Hosken Consolidated Investments (HCI), the black empowerment investor with stakes in Tsogo Sun Hotels and Tsogo Sun Gaming, reported a strong turnaround in its fiscal first half-year, though it continues to be bedevilled by a share price that trades at a glaring discount to its net asset value (NAV).
Like other investment holding companies — even those at the scale of Naspers and Prosus — HCI’s total market capitalisation is worth less than the combined value of its underlying assets, which extend beyond gaming and leisure and include majority holdings in Frontier Transport and eMedia Holdings.
At R78.05 as of 3.32pm on Thursday, HCI’s share price trades at a near 50% discount to the net asset carrying value per share of R154.81 reflected in its latest interim results. That illustrates the difference between HCI’s book value on a per share basis relative to where the counter trades on the JSE. The reason simply that investors would rather buy into HCI’s underlying assets directly than do so via an investment holding company that comes with another layer of management costs.
“HCI does have potential and much of that is clearly derived from the ongoing recovery in the Tsogo assets,” said Anthony Clark, an independent analyst at Smalltalkdaily Research. “But it’s an unwieldly structure [and] I’d rather own Tsogo Sun and Tsogo Gaming directly. The other stocks, like Frontier Travel, Deneb and eMedia may have attraction but they’re hellishly illiquid. Do I really want to own HCI to get hold of those illiquid assets? The answer is probably no.”
HCI delivered an aftertax profit of R492.17m for the six months to end-September 2021, bouncing back from the R759.69m loss reported in the previous interim period. As was the case in May when it reported its full-year results, HCI opted to withhold dividend payments in the first-half period. That prompted a 2.4% drop in the share price within two hours of HCI’s interim results being published, meaning the turnaround in its results did little to alleviate the group’s discount dilemma.
While HCI’s discount has narrowed from above 60% in the past year thanks to the gradual opening up of hotels and casinos, it is still well above where any investor would like it to be. The easing of Covid-19 restrictions helped deliver a strong fiscal first-half turnaround in HCI’s gaming segment, which chiefly consists of stakes in Tsogo Sun Gaming, Galaxy Bingo and Vukani Gaming. Headline earnings for the segment rose to R157.56m, a solid recovery from the loss suffered in the previous half-year period.
Hotel operations, though, remain under pressure with the segment delivering a headline loss of R59.42m in the fiscal first-half. HCI’s coal mining, property and transportation segments all delivered headline profits, though this was countered by headline losses in its oil, gas and palladium prospecting divisions.
But like PSG, which was eventually forced to unbundle its Capitec stake to unlock value for investors, HCI may have to do more to convince sceptical investors that its management team can put their capital to work more effectively. However, Clark says this is unlikely since CEO Johnny Copelyn, now in his seventies, has indicated he has no intention of stepping away from the business.
“Given that HCI is a conglomeration of disparate industrial assets, many trading at substantial discounts to NAV, there is very little remedy to unlocking value in the near term given the current management structure,” Clark said.
“If they were just to unbundle Tsogo assets you’d pretty much get everything else for free. At some point the market will realise the situation is untenable.”
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