Remgro: Taking advantage of a highly diversified offering

If you are looking for a diversified portfolio with exposure to the financial, banking, consumer product, insurance, industrial, infrastructure, media and sport sectors, then Remgro might be of interest to you.

Remgro’s listed investment portfolio includes stakes in Mediclinic International, Rand Merchant Insurance Holdings (RMI), Rand Merchant Bank Holdings (RMBH), FirstRand, Distell, RCL Foods and Grindrod. 

Healthcare

Healthcare makes up the largest section of the Remgro portfolio, at around 29% of the group’s intrinsic net asset value (NAV).

Mediclinic provided the largest negative contribution to Remgro’s NAV in the last financial year, as Mediclinic’s market value declined more than 40%.

This was due to one-off costs relating to the Abu Dhabi-based Al Noor Hospitals takeover and reverse listing, difficulties with its Middle East healthcare integrations, and regulatory setbacks in Switzerland and the UAE.  

These factors are relevant, but it does appear as if worst-case scenarios have been priced into the share, perhaps leaving it undervalued. Management remains confident about the long-term growth opportunities in the Middle East.  

The Mediclinic International healthcare operations now see about 72% of revenue, and around 68% of earnings before interest, tax, debt and amortisation, from outside of Africa, suggesting a rand hedge defence. The healthcare sector also provides a defensive sectoral play to an investment portfolio.

Mediclinic made an offer to acquire the remaining roughly 70% it didn’t already own of UK private hospital group, Spire Healthcare.

At a 29% premium to a severely depressed Spire share price, the offer was rejected. Speculation is that Mediclinic will make another higher offer soon. Should the acquisition manifest, it would add about 1% to 2% to Mediclinic’s earnings. 

Banking 

Investment holdings include a 28.2% interest in RMBH and a 3.9% interest in FirstRand, making up around 23% of the group’s NAV. RMBH’s main asset is a 34.1% interest in FirstRand, and its performance is therefore primarily related to that of FirstRand.

RMBH also holds a 27.5% interest in Atterbury Property Holdings, a 34.1% interest in Propertuity Development, and a 40% interest in Genesis Properties, although these investments only contribute to about 1% of headline earnings for the company.

In the past financial year, FirstRand and RMBH performed well in an uncertain economic climate. The banks have proven to be a stable and growing (albeit more modestly of late) contributor to Remgro’s earnings.   

Insurance

Remgro’s exposure to the insurance sector is its 29.9% holding in RMI, which makes up roughly 12% of the company’s NAV. The underlying listed investments of RMI include Discovery (25.1% interest) and MMI Holdings (25.7%).

The unlisted investments include OUTsurance (88.5%), Hastings (29.9%), RMI Investment Managers (100%), AlphaCode and its first two next-generation investments, Merchant Capital (25.1%) and Entersekt.

Headline earnings from continuing operations for RMI grew at 16.4% in the 2017 financial year with standout performances from Discovery (normalised earnings +8.7%) and OUTsurance (normalised earnings +25.7%).

Consumer products

The consumer products investment holdings account for around 21% of the group’s NAV and include listed food and beverage counters RCL Foods and Distell, and an unlisted equity holding of Unilever.

This department has been a negative contributor to earnings and NAV in the year to June 2017. RCL Foods has seen poultry imports adversely affecting earnings, while sugar and milling have gained over the year.

Distell earnings have been flat to marginally lower, while Unilever earnings have been negatively impacted by restructuring costs. 

Remgro has also announced the sale of its 25.75% stake in Unilever SA back to Unilever in exchange for R4.9bn in cash and Unilever’s Spread business, which appears to provide a logic fit to the foods business. The R4.9bn could free up further cash for investment (or return to shareholders?). 

Infrastructure

Infrastructure investments include Grindrod, SEACOM and Community Investment Venture (CIV). While Grindrod and SEACOM have been negative contributors to earnings for this portion of the portfolio, CIV has been strong and in turn aided a positive earnings contribution overall for Remgro. 

CIV, whose major investment is Dark Fibre Africa, has seen its contribution to Remgro’s headline earnings increase a massive 72%, to R110m.

There could be a decent value unlock in the near future from Grindrod, should the freight and shipping divisions be separately listed as has been proposed. 

Investment case

The diversity of sectors and companies, both public and private, that Remgro provides is attractive. It exposes market participants to defensive and rand-hedging attributes, while being cash generative and holding pockets of potential value yet to be unlocked. 

The share currently trades on a forward price-to-earnings ratio of 13 times, which is significantly cheaper than the Top40 Index (around 21 times). 

The more material figure when valuing investment holding companies is the discount to NAV, which for Remgro is currently around 20%, larger than the usual historic discount of 15% to NAV.  A cherry on top for investors would be the 2.4% dividend yield. 

This article originally appeared in the 30 November edition of finweek. Buy and download the magazine here.