Economy / 19 February 2018, 2:30pm / Amelia Morgenrood
JOHANNESBURG - The changing political climate in SA is a miracle in the making. For the first time in many years, there is interest in stocks that could outperform in a strong domestic economy. Despite the offshore component of Remgro, there is a high probability of outperformance if we do see a recovery in the South African economy.
Remgro is an investment holding company established in April 2000 after the restructuring of the former Rembrandt Group. It comprises a diverse investment portfolio across more than 30 companies and is chaired by Johann Rupert. They aim to invest in businesses that deliver superior earnings and dividend growth over the long term and only acquire significant interests in companies to have considerable influence.
The group’s interests consist mainly of investments in consumer products, banking, healthcare, insurance, industrial, infrastructure as well as media and sport. The company’s activities are primarily concentrated on the management of investments and the provision of support rather than on being involved in the day-to-day management of business units of investees.
The group’s listed investments contribute 81percent to its portfolio’s intrinsic value, of which MediClinic is the largest at 28percent. On a sector basis, it is most exposed to financials at 36percent through FirstRand, RMB and RMI. Remgro holds 23percent of Grindrod; although very small in their lives, the prospects for shipping rates have also improved lately.
Another investment showing an improvement is their 71percent stake in RCL Foods. After almost 10 years of not doing much, the share price has recently recovered very well and seems to be on a better growth path. RCL represents 7percent of Remgro’s net asset value.
Remgro also offers an entry point to attractive unlisted investments such as DFA, Air Products, Seacom, Wispeco and Business Partners, to name a few.
Given the significant listed component of its portfolio, equity market performance remains a substantial contributor to movements in Remgro’s intrinsic value over the short term.
The group has a significant domestic component to its portfolio, but the international part has become material, primarily due to the global expansion of MediClinic.
The company encountered headwinds in all its international operations but may soon be turning the corner. Investments in the healthcare industry usually are lower risk investments, due to the sector’s defensive nature and high barriers to entry. Positive structural drivers include an ageing population and increased rate of diagnosis, particularly for lifestyle diseases.
RCL Foods still has some severe challenges to surmount - especially the ongoing strain in the poultry market - but it has built a sufficiently lean and mean operational structure. The Rainbow Chicken business has been dramatically restructured, and a marked improvement in performance was evident in the last set of results. Other RCL brands include Selati Sugar, Supreme Flour, Sunbake Bread and Epol Pet Food.
The market share statistics presented in the company’s investor presentation make for surprising reading. RCL’s dog food brands hold a commanding 26.5percent market share, while the cat food brands have extended their share to 20.9percent. Yum Yum peanut butter owns 31percent; Nola mayonnaise 43.2percent; RCL’s sorghum brands 30.2percent; and Ouma rusks 47.1percent.
Perhaps the most crucial market share gain was in the poultry segment’s freezer-to-fryer area, where Rainbow soared from 23.7percent at the end of June 2016 to close to 40percent in the middle of 2017.
Remgro is a stable and diversified company with a proven track record of unlocking shareholder value with a reasonably low-risk profile. It has exposure to high-quality investments, led by shareholder-aligned management teams, which have credible growth prospects.
It is trading at an estimated 15 percent discount to its intrinsic value of around R268. Remgro remains a good option at R228 per share.
Amelia Morgenrood CFP®, BCom (Hons) Financial Planning; member of the South African Institute of Stockbrokers; portfolio manager and regional director.
The views expressed in this article are not necessarily those of the Independent Group.