Remgro CEO Jannie Durand. Picture: FINANCIAL MAIL
Remgro CEO Jannie Durand. Picture: FINANCIAL MAIL

Investment behemoth Remgro’s role in dealing with a dastardly discount in RMB Holdings (RMH) — its biggest investment — is coming under intense scrutiny.

Remgro holds a 28.2% stake in RMH, which has as its main investment a 34.1% stake in banking group FirstRand.

It was clear from the Remgro investor conference call last Thursday that there are growing frustrations with the RMH structure.

RMH technically escapes being tagged a holding company with a single listed asset because of a smattering of (dare we say "unconvincing") property investments.

Some of these property assets have underperformed, and have been subject to worrying impairments.

It is estimated that RMH, which now attracts a wider discount on the FirstRand holding, is "costing" Remgro R5bn in trapped value.

During the investor conference call, shareholder activist Nick Krige contended that RMH’s previous argument — that the wider discount on the FirstRand holding was caused by market technicalities — was incorrect.

He believed that the argument around market technicalities, articulated in a Sens announcement by RMH earlier this year, was misleading, and needed to be rectified in order not to misinform investors.

Krige also reckoned that Remgro — as RMH’s largest shareholder — had condoned the property strategy.

He said there was a conflict of interest developing. "RMH’s management are rewarded based on how the property operations perform. But how the [RMH] discount widens is not for their account, it’s for Remgro’s account."

Krige urged Remgro to be more proactive with RMH. "Don’t Remgro have to say we are losing R5bn here, and RMH management are incentivised to grow property. They don’t care that Remgro lost R5bn; they are more interested in growing the property … buying more properties all over the show."

Remgro CEO Jannie Durand said the RMH discount was being taken more seriously and would be discussed at board level.

The RMH issue will no doubt raise questions around the raison d’être for Remgro.

At the end of June, around 77% of Remgro’s net intrinsic value was held in its major listed investments — RMH, insurance cluster RMI Holdings, private hospitals group Mediclinic International, food brands conglomerate RCL and liquor group Distell.

If other listed positions are added in (most notably eMedia Holdings, Grindrod and Grindrod Shipping) this pushes the listed investment component to over 80% of the portfolio.

To skew matters further, the post-year-end sale of the group’s stake in consumer brands giant Unilever further diminishes the presence of unlisted holdings in the portfolio.

Although Remgro will retain Unilever’s spreads business — housing bestselling margarine brands like Flora, Stork and Rama — it seems reasonable to assume that this segment will eventually be ushered into RCL Foods.

The FM has previously argued that investors may prefer to customise a Remgro-aligned portfolio rather than invest in Remgro. For instance, an investor could buy RMH, RMI, Mediclinic and Distell — cutting out exposure to RCL (and the other smaller listed positions).

Investors could also mimic Remgro’s portfolio and tinker with the respective portfolio weightings.

Make no mistake, there are attractive unlisted assets in Remgro — most notably influential stakes in fibre optic network Dark Fibre Africa, perennially profitable industrial gases specialist Air Products and energy business Total SA.

Not only are the attractive unlisted holdings buried under the collective weight of the listed investments, they are also offset by iffy industrial and infrastructure holdings (PGSI, Wispeco, PRIF and Seacom) as well as sideline positions — like small-business funder Business Partners and sports brand investor Premier Team Holdings. These smaller unlisted investments are never going to move the needle at Remgro.

While the discounts — and double discounts — can be frustrating for investors, what remains attractive about Remgro is a new-found reassurance around the progressive dividend policy.

Remgro’s long-held strategy of investing in companies with strong cash generation does provide a reassuring underpin to the yield.

In the year to end-June the full-year payout was hiked 7.5% to 532c a share, a solid payout considering the state of the local economy.

This means the shares trade on a decent yield of 2.5%, with some potential for being ratcheted up by improved performances from the key investments and share buyback exercises.

What might, in recent years, have worried shareholders is that Remgro has found itself in the unfamiliar position of holding substantial debt. There were initial worries that servicing this debt — including a preference shares structure — could staunch dividend flows.

But a recent rights offer of R9.5bn and strong cash flows from investments have meant a neutral position at the end of June, with cash on hand and debt both sitting at around R14bn.

An important post-balance-sheet event, however, was the inflow of net proceeds of R4.9bn from the sale of Remgro’s stake in Unilever.

Added to this useful dollop of cash is another roughly R1bn ($70m) earned from selling off an investment and loan in China-focused Milestone Capital Strategic Holdings.

In addition, Remgro remains a most efficient cash-spinning machine.

A cash flow analysis shows that cash available from operations was close to R5bn — roughly similar to the previous financial year if the R471m RMI scrip dividend is added back. Cash flows from operations were down marginally at R2.1bn, with dividends (factoring in the RMI scrip alternative) coming in slightly higher at R4.3bn.

The bottom line is that Remgro has a sizeable cash pile, which should provide some reassurance that the group can maintain or ratchet up dividend payments — even if prevailing tough economic conditions linger.