Remgro, a South African investment holding company led by Johann Rupert, has seen its share price increase by 22% over the past year. In contrast, its intrinsic net asset value (iNAV) has only grown by 4.6%. This divergence has led to a narrowed discount to iNAV, but it still trades at a 33% discount. To understand this, it's essential to grasp the concept of iNAV, which represents management's view of the company's assets' worth, net of debt and tax.
The iNAV is a crucial metric for investment holding companies like Remgro. It provides insight into the company's asset valuation, allowing investors to assess its performance. Remgro's iNAV per share stands at R305.80, while its share price is around R206. This 33% discount has been as high as 40% previously, indicating that the market has become more optimistic about the company's prospects. However, rival Sabvest trades at a significantly lower discount of 12%, raising questions about the differences in their capital allocation strategies.
A key factor contributing to the discount is the composition of Remgro's portfolio. The company's listed assets, such as OUTsurance, Rainbow, and RCL Foods, account for 34.2% of its iNAV. Investors can directly buy these assets, reducing the appeal of investing in Remgro. In contrast, Sabvest's portfolio is primarily composed of unlisted assets, making it more challenging for investors to access them directly. This difference in portfolio composition contributes to the structural difference in discounts between the two companies.
Remgro's dividend policy also plays a role in the market's perception. Despite trading at a substantial discount to iNAV, Remgro paid a special dividend of 550 cents per share, in addition to the ordinary dividend of 595 cents per share. This move sends two messages to the market: that Remgro appears to be short on attractive investment opportunities and that management lacks conviction in their iNAV. In contrast, Sabvest frequently uses share buybacks to invest in its own shares at a discount to intrinsic value, helping to maintain a lower discount.
The shape of Remgro's iNAV has changed, with Mediclinic becoming the largest contributor to group headline earnings. The company's decision to take Mediclinic private has reduced the discount, as investors can only access Mediclinic through Remgro shares. Additionally, Remgro's cash holdings have increased significantly, contributing 12% to iNAV, up from 5.1% in the previous period. This change in iNAV composition has helped narrow the discount.
The market's reaction to Remgro's increased cash holdings is positive, as it provides a clear and easily realizable asset. However, the company's approach to paying special dividends instead of repurchasing shares may lead to a reduction in cash holdings over time. This could result in an increase in the proportion of listed and unlisted assets in the iNAV, potentially widening the discount. In contrast, share buybacks would reduce the number of shares in issue and eliminate cash from the balance sheet.
Remgro's focus on paying large dividends rather than repurchasing shares may impact its ability to sustain the narrowed discount. While the company has generated strong returns in the past year, it remains to be seen whether it will adopt a more shareholder-friendly approach, such as share buybacks, to maintain a lower discount to iNAV. The Finance Ghost provides insights into Remgro's current share pricing and capital allocation strategy, highlighting the importance of understanding iNAV and its implications for investment decisions.
Key points
- Remgro's 33% discount to iNAV is still significant, despite narrowing from previous highs.
- The company's capital allocation strategy, including its focus on dividend payments, contributes to the market's perception and the discount to iNAV.
- Rival Sabvest's 12% discount to iNAV raises questions about the differences in their investment approaches and portfolio compositions.
