Johann Rupert’s Remgro a good bet

Gary Davids, an investment analyst at Sanlam Private Wealth, said Remgro offers investors a high margin of safety with good potential upside.

Remgro is an investment holding company based in Stellenbosch, South Africa. Billionaire Johann Rupert chairs its board and strongly influences the company.

Remgro has interests in banking, financial services, packaging, glass products, medical services, mining, petroleum, beverage, food and personal care products.

Its largest holdings as a percentage of net asset value (NAV) are Mediclinic (31%), OUTsurance (16%), Community Investment Ventures Holdings (CIVH) (9.5%) and FirstRand (7%).

Remgro gives investors access to strong companies and exposure to assets expected to benefit from improved South African economic growth.

Davids said Remgro has been a stalwart in the Sanlam Private Wealth Equity portfolio for many years.

Shares in the Stellenbosch-based investment behemoth have historically traded at an average discount of 15% to their net asset value (NAV).

However, the current 45% discount is the largest it has been in over a decade, providing investors with an even better margin of safety.

Davids explained that the high margin of safety prompted them to add the company to their clients’ portfolios.

“Beyond the benefits of diversification to remain competitive, Remgro exhibits low financial risk given its net cash position,” he said.

What is particularly appealing is that these strengths are currently available at the largest discount to NAV in over a decade, providing investors with a considerable margin of safety.

“While holding companies normally trade at a discount to NAV, Remgro’s discount has expanded significantly, growing from around 15% to 45% in recent years,” he said.

Several factors have contributed to this widening discount, including the negative sentiments towards South African assets.

“Issues such as slow economic growth, political uncertainty and structural challenges have resulted in reduced investor confidence,” he said.

These factors impact the valuations of companies tied to the South African economy, like Remgro.

Another contributing factor is the illiquidity of Remgro’s underlying investments. Over the past few years, Remgro’s composition of NAV has shifted toward unlisted assets.

These increased to 65% after the conclusion of the Heineken-Distell reorganisation and the Mediclinic buyout.

The unlisted holdings, such as Mediclinic, CIVH and Heineken Beverages (5% of NAV), are not as easily tradable and have been exposed to poor earnings and corporate action costs.

The Heineken Beverages and Mediclinic businesses have seen their valuations decrease on the Remgro books due to poor performance.

In addition, the corporate action between CIVH subsidiary Maziv, the parent company of Dark Fibre Africa and Vumatel, and Vodacom has been delayed.

Vodacom’s planned acquisition of a 30% stake in Maziv and subsequent capital investment was set to drive growth and reduce debt within Maziv.

The deal, which is currently with the Competition Tribunal, would also increase Remgro’s net cash position.

The uncertainty surrounding this issue and a spate of poor earnings from large underlying investments have further increased the discount.

Despite these challenges, Sanlam Private Wealth believes that Remgro is well positioned to benefit from an improving South African economic cycle and lower interest rates.

In addition, the contribution of listed assets to NAV dropped from 78% in 2015 to 33%. “We view this decline as a positive outcome,” Davids said.

Remgro recently sold its holding in Momentum, with more sales in the listed portfolio on the cards.

This, combined with positive capital allocation decisions, could further reduce discount to NAV.