Astoria buyout: diving for the JSE’s deep value

Cashed-out offshore investment company Astoria might finally be the key to unlocking value at RECM & Calibre (RAC).

Spearheaded by asset management heavyweights Piet Viljoen and Jan van Niekerk, RAC is an investment firm with a penchant for buying into unloved local companies.

RAC itself hasn’t enjoyed much market affection of late, dwindling from its 2016 high of R26 to its present R15 level.

It owns almost 80% of Astoria (which now comprises mainly cash), and is in the throes of making an offer to the remaining minority shareholders at 240c a share.

Before taking full control, RAC was instrumental in forcing the offshore investment company — founded out of Peter Armitage’s Anchor Capital stable — to liquidate its holdings and return a R12.82 a share dividend to shareholders.

RAC banked a not insubstantial R453m in the process.

Unfortunately, RAC’s success at Astoria has been overshadowed by two costly missteps in the form of investments in building supplies group Dawn and hapless diamond miner Trans Hex Group. The Dawn investment was unceremoniously wiped out, and Trans Hex, which has a main subsidiary under threat of liquidation, is probably wisely pursuing a delisting from the JSE.

At last count, RAC shares were offering a discount of almost 50% on the end-September 2019 NAV of R28.88 a share.

Ironically, it is Astoria that could be the catalyst for a rerating — even though the market might understandably be a tad wary of deep-value pursuits.

RAC executive Van Niekerk confirms Astoria will be transformed into a new-look investment company, though the deep-value theme will remain its central investment philosophy.

The process will entail ushering the bulk of RAC’s portfolio — aside from alternative gaming company Goldrush — into Astoria.

Astoria’s cash will be channelled into new investments, and RAC has already lined up a few opportunities on the beaten-down JSE.

"At the moment it is a great time for value investing … the valuations of JSE-listed companies are now below those of private equity investment valuations," says Van Niekerk.

It certainly will be the calibre of new investments that determines new-look Astoria’s fate on the JSE, simply because RAC’s existing portfolio is unlikely to generate much market interest.

The main holdings are an unlisted position in specialist retailer Outdoor Investment Holdings (the 33% stake is valued at R109m), and a 49% stake in private education venture Isa Carstens (R49m). There are also listed holdings in the form of JB Equity, which holds a controlling stake in listed Unicorn Capital Partners, and a minuscule holding in insurance counter Conduit Capital. Astoria will in effect become RAC Mark II.

While the morphing of Astoria might go largely unnoticed, the development will at least sharpen the focus on the old RAC listing and more specifically its 58.8% stake in Goldrush, which will effectively become a standalone listing. The "listing by default" exercise looks like it might also coincide with Goldrush paying its first dividend.

At the end of September, RAC valued its Goldrush stake at R1.3bn — in other words, about R25 a share, or 71% of the R28.88 a share NAV.

One could infer the market is applying a discount of about 40% on RAC’s Goldrush stake.

But this discount needs to be seen in light of the ongoing profit growth in alternative gaming formats like electronic bingo terminals (EBTs), limited payout machines (LPMs) and sports betting. What’s more, both JSE casino giants Sun International and Tsogo Sun have enthusiastically bought into these niches.

In the six months to end-September, Gold-rush was still going great guns with new EBT and LPM openings pushing revenue up 12% to R710m.

While the interim report did not disclose profit numbers, RAC’s annual report did state "sustainable" earnings before interest, tax, depreciation and amortisation (ebitda) for Goldrush at R350m for the year to end-March 2019.

The inferred value for Goldrush — which carries debt of about R500m — is about R2.1bn, which suggests an ebitda multiple of about seven times.

RAC’s interim commentary notes a multiple of nine times was applied to earnings. With slightly elevated debt levels in the business to fund the final rollout of the bingo properties in KwaZulu-Natal and the repurchase of shares, RAC’s equity valuation for Goldrush was R2.26bn.

Investors who believe the releasing of deep-value traps might be the one sure way of making profit on local stocks this year might well find the Astoria/RAC situation alluring.

While the new-look RAC (Astoria) will need time to find fresh traction, Goldrush will offer investors a meaningful slug of the vibrant alternative gaming market (especially since Phumelela has gone off course).

It is highly unlikely that Goldrush will need to raise fresh capital, so punters keen to latch onto a pile of alternative gaming chips will need to closely monitor developments between RAC and Astoria in the next few months.