customers. “Despite the successful expansion into more than 30 countries across Africa, Asia, Latin America, the Middle East and Europe, about 1.7bn people globally remain underbanked, representing a fast-growing and large addressable market of $380m. Optasia has only penetrated about 30% of this underbanked population,” he says.
Optasia clearly has the potential to list internationally. Like ARC, it could be argued investors are paying for Virgin Active, Premier and Optasia and getting access to interesting unlisted positions in cutting-edge businesses such as Gammatek, Vertice MedTech, Synerlytic Group, Crossfin Technology and Echo for nothing.
Universal Partners
This offshore-focused investment company trades at a deepish discount despite having twice executed deals at considerably higher prices than indicated in the financial statements.
The main store of value lies in an enlarged dental practice business in the UK. Other meaningful interests include a distressed debt specialist, a purveyor of accountancy and payroll solutions and a developer of water efficient toilet systems. Clearly not everyone’s cup of tea …
Trematon Capital
The main store of value in Trematon — which was traditionally property focused — lies in private school business Generations, which is valued at R417m or roughly 40% of the portfolio.
That’s not to say property is irrelevant. Real estate investments — mainly Aria Property Group, Club Mykonos Langebaan and UK property financier ASK Partners — are collectively worth R475m.
While the property provides a stable value (and dividend) underpin, the market is still weighing up longer-term prospects for Generations. The business is certainly not being grown at the cracking pace once seen at market leader Curro. But that might be a good thing.
In its last report to end-February, the business was cash-flow positive but yet to earn significant commercial returns due its two largest schools — Generation Imhoff and Generation Somerset West — not yet reaching maturity.
Full-year results to end-August will hopefully show these schools are moving towards full capacity.
GPI
The emergence of GMB Liquidity Corp — aka former merchant banker and horse racing enthusiast Greg Bortz — as an anchor shareholder last month might mean betting on GPI as a longer-term gaming play rather than a short-term value-unlocking opportunity.
As things stand GPI arguably holds a “best of Sun International” hand — a 15.1% stake in the GrandWest casino — probably the best-performing casino asset in South Africa since the late-1990s, and a 30% stake in Sun Slots, the cash-spinning limited-payout machine operator. GPI also holds a 15.1% stake in Sun’s Golden Valley casino in Worcester, which could be a more valuable card should a second casino licence come into play in the Cape Town metropole.
Smart money suggests Bortz — with partner Hollywood Bets — would be looking to reverse their recently acquired Kenilworth Racing business into GPI, though such a development might be some years off. But certainly it seems conceivable that other gaming assets might be ushered towards GPI, which could be reconfigured as a diversified gaming investment company. Sun may still be itching to get its hands on the outstanding stake in Sun Slots, and possibly GPI’s stake in GrandWest, which adds a good deal of intrigue to GPI.
AEEI
This investment company, controlled by Sekunjalo (or Iqbal Survé), reflected its iNAV at over R13 a share — which certainly does not stack up if the market value of the group’s two listed investments (Ayo and Premier Fishing & Brands) are tabulated. That said, the group has a valuable stake in unlisted British Telecommunications SA (BTSA), which is still subject to a disputed call option. BTSA has performed well for AEEI over the years, and been a source of regular dividend flows. Valuations for the BTSA stake have ranged as high as R900m in recent years, but even a figure of between R500m and R600m exceeds AEEI’s current market value by some margin. Strictly for the brave and very patient punter.
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