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Remgro Added to Buy List

Vestact's local portfolios have had a tough few years. A number of our preferred stocks have really struggled. One has even gone down the drain (Steinhoff). There have been so many landmines to tread on, and investor sentiment on the JSE is very gloomy. However, we must go on searching for opportunities. Our newset idea is to lean towards diversity. We have decided to add Remgro to the list of Vestact recommended stocks.

Remgro is a listed investment holding company that comes out of the Rupert family holdings. It's the South African sister company of Richemont, the half-brother of Reinet and a distant cousin of that ugly British American Tobacco. Let's take a look at the Remgro portfolio. This table shows sales contributions from the different businesses.



As you can see, the stakes in financial stocks RMH and FirstRand are the most dominant. Remember, RMH owns 34% of FirstRand and is currently using the dividends to buy property assets around the globe. FirstRand is such a quality operation, one of the globe's most innovative banks. It really stands to benefit when the South African economy turns. Even if South Africa is downgraded further by Moody's, we expect the local banks to only take a modest hit. Owning Remgro means that you are not fully exposed. It is about mitigating your risk in this environment.

RMI is another high quality financial services industry asset run by the highly regarded Herman Bosman (he also runs RMH). RMI owns a big chunk of Discovery, which we know well. Another jewel is the almost fully-held Outsurance, which has been a highly successful disruptor in the short-term insurance market for years. Another holding is MMI, which has been under pressure, but is under new management. Hastings is a UK insurer, and may have Brexit risk, but is growing market share with a slick new digital model that emulates Outsurance. RMI trades at a discount to its net asset value (NAV), so it is currently implementing a share buyback scheme worth R2 billion.

Hospital group Mediclinic is another big holding, and one that has performed very poorly lately. It is still a good asset, and owning a few more via Remgro is not a bad idea.

Another 18% of Remgro's earnings come from consumer-facing companies. Unilever (South Africa) is an unlisted food and consumer goods giant that is going through a restructure. Remgro is selling this business back to Unilever International in return for Unilever's spreads business and R4.9 billion in cash. The spreads business should integrate well within the distribution networks of RCL (formerly Rainbow Chicken). Everyone needs food (and drinks seemingly through Distell). Middle-class consumer demand won't stay depressed forever.

Take a look at the pie graph, which shows the profit mix.



The other group investments are relatively small but some of them are very exciting. Remgro owns 51% of CIV which holds stakes in Dark Fibre Africa and Vumatel. That now has an enterprise value of R10 billion. Fibre networks in Africa are still coming off a low base. Their customers are the telecommunications companies. Even the "wireless" guys like Rain need to leverage off fibre in the ground. I expect this to become more significant. They also own 30% of Seacom.

Some residual Industrial assets in the portfolio have been battling, but their half-stake in oil refiner and distributor Total South Africa does well.

We think that the diversity of Remgro is a positive. They are sitting on R13 billion in cash, waiting for opportunities.

The share price, as expected, has lagged since 2015. But it hasn't done nearly as badly as many others. The discount to NAV is around 17%. It trades at 13.5 times earnings and pays out dividends at a current yield of 2.66%.



The management is solid. CEO Jannie Durand is highly regarded and we know that non-executive chairman Johann Rupert keeps a close eye on things. His conservative instincts have prevented Remgro form wading into too many misguided investments. It's not that they never make mistakes (they bought Grindrod at a bad time, and funded the purchase of Al Noor) but because they are so big, the impact is not huge. With a market capitalisation of R106 billion we think Remgro would be a good addition to your portfolio. Let us not forget that our biggest holding, Naspers, is also an investment holding company run from the Cape.


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