Patrice Motsepe’s African Rainbow Capital Investments (ARC) is considering delisting from the JSE as the company’s significant trading discount to its net asset value (NAV) shows no sign of narrowing.
This was revealed in ARC’s annual report, released Friday. The company said it will consider whether there is value in remaining listed on the JSE.
ARC’s latest NAV is R11.41, while the company’s share price is R5.71 as of Monday morning. This equates to a trading discount of 50%.
The company said the discount and the low free float – the number of shares available to trade publicly – will receive more focus in 2024.
ARC said it continues to implement appropriate actions to minimize the discount to underlying net asset value to the extent possible, including:
- Portfolio repositioning: Efforts to reduce the long tail and upweighting future-focused companies and sectors.
- Portfolio valuations: Portfolio valuations have been validated through several disposals at full value.
- Listed portfolio: Much of the listed portfolio that can readily be acquired in the market has been sold so that the unlisted portion of the fund, which is only accessible through ARC Investments, has grown to 89% of the portfolio.
- Management and participation fees: Management and participation fees have been reduced substantially after the General Partner fee structure review was approved by shareholders. The management fee for the year was R98 million (2022: R225 million). The 2023 fee was inflated by the legal fees of the elevated number of transactions during the past year. Further savings should be possible in future years.
“We will continue efforts to address the issue,” co-CEOs Johan van der Merwe and Johan van Zyl said in the report. “In the current environment, it remains prudent for management and the board to continue to consider whether there is value in being listed, should the discount remain excessive.”
Their view was echoed by company chair Mark Olivier, who said the discount is affecting the ability of the investment holding company’s ARC Fund to raise capital.
“The present focus is on organic growth and smaller add-on acquisitions. Therefore, further funding is not currently needed,” he said.
“However, the discount reduces our ability to raise capital as a listed entity should a compelling but sizeable investment opportunity arise.”
“It is a constraint that removes much of the benefit of being a listed entity. The board’s challenge will be to deal with the listing, particularly securing access to capital for growth over the medium term.”
JSE delisting trend
The number of companies listed on the bourse has dropped by more than half over the past 30 years to less than 300, with over 20 companies delisting from the exchange in 2022 alone.
In 2022, AmaranthCX rang the warning bells for a string of delistings from the JSE.
The company said South Africa had 332 listed companies across the JSE and the three challenger stock exchanges at the beginning of 2022.
AmaranthCX director Paul Miller said that during the first half of 2022, 18 companies delisted from the JSE and other exchanges.
Fourteen more companies are in the formal process of delisting or are subject to corporate action likely to result in their delisting.
There are also 16 companies suspended from trading or which have not been able to publish their financial results.
AmaranthCX’s research suggested that at least 32 companies, potentially far more, will delist from South African stock exchanges this year.
JSE competitor A2X markets also said earlier this year that South Africa’s main stock exchange would probably continue haemorrhaging listings over the next year as companies grapple with onerous regulatory and funding conditions, making raising capital through initial public offerings less attractive.
“The macro-economic environment is not particularly conducive to raising capital in South Africa,” A2X CEO Kevin Brady said.
“The regulatory requirements to have a primary listing are quite burdensome from cost, to time, to compliance departments, particularly for the smaller companies, which are the ones we are seeing delisting.”
According to Brady, small companies are also struggling to keep up with the regulations imposed on listed entities.
“We have swung the pendulum too far on regulation and investor protection, and we haven’t spent enough time on how do we grow this market,” he said.