Remgro: A play on the South African economy?

Remgro, an investment holding company which holds a variety of investments over a number of different industries, released its half-year results which underscore a strained South African economy. Part of the Rupert stable, Remgro’s interests consist mainly of investments in healthcare, consumer products, financial services, infrastructure, industrial and media industries. Although the company does have rand-hedge exposure, its predominately a diverse play on the South African economy.

Remgro holds a combination of listed and unlisted investments and as an investment holding company its principle metric of performance is based on the firms net asset value (NAV). NAV represents the value of an entity’s assets minus the value of its liabilities.

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A perennial problem for investment holding firms is that its share price very rarely reflects the underling net asset value of each constituent. Naspers, Reinet and PSG are a few examples of large listed firms on the local bourse that trade at significant discounts to NAV. Remgro is no different, with the discount to NAV around a staggering 40%. These discounts have widened over the last few years as investment holding structures seem to  have become increasingly unloved by the market in combination with a loss in faith of management as a result of poor capital allocation decisions.

Remgro’s largest holding is JSE-listed Mediclinic, which has been adversely affected by the coronavirus pandemic and ensuing lockdowns. The healthcare sector has been a laggard in the largest stock market reversal in history. The healthcare provider has a diverse earnings profile, with operations in Switzerland and the UAE. Covid-19 has impacted elective surgery, which is one of the main drivers of the company’s earnings. There’ll no doubt be pent-up demand as Covid-19 becomes somewhat of a distant memory in the months to follow.

Other significant listed investments include FirstRand, Rand Merchant Investment Holdings, Distell and RCL Foods. Any general uptick in the South African economy will benefit these underlying holdings share prices, which should have a knock-on effect to Remgro.

A benefit of being a shareholder in Remgro, or any investment holding company for that matter, is the ability of management to unlock value. This can be done in various ways, one of which was implemented by Jannie Durand and his management team last year with the unbundling of RMB Holdings. Other options available to management include distributing excess cash to shareholders in the form of a dividend or special dividend, or a share buyback program.

Read also: Remgro moving ahead with RMH unbundling 

A few years ago Remgro traded at par with its NAV. A few years later and this discount has blown out to 40%. During that time, there has been a lot of negativity priced into the South African market. If you believe that the South African economy will normalise in the coming months, you will be buying a solid, diverse group of assets at a markedly discounted price. You’ll also need to believe in management to ensure they unlock value via corporate action when necessary.

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