The Finance Ghost: The lowdown on investors loving property again, and anything-but-tasty Remgro

22 Sep 2024

In the middle of the lost decade in South Africa, practically any listed property company – yes, even the bad ones – could wake up in the morning, phone a corporate adviser and raise hundreds of millions or even billions of rands in a matter of hours.

‘Accelerated bookbuild” was the term that filled Sens with activity and the pockets of advisers with fees. Property companies ran off and deployed that capital in all kinds of places, including deals in developed markets that turned out to be mistakes.

The extent of capital-raising in the property sector is an excellent barometer for where we are in the cycle. As things start to improve, the better funds (like Vukile and now Lighthouse Properties) can raise capital in oversubscribed raisings. When sentiment starts to get too frothy, you’ll see the less-successful funds trying to get their hands on whatever capital they can.

For now at least, we are still in the healthy phase. Lighthouse announced a R500-million bookbuild on Thursday, 19 September, and increased that number to R1-billion just a few hours later. Even at that level, it was oversubscribed. The R1-billion was raised at a share price representing a 3.1% discount to the closing price the day before.

The market loves the strategy in Iberia. I’m old enough to remember when the market loved the strategy in the UK for many funds. Be cautious and watch closely for signs of unhealthy capital-raising activity.

Remgro’s fruit salad leaves a bitter taste

Remgro’s share price is down 17.5% in the past five years. Before you lay all the blame at the door of the pandemic, I must point out that it’s down 6% in the past 12 months. The GNU-inspired rally helped Remgro a little earlier this year, but the overall story is one of market disappointment.

Remgro has a wide portfolio and no clear strategy. Though it is true that investment holding companies tend to be diversified, there’s a point at which the market simply doesn’t know where to look any more.

To make it worse, some of Remgro’s largest positions are in listed companies that you can invest in directly, so it doesn’t even have the benefit of offering access to primarily unlisted assets. And where assets have moved from listed to unlisted with the help of Remgro, well, let’s just say that the track record is patchy.

For example, one of the biggest disappointments has been the aftermath of the Distell-Heineken deal. Before that transaction, Distell contributed R751-million in profits to Remgro. In the latest period, there’s a loss of R297-million from Heineken Beverages, partially offset by a R65-million positive contribution from Capevin.

Read more: Heineken and Vumatel parent deal plunges Remgro earnings severely

Heineken Beverages is by no means the only headache. Fibre business CIVH swung into a loss of R75-million this year after a profit of R206-million last year.

One of the problems is higher competition in that market, which isn’t an issue that the GNU or better interest rates will solve. If anything, it will get worse.

The good news? The best was RCL Foods, which more than doubled headline earnings. Of course, you can just own shares in RCL Foods directly. Next up is TotalEnergies, which is private at least, but earnings are volatile and the recovery this year is largely due to a terribly weak base. The third-best year-on-year move was in Outsurance, another separately listed group that you don’t need to own via Remgro. You see the problem here?

This fruit salad has some good stuff and leftovers that should have been thrown out days ago. The resultant taste is anything but delicious, with the intrinsic net asset value per share up by just 1%. To try to improve the taste, Remgro has sprinkled sugar in the form of a 10% increase in the dividend. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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Remgro’s fruit salad leaves a bitter taste