Investment veteran Remgro’s “evolution towards asset scarcity” is already paying dividends. But management might need more slack from investors as it tries to narrow the hefty market discount on its R138bn portfolio.
At the time of writing Remgro’s shares were trading at a roughly 37% discount to the intrinsic net asset value (iNAV) of R249 a share at the end of June. Remgro’s trailing dividend yield has fattened to 4.2% if investors factor in an effective R3.5bn “distribution” in the past financial year.
Remgro CEO Jannie Durand says executives are acutely aware of the discount, which has widened since the group unbundled banking group RMH in 2020.
But it’s not as if Remgro — which labours under the perception that its corporate wheels grind slowly — has not rung loud changes for a value unlock. In the past two years it has taken hospitals group Mediclinic International private (with shipping group MSC), unbundled its stake in logistics group Grindrod and is hopefully in the final throes of creating a fibre infrastructure company with a merger between CIVH and cellular services giant Vodacom. What’s more, Remgro has bought back nearly R1bn of its own shares and is likely to continue doing so as long as the wide discount remains.
The evolution towards asset scarcity — which is essentially Remgro’s prolonged push to have a pronounced unlisted investment bias in its portfolio — is now almost complete.
The past year saw a dramatic shift in the portfolio composition with Mediclinic and Distell (now part of Heineken Beverages and with a boutique Scotch business in Capevin) taken “private”. Effectively Remgro is the only realistic way of gaining exposure to these health-care and liquor assets — both of which have new strategic partners that could potentially add considerable value in the future.
Remgro’s iNAV breakdown shows that the unlisted portion of its portfolio has increased from 33% at the end of June 2022 to 72% at the end of June this year. Durand says the finalisation of the Mediclinic and Distell/Heineken Beverages transactions marks “another inflection point” in Remgro’s history and positions it for further growth and value-unlock for shareholders.
Durand was asked if Remgro, after completing the CIVH/Vodacom merger, would look for more corporate action, or rather return capital to shareholders via increased dividends and share buybacks.
He concedes that share buybacks, at this point, make economic sense, but stressed that Remgro needs to clean up its noncore holdings.
In fact, these considerations might well go hand in hand if Remgro could raise additional capital from its noncore investments — including leftover stakes in FirstRand, British American Tobacco, Reinet, Discovery and MMI.
One obvious opportunity for corporate action, and one that the FM has persistently raised, is the logic of Remgro buying out minority shareholders in consumer brands conglomerate RCL Foods (it owns 80.3% already). RCL recently sold off Vector Logistics and is likely to separate the cyclical Rainbow Chickens business, which will allow management to focus on a profitable grocery brands basket. The new-look RCL should surely be merged with Remgro-owned spreads brands business Siqalo (where RCL already holds a management contract). Durand, however, is still not keen to discuss a deal.
But he says Remgro will “not sit back” after completing the CIVH/Vodacom transaction (if it finally gets Competition Tribunal approval).
Remgro will ‘not sit back’ after completing the CIVH/Vodacom transaction (if it finally gets Competition Tribunal approval)
For now, Remgro’s biggest unlisted investments stack up as follows: Mediclinic (worth R47bn and 33% of intrinsic value); CIVH (R14.3bn and 10%) and Heineken Beverages (R22.5bn and 9%). Along with JSE-listed Outsurance (R16bn and 11%), these make up 63% of the portfolio value, as of end-June.
Durand has promised “a lot more” transparency in the unlisted investments. So far, the disclosure from Mediclinic and CIVH — which both made standalone presentations at Remgro’s investor gathering last week — has been exemplary.
CIVH, in particular, produced strong numbers with fibre optics business Vumatel — which connects homes to fast and affordable internet — still growing apace. Vuma Core, which connects homes with household income of more than R30,000 a month, increased its reach only fractionally to 906,315 homes — but the subscriber base grew more than 5% to 385,000. Vuma Reach, which connects households earning between R5,000 and R30,000, saw a 57% jump in homes passed to more than 1-million, with subscriber numbers up 60% to 263,000.
Recently launched Vuma Key, which connects households earning less than R5,000 a month, enjoyed a brisk start with more than 20,000 connections and almost 2,000 subscribers. Vuma Key is an important development with a potential reach of 9.7-million households, against Vuma Reach’s potential market of 4.8-million homes and Vuma Core’s 2.2-million.
Still, there’s the threat that the competition authorities won’t give the merger the go-ahead. Will Remgro then seek out new investors, asks Rey Wium, head of consumer research at SBG Securities?
Pieter Uys, Remgro executive and chair of CIVH, says an unfavourable ruling will affect long-term plans to connect another 12-million homes. “It would take 10 years to do this on our own. But it would be of huge benefit to the country if we could scale up.”
The CIVH breakdown shows Dark Fibre Africa (DFA), which connects mainly businesses, increasing revenue 7% to R2.65bn with operating profits more than doubling to R1.34bn. Vumatel has hiked revenue 15% to R3.4bn and increased operating profits 35% to R1.3bn.
CIVH has debt of more than R18bn, which is why the proposed equity investment by Vodacom is critical to fund further rapid expansion efforts.
By contrast, there is little detail on Heineken Beverages, which is still at an early stage of integrating the Distell and Namibian Breweries operations. It might be premature to start fretting but Durand does mention “some beer-side challenges” with “a lot of discounting happening”, plus the drawbacks of load-shedding.
Remgro’s earnings breakdown shows Heineken Beverages posting a loss of R75m for a two-month trading period. The actual loss was much smaller at R19m, with a R56m loss stemming from a depreciation and amortisation of intangible assets identified in the Heineken/Distell merger. Durand argues that the two-month performance is not illustrative of “the potential of a fantastic portfolio of brands”. Hopefully Remgro’s half-year results to end-December can provide that reassurance.
Back in the day, Remgro would retain a serious pile of cash as an insurance policy against unforeseen setbacks
In the interim, there is plenty that can be read into Remgro’s commitment to boost dividend flows — especially at a time that Durand describes as the “toughest trading conditions in my 30-plus-year career”. Back in the day, Remgro would retain a serious pile of cash as an insurance policy against unforeseen setbacks.
It’s a bit different now. Remgro has a cash heap of R9bn, but debt-at-centre is close to R8bn. In the past financial year Remgro returned about R3.5bn to shareholders — comprising a cash dividend of R1bn, the Grindrod dividend in specie (worth R1.63bn) and a share buyback of R830m.
Some eyebrows might be raised since Remgro raised the ordinary dividend payout 60% with earnings up only 9%. Durand explains that Remgro’s cash flow at centre lags by a year. “The underlying investments declare dividends and we only get these later.”
Thane Duff, an equity analyst at Investec, asked if an 80% dividend payout from Heineken Beverages is still on the cards.
“It depends how the integration goes. I’m not going to commit to anything … I don’t want to overpromise and underdeliver,” says Durand.
More certain is a special payout from Capevin after selling the Gordon’s Gin distribution rights to Diageo for R1bn. There, Durand is more forthright: “Neville [Williams, the Remgro CFO] is waiting for a nice dividend out of Capevin.”
Zaid Paruk, portfolio manager at Aeon Investment Management, says Remgro has executed on lots of mergers and acquisitions - but the market will be looking closely at how management plans to unlock value through reducing the discount to iNAV. "This is now at around 38% - a wide window compared to the ten-year average of about 20%."
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