Jannie Durand. Picture: HETTY ZANTMAN

Jannie Durand. Picture: HETTY ZANTMAN

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WHAT IT MEANS: Growth in Remgro’s listed investments tops unlisted stakes. No structural changes planned for portfolio.

Investment behemoth Remgro, which holds a portfolio worth more than R150bn, may be facing a structural quandary.

The company’s year to end-June financials show that the makeup of intrinsic net asset value (NAV) — the most appropriate measure for an investment company — is now very much skewed to listed investments, despite Remgro reiterating that unlisted investments are preferable.

The problem is that Remgro’s listed investments have — thanks to compelling organic growth or game-changing corporate activity — easily outstripped the growth in unlisted investments.

A breakdown shows that 70% of Remgro’s NAV resides in the health care, banking and insurance cluster — listed counters like Mediclinic International, FirstRand/RMB and RMI.

If the holdings in listed liquor giant Distell and RCL Foods are worked into the equation (along with smaller listed investments like Grindrod, Caxton and eMedia), then close to 80% of the portfolio is represented by listed interests.

At the end of June Mediclinic represented a chunky 41% of NAV, though that figure may since have dropped to nearer 38% as the private-hospital conglomerate’s shares have weakened markedly in recent weeks.

The issue is that having the bulk of an investment portfolio listed on the JSE can detract from Remgro’s value proposition.

Like equity instrument countermates PSG, Hosken Consolidated Investments and corporate cousin Reinet, not only is the bulk of Remgro’s NAV residing in listed counters but also in a single company (PSG in Curro, HCI in Tsogo Sun and Reinet in British American Tobacco).

As the Financial Mail has argued before, without Remgro’s share price offering a compelling discount to NAV it perhaps becomes more tempting for investors to mimic the bulk of the portfolio.

For instance, an investor with little craving for food (is the chicken cycle turning for the worse?) or beverages sectors (is Distell trading on too demanding a rating?) could rather customise Remgro’s portfolio by buying shares in Mediclinic, Distell, RMI and FirstRand.

Customising a Remgro portfolio does rob investors of exposure to some compelling and interesting unlisted investments.

The biggest unlisted investment is the 25.8% stake in household-brands powerhouse Unilever SA, which is valued at R10.65bn (and is now bigger than the 77% shareholding in RCL Foods).

Following a bout of restructuring, Unilever looks in fine fettle again, reporting a 43% hike in profit after tax to R1.78bn after seeing revenue growth as well as margin improvement. Unilever chipped in R461m to Remgro’s headline earnings, almost 40% higher than last year.

Another unlisted gem is Dark Fibre Africa (DFA), a fibre optic network provider held under 50.9%-held subsidiary CIV Holdings.

Remgro values its DFA investment at R3.1bn, which is more than all its other infrastructure investments (which include influential stakes in logistics and shipping group Grindrod and undersea cable specialist Seacom).

DFA looks a cracking business, with revenue growth of 13.5% to R1.2bn translating into high-margin earnings before interest, taxes, depreciation and amortisation growth of 13% at R861m. Annuity income grew an impressive 21%, and DFA now generates more than R87.5m in annuity flows a month.

The current book value of the fibre optic network is worth more than R6bn, and the future value of annuity contract base tops R10bn. Not surprisingly, Remgro CEO Jannie Durand expects double-digit growth to continue at DFA.

One overlooked corner of Remgro’s unlisted segment is the relatively small industrial hub. This includes a 25% stake in energy group Total SA, a 50% stake in industrial gas group Air Products, 100% of building products specialist Wispeco and 37% of glass manufacturer PGSI.

Though much of local industry resembles a wasteland, Remgro’s industrial portfolio houses investments that outperformed the listed portfolio.

Air Products reported a 20% increase in revenue to R2.6bn and a 22.5% jump in operating profits to R817m, with the performance buoyed by new contracted business in the oil refining and petrochemicals sectors.

Wispeco managed a 28% rise in revenue to R2.1bn and a trend-bucking 42% increase in operating profits to R213m, with the company benefiting from the acquisition of Pressure Die Castings and new projects.

At last count — mid-September, to be exact — Remgro was offering a roughly 16% discount on its intrinsic NAV of around R290/share. One interpretation is that the current valuation discounts Remgro’s unlisted portfolio by almost 100%.

Could Remgro consider unlocking this trapped value with corporate action? Durand seems in no hurry to make any structural changes to Remgro’s portfolio, but points out that Remgro has previously released value by unbundling smaller interests (Trans Hex Group, being one) and has dabbled in different structures (the short-lived Venfin vehicle, which housed mainly technology investments).

"We don’t have any immediate plans (to restructure the portfolio). But never say never," adds Durand.

On paper, it might be a compelling option for Remgro to revisit another Venfin-type spinoff — this time hosting either the unlisted industrial hub, a selection of infrastructure interests or a combination of both.

While the components of the industrial segment are small, as a collective the interests would tally up to an inferred value of R7.5bn if the holding in black-owned investment company KTH (which must be a candidate for a separate listing) is stripped out. If DFA, Seacom and other infrastructure interests were lumped together with the industrial interests then one would have the makings of a very profitable separate listing, with a potential market capitalisation of anything between R12bn and R15bn.

This would be bigger than the combined market capitalisation of JSE stalwarts like Invicta, Hudaco, Torre and Argent.

Admittedly, as several market-watchers point out, it may not be the best time to take a broader industrial/infrastructural play to market.

But then again, having highly profitable and cash-generative interests buried so deep in a R150bn-plus portfolio makes little sense.

Remgro, of course, has always been a patient investor, and is unlikely to rush any strategic options.

Perhaps there could be a trigger if any of the acquisitive industrial players on the JSE — think enX Group, Deneb Investments and Stellar Capital Partners or even Marcel Golding’s Geomer Investments and RECM & Calibre — decide to tilt at any of Remgro’s smaller unlisted assets.