Emotions are running high around a widening discount at RMB Holdings (RMH) — which holds a 34.1% stake in banking giant FirstRand — with shareholders particularly irked about a contentious management participation arrangement at the group’s fledgling property hub.

Last Friday, investment behemoth Remgro, usually regarded as an astute investor and a bastion of good corporate governance, was taken to task by shareholders for not addressing the widening discount at RMH.

Remgro CEO Jannie Durand is set to take the chairman’s seat at RMH shortly.

Shareholders noted that the 13%-15% discount at RMH took at least 3%-4% off Remgro’s intrinsic value.

Feisty Cape Town-based investor Nick Krige asked Durand how concerned he was, on a scale of one to 10, about the growing RMH discount, pointing out that RMH and Rand Merchant Insurance represent about R50bn of Remgro’s intrinsic value. "This is an important question to ask of Remgro, which is really a holding company of a holding company," he said.

Durand said Remgro is "very concerned" about the discount. "There was a time when RMH traded at a premium, and now it’s at a discount ... so we need to look at it seriously."

For some shareholders, the main sticking point at RMH seems to be the dalliance with property. The contention is that this (very) small sideline could distract RMH executives from focusing on the core investment in FirstRand at a time when competition is rapidly growing in the local banking sector.

The property segment does not look inspiring, with a portfolio that includes a 27.5% interest in Atterbury Property Holdings, a 34.1% interest in Propertuity Development (an urban renewal business) and 40% in Genesis Properties Three (a mezzanine debt and equity funding business). In January the division also bought a 43.8% interest in Atterbury Europe from Steinhoff International.

While the 34.1% stake in FirstRand — worth R133bn — represents more than 99% of RMH’s value, the small property thrust is causing some consternation. In the half-year to end-December, the property hub reported a loss of R15m, and took an impairment of R174m, which is equivalent to nearly 20% of the portfolio value.

But it’s not only the performance of the property segment that is worrying shareholders. At last week’s Remgro investor presentation, All Weather Capital director Shane Watkins raised questions around RMH executives participating in the property division’s growth.

"Management have negotiated a transaction for themselves. They capture 10% of the upside in their own name," he said. "It’s not normal in Remgro group companies for executives to participate ... they are already employees of these businesses."

Durand said he was unaware of the RMH arrangement and would need to look into it.

Opportune Investments’ Chris Logan asked how Durand could not be aware of the matter, as it was disclosed in the recent financial results.

Commentary accompanying RMH’s results on the property division states: "A management ownership participation scheme with maximum participation of 10% in RMH Property has been put in place."

Durand said: "I must apologise ... I was not aware of it."

At the time of going to press, Logan had petitioned the RMH board for further details around the management agreement.

The bottom line for RMH shareholders is that the company, which previously traded at a premium to its underlying value, now attracts a wide discount. One solution would be to simply unbundle the FirstRand shares to shareholders, leaving the property hub to fend for itself.

RMH holds a market capitalisation of about R116bn when its stake in FirstRand is worth R133bn. This implies a discount of nearly 13%, which is not great for Remgro, considering RMH is one of its biggest investments.

Logan noted that in the past financial year Remgro’s intrinsic NAV had fallen 17.9%.

"The chairman [Johann Rupert] at the AGM last year said Remgro was given very bad financial advice around [health-care subsidiary] Mediclinic International. Now we are seeing that repeated at RMH."

Logan said the bigger discount at RMH shaved 3%-4% off Remgro’s intrinsic value. He hopes Remgro appreciates that it needs to make good deals and take good financial advice before putting shareholders’ money at risk. "Apart from this little ownership participation arrangement, RMH Property has written off R174m, or 20% of its property portfolio.

"In defending the discount, RMH executives did not once acknowledge that there is very poor deal making [at the company]."

Logan said RMH’s key investment FirstRand is operating in an increasingly competitive banking environment, in which some new entrants offer markedly cheaper services.

"Yet there is a fiddling around in property when you should be concentrating on getting the company operationally tip-top to meet this new competition," he said.

Remgro has already played a role in proposals to remove the holding company structure at liquor subsidiary Distell and Capevin. Whether it will push for dismantling another holding company structure at RMH remains to be seen.

Durand did, however, concede: "We don’t like seeing discounts of 15%, 16% or 17% on the real value of assets."

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