Amelia Morgenrood.
JOHANNESBURG - When the rand weakens, we tend to look more carefully at rand hedge shares. At PSG we maintain our overweight call on Reinet, primarily due to our view on the group’s largest investment, British American Tobacco (BATS), and the attractive discount that the group trades at to its intrinsic value.

Reinet was established in 2008 when the former Richemont changed its legal form to that of a partnership limited by shares and adopted the name Reinet Investments, an investment vehicle. The principle way of evaluating an investment company is to look at the total underlying investment value, and, of course, the prospects of these investments.

The share is trading at a 36percent discount to our valuation of its sum of the parts. The group’s largest investments include BATS, which makes up 63percent of the group’s portfolio, Pension Corporation (Pension Corp) with 25percent, private equity and related partnerships with 14percent. The movement in exchanges rates and BATS share price will dominate movements in the share price, given the size of investment in the business.

Pension Corp should sustain its growth over the medium term as tightening regulation, volatile market conditions and low gilt yields provide incentives for companies to reduce the risk on their balance sheets.

According to the results for the year ended March 31, 2018, the net asset value (NAV) of Reinet declined by 14.6percent to 26.17. The decline in NAV was largely due to the 22percent decline in the BATS share price and adverse currency movements. This was partly offset by an increase in the value of Pension Corp.

BATS - 63percent of NAV:

Reinet holds 68million shares, representing around 3percent of BATS issued share capital. BATS share price was impacted by regulatory concerns emanating from the US where the FDA proposes to reduce nicotine content to non-addictive levels. Management said they are comfortable with BATS financial results; dividend flows, future growth prospects supported by the Reynolds investment, declining US tax rates and an increased focus on next-generation products.

Pension Corp - 25percent of NAV:

Pension Corp provides risk management solutions to defined benefit funds in the UK. Pension Corp wrote new pension insurance with premiums of £3.7billion (R65.68bn), up from £2.6bn in the previous year. The embedded value for Pension Corp increased by 13percent, which supported a 11percent increase in the value of Reinet’s holding to 1.3bn (R20.29bn).

Private equity and related partnerships - 14percent of NAV:

The group’s investment in this segment declined to 736million (2017: 780m). Trilantic Capital Partners, focusing on private equity in North America and Europe, declined by 10.8percent. The Asian focused funds declined by 2.7percent to 177m.

Other investments - 4percent of NAV:

This division comprises of SPDR Gold Shares, Selecta Biosciences, US land development and mortgages, diamond interests and other investments. The value of Reinet’s investments in these assets contracted 32.1percent to 207m.

Reinet management guidance

Reinet will continue to focus on investing to achieve long-term NAV growth. Management believes rising interest rates and declining support from the central bank is likely to add more risk and volatility to capital markets. BATS is optimistic about its Next Generation Products and will continue to focus on its potentially reduced-risk product space. BATS expect market share gains and improved operational efficiencies through its Reynolds acquisition.

Pension Corp continues to see strong interest in bulk annuities. Their focus is on growing the business in a secure, sustainable and focused basis. The management of Pension Corp maintains that the business is in a growth phase and have raised additional debt and equity capital to support the expected increase in demand.

Amelia Morgenrood BCom (Hons) Financial Planning, Member of the South African Institute of Stockbrokers. Portfolio Manager, Regional Director Faerie Glen Stockbroking & Financial Planning.

 The views expressed here are not necessarily those of Independent Media.