Some 21 years after the turn of the century, there are fewer holding companies in the JSE today than in the two decades before 2000.
Unfortunately, the problem with your shares trading at a discount from the market value of your underlying investments persists after all these years.
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No one has come up with a plan to convince shareholders that large holding companies are really valuable and deserve more credit.
The only proven method of unlocking trapped value is to distribute the shares of the underlying companies directly to shareholders.
While the unbundling of publicly traded subsidiaries immediately unlocks shareholder value by closing the gap between market prices and net asset value (NAV), holding companies often have reasons not to go down this path.
Prosus and Naspers
A striking example of the problem is the billions of dollars trapped in the large investment Naspers and Prosus own in Tencent.
Recent figures show that Prosus is trading at a 47% discount to the value of its underlying investments and net cash, while Naspers is trading at an even greater discount to interest.
Prosus issued a comprehensive calculation of its net asset value when it published its interim results. At the end of September 2021, the market value of its listed investments amounted to $ 177.8 billion, of which Tencent was $ 164.3 billion. His unlisted investments were valued at $ 37.8 billion and he had a net cash of $ 3.1 billion.
The total net asset value per share was R299 per share, compared to the closing price of R230 per share on the JSE at the time.
While the divestiture of Tencent would bring shareholders a net profit of R1,000 per share, the total amount of “hands-off” value of this is staggering: R1,535 billion.
Naspers was trading at R565 at the end of September, compared to its NAV of R 325 per share. Naspers noted that this calculation is based on Prosus’s net asset value and not on the latter’s share price.
Naspers and Prosus are unwilling to part ways with Tencent, stating time and again that Tencent remains an investment with good prospects. It is also important to have the assets and influence of such a large investment behind Prosus in its quest to grow its diverse interests in consumer internet businesses.
A look at Prosus’s annual report and subsequent interim results show that the group’s new interests are still developing a lot, and this takes a long time and costs a lot of money.
Remgro’s management has probably heard the separation argument more often and for much longer than they’d like.
Its listed investments (such as Mediclinic, RCL Foods, and RMI, as well as some FirstRand and British American Tobacco) and unlisted assets (including Total and PG Glass) have been discounted by investors for years.
At the end of the last fiscal year, Remgro was trading at a 35% discount on its NAV, according to a calculation included in its results for the year until June 2021.
However, Remgro restructures its investments from time to time and has unbundled the underlying holdings several times.
The first and foremost was the listing of Compagnie Financiere Richemont in 1988. At that time, Richemont’s shares were distributed to shareholders. Remgro also moved its interest in British American Tobacco (BAT) to give investors more direct access and minimize any discounts within a holding structure.
BAT shares were distributed to shareholders in 2008 and BAT SA was registered as a separate entity with the JSE. Remgro also loaded Reinet Investments (Reinet) with some BAT shares and offered investors the opportunity to invest in Reinet in 2008.
Reinet also trades at a discount to its net asset value. The balance sheet at the end of September 2021 placed the net asset value at € 25.95 per share compared to the share price of € 16.20 at that time.
Remgro spun off its stake in the Trans Hex diamond mine in 2010 and its shares in Rand Merchant Bank Holdings in 2011.
Dawid Meades, a veteran financial writer and stockbroker, says to remember that Remgro used to have an even more complex holding structure years ago, with no fewer than four publicly traded holding companies, excluding listed operating investments within the stock market. then Rembrandt Group.
“There were a lot of holding companies at the time,” says Meades, now a Millhouse Wealth consultant. “Large mining houses can be considered to be holding companies that had interests in their listed operating mines, while Anglo American also had a large portfolio of industrial assets.
“All of these holding companies were dissolved and only a few were left,” says Meades.
It says that investment or control structures also existed between banks and life insurance companies, while Barlow Rand and Anglo American Industrial Corporation (Amic) were examples of industrial holding companies, mostly always trading at discounts on their liquidation value.
PSG Group can be regarded as the newest holding company in the block, but it is seen as aggressively increasing value and unlocking it for shareholders.
Still, investors are unwilling to pay the full price for management skills and track records.
PSG traded at a 27% discount last week, based on its daily NAV update (available on its website).
PSG has unbundled as much of its portfolio as has seemed appropriate from time to time. It has only small stakes in Capitec Bank, Zeder and Curro, and a larger stake in PSG Konsult.
Interestingly, PSG’s share price jumped to a new high in May 2020 when it announced the divestment of 28% of the shares it held in Capitec, retaining just over 4% of the bank.
It is difficult to assess whether portfolio companies offer opportunities for investors or not. Buying something at a discount is attractive, except when the prospect of selling it at a discount is unavoidable.
However, stockbrokers operating for their own accounts, private investors, and active fund managers have been making money investing in holding companies for years.
Tracking changes in portfolio company discounts over time – buying when high and selling when low – offers low-risk returns.
Then there is the sudden windfall when a holding company distributes some of its interest to shareholders.
Hear Simon Brown’s interview with PSG Wealth Old Oak’s Schalk Louw on this MoneywebNOW podcast (or read the transcript here):