OPINION: A start-up to ride out the storm

JOHANNESBURG - Shareholders’ value is quintessential. 

This old man lived through another effective pandemic in the early 1980s. The massive onslaught on global inflation saw the global economy and equity markets behaving in a very similar way to what we see today.

As a young mining analyst, I was aghast when our fund managers were instructed by our main “makhulu” to sell all the then-listed De Beers shares in June 1982 at the bottom of the market, with no understanding of shareholders’ value.

With that in mind and in light of the current circumstances, I have decided to start a business. Yes, I know the commissioner of the SA Revenue Service (Sars) last week said only one out of 100 start-ups are successful.

I did not want to go through all the schlep of establishing a company from scratch and the extremely time-consuming processes. But I wanted a successful business. Remgro is my new business. 

Remgro as a business ticked all the dots of requirements for my business. I wanted to pay a fair value for the assets and, if possible, pay no more than the cost of the assets.

Firstly, I had to calculate Remgro’s effective holdings in companies held through its holdings in RMI Holdings. I also had to make provision for the unbundling of RMB Holdings where Remgro shareholders will receive about seven RMB Holdings’ shares for every 10 Remgro shares held. I have also taken into account a provision for capital gains tax of R4.9 billion.

I used three methods for an indication of fair value of Remgro’s assets:

The first method involved the calculation of Remgro’s effective shareholders’ interest. Where obtainable, the effective shareholders’ interest of each of the direct and indirect (through RMI) holdings was calculated using the latest available financials and exchange rates in the cases of Mediclinic and Hastings. The book value of assets were used where shareholders’ interest was unobtainable. The total value post the RMH distribution amounts to R148 per share while the RMH distribution itself amounts to about R37 per Remgro share - therefore a total shareholder value of R185 per Remgro share.

With Remgro’s share price at about R143 per share at Friday’s close, it means that Remgro is trading at a discount of 22.7percent to the underlying shareholders’ value. More importantly, when Remgro goes ex-div RMH in June and Remgro’s share price adjusts by only R37, Remgro’s total shareholders’ value will drop to R148 per share and its share price will fall to R106 per share. It will result in the discount of the share price to the underlying shareholders’ value opening up to 28.3percent.

I estimate Remgro’s total consolidated debt at around R43 per Remgro share with more than 70percent of that attributable to Mediclinic’s debt. So, the value of a Remgro share even after subtracting the debt from the shareholders’ interest ex-RMH distribution will be virtually equal to the ex-RMH distribution share price.

The two other methods that I used are intrinsic values, where the latest share prices of the direct and indirect holdings are used to determine Remgro’s sum-of-the-parts value, and book values, where the effective costs of the direct and indirect holdings to Remgro are used. The valuations of R188 and R187 cum RMH distribution are in the ballpark of the value based on shareholders’ interest.

So, yes, I get Remgro’s assets at a discount of more than 28percent.

The market in Remgro shares is highly liquid. When I disagree with, where and how the business is managed, where it is heading or if my personal circumstances have changed, I can sell my interest without avail and at prevailing market prices.

On a look-through basis whereby Remgro’s effective holdings in companies via RMH and RMI are taken into account, Remgro’s operating assets fit my lifestyle. Most of Remgro’s assets have long track-records and are already profitable and provide a decent return on the net worth of the assets. Remgro’s own track-record is outstanding.

I will share in the profits of assets that profit from my spending on essentials. Medical aid through Discovery, medical care and hospitalisation through Mediclinic, banking through FirstRand, asset management through Momentum Metropolitan, my favourite tipples through Distell, basic foodstuffs through RCL and Siqalo, fuel through Total, telecoms and information technology through CIVH (Vumatel) and Seacom, which provide high-capacity local and international fibre-optic connectivity, internet and cloud services, and TV services via e.tv.

Yes, you can start your own business for less than R150.

The management of my (Remgro) assets is in the hands of competent teams and executives.

Ryk de Klerk is an analyst-at-large. Contact rdek@iafrica.com. The views expressed above are his own. He has a direct interest in Remgro, but no other companies mentioned. You should consult your broker and/or investment adviser for advice.

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