Want to invest in an early stage Berkshire Hathaway? Piet Viljoen’s R550m fund could be it

It’s testament to Piet Viljoen’s standing in the investment community that the shares in his listed investment trust Re:CM & Calibre trade at a premium to the stated net asset value. The interim results released this week disclosed its NAV as R11.87. On Friday, you’d have needed to pay R12.20 to acquire any shares. Being a deep value investor himself, Viljoen would probably advise us to wait for a pull-back in the price before accumulating stock. Whether that opportunity will come soon, though, is a moot point. As you’ll see from this interview, the R550m Re:CM Calibre has some interesting plays in the balance sheet at conservative valuations – meaningful stakes in an unlisted  diamond mine, the Dischem chain and a “pokey” machine business; and a chunk of the rapidly re-rating listed  Sovereign Foods poultry business. Is this an SA-version of  Berkshire Hathaway in the making? Perhaps. Viljoen admits he follows the same investment principles as Warren Buffett and Charlie Munger. If he does half as well, he may one day also attract 30 000 to his own AGM. Now there’s something to aim at. – AH  

To watch the video of the interview on CNBC’s Power Lunch click here

ALEC HOGG:  Re:CM & Calibre reported a 14 percent drop in half-year revenue and headline earnings per share came in at 47 cents.  As we unpack the numbers, we are joined by chairman Piet Viljoen.  Piet, you’re better known as an asset manager.  Just by way of a brief background, what motivated you to put RECM & Calibre together?

PIET VILJOEN:  Well we put RECM & Calibre together basically to pull in permanent capital so that we could invest for the long term without the risk and threat of client in-and-out flows affecting our investment strategy and investment execution.

ALEC HOGG:  A little bit like Berkshire Hathaway, our hero – Warren Buffett.

PIET VILJOEN:  Yes, I guess if you want to model yourself on somebody, that is probably a good place to start and I think there is a large element of that in there – yes.

ALEC HOGG:  You have some very interesting investments in the portfolio.  American Homes: is that one of Buffett’s companies?

PIET VILJOEN:  No, it’s not.  American Homes: we started out in partnership with a man in Atlanta who was buying up houses, single-family residential units at cents in the dollar.  After the Financial Crisis houses were in foreclosure and otherwise in distress and we co-invested with him in that market, which we felt was massively undervalued at the time.

ALEC HOGG:  Where did you find him?

PIET VILJOEN: I read about Aaron Edelheit – that’s the man running American Homes – in a publication called Grant’s Interest Rate Observer. It comes out every two weeks and is James Grant writing on different things in the market.  He happened to speak to Aaron at one stage and interviewed him for his publication.  I flew over to Atlanta, met with him and toured Atlanta and some of the other parts of south-eastern USA, and saw what was on offer. And what was on offer I liked.

ALEC HOGG:  You certainly get around from an investment perspective, Piet.  I remember talking to you about a Greek cement company at the time of the financial crisis. How has investment been going?

PIET VILJOEN:  It has been a fantastic investment.  We invested in Titan Cement Group.  We invested in the lottery business in Greece, in the stock exchange operator of Greece and they’ve all been between three and five baggers so far.

ALEC HOGG:  That’s pretty good going, a deep value investor’s dream.  I see that you also have a big holding in Dischem.  We know that they’ve been talking about coming to the market for a while.  They certainly have disrupted the pharmacy sector here in South Africa.  What kind of a stake do you have there?

PIET VILJOEN:  It’s a small stake.  We own it via an SPV called Fledge Capital, so it’s a small stake in the business – not under our control.  We have no influence there, but we saw it as an opportunity to invest in a company that is growing quite rapidly.  I think you’ll find that a common thread through all the investments in RECM & Calibre is that they are all fairly high-growth investments.  At the moment, the market wants stability, wants dividends, and it is almost willing to pay any price for dividend-earning and stable earnings companies.  For instance, SA Breweries have been in a forward PE of over 20 with 5% growth, but it’s stable growth. So the market will pay any price for stability and banks will lend money to that market, but they won’t touch markets that are growing that might not be paying dividends.  That’s where we’re finding tremendous investment opportunities at this point in time. Dischem is a case in point.

ALEC HOGG:  Sovereign Foods – a chicken company…

PIET VILJOEN:  Ja, that’s quite an interesting one.  That one would fall under the heading of what we call “golf course” economics.  The only people who make money out of golf course resorts are the people who buy them out of bankruptcy when the original developer has gone bankrupt.  What happened with Sovereign Foods is that at the top of the chicken market – four or five years ago when the chicken business was printing money – they went out and borrowed a whole bunch of money to expand their facilities.  They put in the latest and greatest facilities and of course that ruined them financially…not ruined them, but they came under severe financial pressure.  It has taken a new management team two or three years to sort that out and we think they’re on a new growth trajectory going forward.  They have great assets because of the overspending five/six years ago.  They currently have some of the best assets in the chicken industry, they have a good management team on board, and we’re partnering with their management team.

ALEC HOGG:  So, like with American Homes you bought at cents in the dollar, or cents in the rand.

PIET VILJOEN:  That’s right, ja.  I think Sovereign Foods’ nett asset value is double the current share price.

ALEC HOGG:  The recent disclosure on the increase on duties, surely that would also support them?

PIET VILJOEN:  Ja, to a marginal extent, but I think if one relies on duties to bail out the companies that you own, I think that is a false comfort.  One has to look at the management of the business – how they execute, and the nature of the business itself.

ALEC HOGG:  Piet, you’re putting about 20 percent of your funds into Namaqua Mine, a diamond mine supporting a deal with Trans Hex, picking it up from De Beers.  What’s the story there?

PIET VILJOEN:  Well this is a transaction we’ve been working on with Trans Hex for about three years.  It’s a very exciting asset.  There are one or two regulatory hurdles that we have to overcome and these sorts of negotiations seem to take quite a long time.  We are very excited about the asset and we are partnering with who we think are the best diamond operators in the business.  There’s that old saying that not everyone in the diamond business is a crook, but all the crooks are in the diamond business.  We’ve partnered with one of the people who aren’t crooks and is a fantastic operator.  Llewellyn Delport and Trans Hex are top-notch operators.  We trust them implicitly and we think that as soon as they get their hands on this asset, that they will extract significant value from it.

ALEC HOGG:  And finally, the R150 million that you’ve committed to an unlisted gaming operation: I take it that that’s gambling, rather than computer gaming.

PIET VILJOEN:  Gaming as a leisure activity, yes.  It’s an LPM and Bingo operator called Gold Rush.  It’s the third biggest in the country and we’ve committed to that transaction.  We’re also going through all the regulatory hurdles again to get that approved.

ALEC HOGG:  Its exciting stuff, Piet.  Lots of off-the-radar investments you’ve made. It is listed so I suppose anybody can buy it.  RECM/Calibre: what kind of investor would it suit?

PIET VILJOEN:  It would suit investors who share our vision of long-term value creation, that aren’t looking for the next up-tick in the share price to buy and sell and to carry on like that.  We are looking for investors who are excited about being able to access good assets with good management teams at good prices, and we stick to that discipline.  If that is what you like then RECM/Calibre is the home for you.