The bottom line: This property is condemned
RMB Holdings and African Rainbow Capital under the investment microscope
Shrinking book value of RMH’s property holdings
Investors irked by the larger discount that RMB Holdings (RMH) offers these days on its underlying investments – mainly banking giant FirstRand – probably won’t want to dig deeper into the financial statements for the six months to end-December.
Much has been made of RMH’s tilt at building a meaningful property hub – an initiative that would give the holding company a rationale for its continued existence.
But the interim results show that the property investments posted a loss of R15-million, and – more worrying – that the book value of these real estate aligned positions have been reduced from R972-million in 2016 to R743-million.
The small print states that the value of the property investments were (re)stated after a R174-million impairment of (unnamed) associates in the interim period.Frankly, that’s a hefty impairment relative to the value of the property investments. If an impairment of similar scale was reported in a listed property venture shareholders might have hit the roof.
Fortunately for RMH this setback in the property thrust won’t really show up or cause too much dismay – not with the portfolio value still firmly hitched to the 34.1% stake in FirstRand. RMH directors argued earlier this month that the recent widening of the discount was “not a structural deviation from historical performance and can be attributed to changes in liquidity and volatility patterns on the JSE”.
Then again it’s difficult not to sceptically view an impairment that represents almost 20% of the value of the property book value. Certainly one might argue – even at this early juncture – that it’s understandable for some market participants to discount RMH’s ambitions to build a R10-billion property hub.What’s holding back African Rainbow Capital?
There are some in the market who believe that African Rainbow Capital (ARC) could be the Remgro of our times – a stable, deep-pocketed anchor investor, with impeccable BEE credentials to boot. If so, it’s not a view that has captivated many retail players in the market as yet, if the company’s share price performance is anything to go by.
While its intrinsic net asset value, as of end-December was R8.79, from R8.46 at listing in September, ARC’s shares on the JSE have steadily fallen to their present level of R6.65, implying a discount of about 32%. While all investment holding companies tend to trade at a discount to net asset value – like Remgro itself – the extent of the discount implies a certain level of unease out there. Perhaps it’s the wide array of unlisted investments, for which investors must take management’s word on how they arrive at their valuations.
According to ARC’s results, fair value is defined “as the price that would be received for an asset in an orderly transaction between market participants”.
That’s easy enough for listed investments.
For its unlisted portfolio, ARC says the primary valuation methodology will be the income approach, discounted cash flow, and comparisons against a market approach “where appropriate”. Here there is plenty of room to be subjective. ARC says “the General Partner (a wholly owned subisidiary of Patrice Motsepe’s Ubuntho Botho Investments) “will use its judgment to select the valuation technique most appropriate for an investment”.
Still, in its short listed life, ARC has attracted some fairly prominent shareholders – among them Old Mutual Global Investors, Absa Asset Management, Mazi Capital and Abax Investments.