EDITORIAL: Nightmare of asset mispricing

The notorious mispricing of assets is haunting African Rainbow Investments (ARC). With a market capitalisation of about R11bn, against a net asset value of R18.6bn, the discount stands at a jaw-dropping 41%, or almost R7bn. It’s almost as if ARC gives away its assets free. 

Take Rain, a data-focused mobile network operator valued at R25bn. Given that investors value ARC at just under R11bn, investing in the Patrice Motsepe-backed company is a bit like buying Rain at a substantial discount and getting the rest of ARC’s diverse portfolio including TymeBank free. It is like a buy-one-get-one-free sale but measured in billions of rand in assets. 

Since its listing in 2017, ARC has been on a rapid growth trajectory, boosting the value of its underlying asset from just more than R5bn to nearly R20bn. But here’s the kicker: this stellar growth has not been fully reflected in the share price. In fact, the share price has slipped more than 10% since the company went public, leaving ARC with a market cap of R11bn.

That is a whopping 40% less than the sum of its parts, even for a holding company. It is not uncommon for investment holding companies to trade a discount to the asset value but the acceptable shortfall is 15%-20%. 

To be sure, ARC has not been sitting idly by as the discount widened. Two years ago, it slashed by more than half the fees it pays the team managing its underlying assets, delivering an immediate value uplift and implicitly acknowledging a long-standing investor complaint that shareholder and management interests aren’t aligned. Why? While the team is compensated for managing and growing the underlying assets, shareholders have not seen the equivalent value reflected in the share price. In addition, ARC sold several non-strategic investments, including its stake in Afrimat, generating R1.4bn in the process.

It was not enough. The discount remains stubbornly wide, raising fears among savers and the JSE that yet another company might find little value in being a publicly traded company. “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,” co-CEOs Johan van der Merwe and Johan van Zyl said in last year’s annual report. 

Nor is ARC the only company grappling with this financial inefficiency. ARC’s situation mirrors the dilemma faced by PSG Group, whose stake in Capitec ended up being worth more than everything else it owned. PSG tried to fix that problem by spinning off its stake in Capitec until it eventually went private. Naspers, Remgro and many more at home and overseas are in the same boat with their market cap languishing below the value of their underlying assets.

General Electric is perhaps the most striking example of how investment-holding companies have lost favour with investors. In 2021, GE split into three separate companies in a widely welcomed move that addressed the complexities and inefficiencies associated with managing a hodgepodge portfolio of businesses under one umbrella.

These changes in investor sentiment in the age of “synergy” and “competitive advantage” are chipping away at the raison d’être for investment holdings companies. For decades, these companies thrived on the notion that they make shareholders richer by managing businesses across various economic sectors. Not any more.   

For existing shareholders in companies such as ARC, this makes it harder to sell their shares at fair value, but for new investors it is like finding a diamond in the rough — if the rough was a pile of billions of rand in mispriced assets.