Johann Rupert. Picture: GALLO IMAGES/LOUISE GUBB
Johann Rupert. Picture: GALLO IMAGES/LOUISE GUBB

Not too long ago, shareholders in Reinet Investments might have wished for a better balance to the Rupert family-controlled company’s portfolio.

Reinet, despite its ongoing attempts at diversifying its investment base, has largely been seen as a proxy for its largest investment, British American Tobacco (BAT).

But right now shareholders can survey a far more equitable spread of investments in Reinet — although the manner in which this new balance was achieved was not triggered by inspired deal-making.

Rather, Reinet’s investment portfolio has been radically reshaped by the steady decline in BAT’s share price over the past six months.

In the past few weeks particularly, BAT has taken a beating on news that the US Food and Drug Administration is mulling a ban of menthol cigarettes in the US.

Over the past three months, Reinet’s share price has fallen 21%.

Electus Fund Managers co-head Neil Brown says this is entirely because BAT has fallen dramatically — by 38% in the past three months and by 24% in November alone.

It’s worth remembering that when Reinet listed in 2007, its large stake in BAT represented over 85% of its portfolio.

The sterling growth in BAT’s value over the past 10 years negated Reinet’s effort to build a more balanced portfolio.

Johann Rupert: De facto asset manager. Picture: AFP/Uli Deck/dpa Picture-Alliance
Johann Rupert: De facto asset manager. Picture: AFP/Uli Deck/dpa Picture-Alliance

Just five years ago, when the number of shares in BAT had been pared down to fund new deal flows, BAT represented 82.5% of the Reinet portfolio.

In March 2017, despite much diversification in the Reinet portfolio, BAT still represented 71% of the total investments.

But this year the BAT effect is being stubbed out. At the end of March Reinet’s 2.97% stake in BAT represented only 64% of the NAV of Reinet’s total portfolio.

Last week Reinet reported that further plunges in BAT’s share price meant that at the end of September its stake in the tobacco giant represented just under 57% of the total NAV of €4.8bn.

The FM estimates that with the subsequent weakness in BAT’s share price in October and November, there is a chance that the key tobacco holding will represent less than 50% of the portfolio value at the end of the third quarter of the year to end-March 2019.

The crimping BAT value does probably mean investors are now able to take Reinet’s other investment interests more seriously. Then again, increased focus on these smaller investments might be a double-edged sword.

Reinet appears to have made a promising investment with Pension Insurance Corp (PensCorp), which, with a value of €1.4bn, represents nearly 30% of the investment portfolio.

PensCorp — a specialist insurer of UK defined benefit pension funds — appears to be going great guns.

In the first six months of 2018 it wrote new pension insurance business with record premiums of £3.3bn (up from £1.9bn in the first half of 2017).

Profit before tax of £123m was posted, with after-tax profits registering at £99m.

Reinet CEO Johann Rupert commented that PensCorp’s new business pipeline in 2018 remained strong, with estimated new business premiums of over £4bn in the year to date.

Investor eyes will inevitably also be drawn to the other bits of Reinet’s portfolio.

In truth, there’s not much to inspire shareholder hopes here — it’s mainly a collection of investments into other specialised funds and private equity vehicles as well as property and mining interests.

Nothing here has performed with any real vigour, and any close scrutiny of this motley collection would most certainly increase the ongoing carping about the management and performance fees that accrue to Rupert (the de facto asset manager).

Brown says Reinet’s fee structure — 1% per year plus a 10% performance fee with a high watermark — is very high, especially as the group is not very active in its portfolio management.

The management fee for the interim period to end-September topped €23m (last year: €27m) compared with the annual dividend of €35m that was paid in September to shareholders. The immediate focus at Reinet seems to be on a share buyback programme — which seems prudent with the group trading at a hefty 35% discount to its intrinsic NAV.

The share buyback will placate jittery shareholders. But, of course, questions will be asked about why Reinet did not cash out at least some of its BAT shares when the share price was smoking hot.

Reinet trots out the standard line that the BAT holding is kept under constant review, considering the company’s performance, the industry outlook, cash flows from dividends, stock market performance, volatility and liquidity.

One can also understand that BAT’s generous quarterly dividend flows are very useful for Reinet — which has so far only passed a sliver of these distributions through to its own shareholders.

Officially, it seems Reinet won’t be cutting its tobacco habit any time soon.

Rupert noted in his half-year commentary that Reinet continued to take comfort from the underlying financial results, strong dividends and future prospects of BAT — including the investment in Reynolds American Inc, decreased US tax rates and increased focus on next-generation products.

Some market wags have even asked semi-jokingly whether Reinet might consider buying up more shares in BAT, if the share price retreats even further. It’s unlikely, but not impossible.

But for now, the determination with which Reinet sets about its share buyback exercise could be a telling statement about BAT’s ability to blaze a recovery.