For an investment group with decent capital allocation discipline and a portfolio of cash-spinning assets, Hosken Consolidated Investments (HCI) is getting short shrift from the market. Don’t get me wrong, I’m not carping bitterly. I’m more than happy to pick up heavily discounted shares when there are ebbs in sentiment.
As per the latest results to end-March, HCI puts the net carrying value of its portfolio at about R26bn, or R303 a share. The market — which gave the share the slightest lift last week — is more sceptical, placing a value of R12bn or R135 a share on the investment business.
That’s a hefty discount of more than 50% — and a rating that seems to pencil in only a slim chance of value unlocking or meaningful value uplift in the foreseeable future. The gaping discount might also suggest a serious difference of opinion between the market and HCI’s directors about the valuation of key investments.
HCI has a handful of investments listed on the JSE: from biggest to smallest, Southern Sun, Tsogo Sun, Frontier Transport, eMedia Holdings and Deneb Industrial. A rough calculation would put the collective value of these investments at about R12bn … maybe closer to R13bn if the 25% stake in Toronto-listed Platinum Group Metals is included.
Among the unlisted investments is a significant property portfolio that did R400m in rental income and R328m in earnings before interest, tax, depreciation and amortisation (ebitda) in the past financial year, as well as a fairly large coal mining operation.
The unlisted investment that is probably causing the valuation consternation is Impact Oil & Gas, in which HCI has a large stake and which is chiefly responsible for its debt. Impact holds concessions in Namibia (where the offshore exploration endeavours are hurtling ahead) and in South Africa (where environmental resistance has stalled development).
Last year in mid-July HCI forked out R454m to acquire an additional 1.5% of Impact — giving it a controlling stake of 51.4%. That transaction, which would have attracted a stiffish control premium, infers a value of about R30bn for Impact. HCI’s share is about R14bn, if we strip out the dividend that Impact declared after part of its interest in promising Namibian oil developments was farmed out to an oil major.
It’s quite difficult to figure out the real level of debt within HCI, but there are sufficient flows for investing in existing operations, paying back debt and sustaining a conservative dividend payout
HCI was probably quite keen to gain outright control of Impact, so a R30bn valuation of the relatively small share purchase might not be a reasonable inference. What is apparent, though, is that HCI stumped up a markedly higher price than what energy exploration group Africa Oil was willing to pay when it made an offer to Impact minority shareholders in March last year.
There is not much in HCI’s reviewed financial report to end-March that will help punters form anything like a definitive opinion on Impact’s worth. HCI’s annual report is usually released in late July, and I do expect a comprehensive report-back on progress at Impact in that traditionally excellent tome.
My gut feel, though, is that until production platforms are in place in Namibian waters and the oil is about to start pumping, HCI’s stake in Impact will not attract any enthusiastic value store. And for now, the softish crude price is hardly lubricating sentiment.
That said, some heart can be taken at the sumptuous and seemingly sustainable dividend flows from all HCI’s listed investments. It’s quite difficult to figure out the real level of debt within HCI, but there are sufficient flows for investing in existing operations, paying back debt and sustaining a conservative dividend payout.
If there is one area of concern it would be on the gaming side, where Tsogo Sun has found itself in the outside lane of the online gaming race. Sun International is making greater strides with its SunBet business, where online gaming offerings are churning impressive growth. Tsogo Sun expressed disappointment that its online division failed “to deliver appropriate financial results for the year in a sector that is fast growing”. The online business ended the year on R250m gross gaming revenue, excluding bonusing, and was at breakeven at an adjusted ebitda level.
Compared with Sun International, and even smaller players such as Goldrush, this is a worrying outcome. Tsogo said administrative issues were identified at the end of the financial year involving cash management inefficiencies and related reconciliation processes, which led to write-offs of R27m. Most of the issues have been addressed — most notably, with management changes in recent months and expansion of online gaming offerings.
Tsogo is also planning to launch a complementary online gaming brand in the second half of financial 2026 alongside existing brands playTsogo and Bet.co.za. There is a lot of catching up to do in this vibrant gaming space, and I’d imagine the challenges will be addressed more candidly by HCI CEO Johnny Copelyn in the annual report.
Frankly, I can’t imagine Tsogo grabbing a meaningful slice of the online gaming segment without resorting to acquisitions. With large players such as Hollywood Bets and Betway dominant, deal making will require sifting through a fragmented market of smaller players in the sports betting-online gaming segment to build critical mass. The odds look stacked — though it wouldn’t be the first time HCI has made a dash from the back of the field.
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.