The market is finally showing some love for Hosken Consolidated Investments (HCI), even though the timing for triggering the “great value unlock” remains unclear and there is still no finality about tapping into potentially rich oil and gas deposits.
The share price for HCI is up around a quarter over the past 12 months. This is due to a combination of a higher average crude oil price as well as improved fundamentals for the group’s underlying subsidiaries and progress in the culling of debt.
The group’s latest financials to end-March show the net asset carrying value of the investment portfolio up at R336 a share, up about 11% compared to the same period last year. This is a conservative valuation that does not reflect the potential value of, in particular, the Namibian oil and gas concessions and interests held by subsidiary Impact Oil & Gas — which, some optimistic punters have argued, is potentially worth more than the current HCI market value.
What is probably more significant is the narrowing of the discount the share price offers on NAV. Last year, around this time, HCI was trading at a 55% discount. This has narrowed to 48%. That is still a wide discount as investment trust-type companies go. But it might at least reflect the initial efforts at realising value at HCI.
Reinet Investments — covered in the Editor’s Note on page 4 — saw its discount narrow to the mid-teens in recent weeks as the market anticipated a windfall from the sale of two of its largest assets. HCI, on the other hand, has not made any moves to sell off its larger assets (if we exclude the farming out of its Namibian oil and gas concessions to Total Energies). But it has started methodically — and very profitably — selling swathes of its real estate portfolio.
HCI CEO Johnny Copelyn, at an investor presentation covering the recently released year to end-March results, took the trouble to detail the group’s debt and cash flow position.
He disclosed head office debt slightly up at R2.735bn (R2.6bn) with markedly reduced cash-on-hand at R188m, against R626m a year ago. The free cash generated during the financial year was R550m, of which R117m was mainly spent on refurbishing the Lynnridge Mall in Pretoria (now rebranded as Lynnridge Walk) and R802m spent on repurchasing about 6-million shares as well as dividends of R143m. The share repurchase, through a short-term lens, looks like a decent dose of capital allocation at an average price of around R133 a share, compared to the markedly higher ruling share price.
In terms of current debt levels, what must also be factored in is a fair heap of pending cash from property sales. This includes R549m from four properties sold to HCI’s cash-hungry large shareholder Sactwu, as well as another net sum of around R915m from the sale of a handful of shopping centres.
These cash proceeds will be used to pay down borrowings, with Copelyn reiterating that HCI would be more comfortable with debt levels around R2bn. Aside from the steady dividend flows from listed subsidiaries — including gaming group Tsogo Sun, hotels group Southern Sun, broadcast business eMedia, passenger transport specialist Frontier Transport and industrial hub Deneb — could there be any other transactional windfalls in the financial year ahead?
The opportunity for further property sales seems limited. HCI is left with properties that it has developed or redeveloped, with Lynnridge being the asset of substance. Copelyn indicated the real estate assets within subsidiary La Concorde — a shopping centre in Paarl and the Laborie wine farm — were unlikely to be sold in a rush.
R400m in free cash flow will be mostly allocated to growth businesses in oil and gas exploration
— Johnny Copelyn
What has obviously crossed the minds of a few investors is the possible sale of HCI’s resurgent coal business. The coal business increased its contribution to HCI’s bottom line by 180% to R179m. But Copelyn stressed it would be more prudent to “milk” the 10-year life-of-mine operation with its single-client (Eskom) structure than to sell the venture.
In terms of reinforcing HCI’s underlying value proposition, Charles Boles, the founder of Titanium Capital, asked if it was not preferable for the group to buy more shares in Tsogo Sun — its largest investment in terms of profits and dividend contribution.
Boles noted that HCI seemed reluctant to buy more shares in its JSE-listed subsidiaries, even when some of these entities looked attractively priced. Copelyn countered that after dividends, HCI was left with R400m in free cash flow that would be mostly allocated to its growth businesses in oil and gas exploration. “If we started spending money on buying back shares in Deneb or eMedia it would make it difficult to hang onto those (growth business) assets.”
Copelyn argued that HCI’s underlying investment companies were in a better (financial) position to buy back their own shares than HCI trying to buy an increased shareholding in these companies.
That said, in the case of “smaller” listed subsidiaries including Deneb, Frontier and eMedia — where HCI holds dominant market shares — it’s worth pointing out that mopping up minority shareholders would not cost billions of rands. The question is whether gaining 100% of these reliable cash flows can be realistically considered, if there is a lull in the development of more oil and gas fields (as well as bringing the platinum investment to production phase).
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