African Rainbow Capital (ARC) Investments, the empowered investment company founded by Patrice Motsepe, is aiming to further narrow the discount between its listed valuation and its intrinsic net asset value (INAV).
Like most investment holding companies, ARC Investments listed share price trades at a discount to its book value. The group’s share price of R7.14 is about 28% lower than its INAV per share, which at end-December was estimated at R9.88.
That is a substantial improvement on the 45% discount to INAV the group was trading at in early September 2022, when the listed share price was R5.51 vs a per share book value of R10.06. However, the group’s co-CEO, Johan van Zyl, says the plan is to narrow that discount further to 10%-20%.
“We're aiming for between 10% and 20% — that’s where we would like to be,” Van Zyl told Business Day on Thursday after the group published its results for the six months to end-December. “We think over the next year or so ... we’ll be there in about a year from now.”
One reason for the narrowing of the discount was the progress by ARC Investments in reducing the annual fee it charges to manage its more than R13bn portfolio of investee companies. The management fee for the six months to end-December dropped to R37m, down from R115m for the same period in the prior year.
Van Zyl said the reduced fee structure, coupled with a portfolio optimisation strategy that saw the group dispose of noncore assets while investing more in strategically aligned portfolio companies like TymeBank, should contribute further towards closing the gap between the intrinsic and market values.
“As [more mature portfolio companies] start paying dividends it should narrow,” Van Zyl said, adding that Remgro, which is invested in listed entities such as Distell and Mediclinic, trades at a roughly 40% discount to its underlying value.
“We should trade at a smaller discount than them,” he said, alluding to the plethora of non-listed assets in ARC Investments’ portfolio of 48 companies.
The unlisted portion of the ARC Fund, which is accessible through ARC Investments, now comprises 88% of its portfolio. About 69% of the portfolio has also reached break-even level or is at what the group regards as a “mature business stage”.
ARC Investments said in its interim results that the intrinsic value of its underlying portfolio stayed more or less static in its financial first-half due to SA’s bleak economic backdrop.
The closing balance of its investment in the ARC Fund, a portfolio of companies that constitute the group’s asset, increased 0.2% to R13.272bn at end-December 2022, from R13.242bn at end-June 2022.
“The diverse investment portfolio has shown resilience in a challenging macroeconomic environment,” said Johan van der Merwe, co-CEO of ARC Investments. “Our efforts to rationalise and reposition the portfolio also achieved good traction during the period.”
While the value of the group’s portfolio remained largely unchanged in the period, it said this did not adequately reflect the value of its efforts to consolidate and optimise its investments.
In total, the group disposed of four investments during the financial half-year with another being disposed of after the reporting period. It also allocated more capital to those it viewed as strategically important.
ARC Investments, through the ARC Fund, made acquisitions of R1.096bn in its financial first-half, while disposals totalled R1.132bn.
Offloaded investments included Afrimat, Humanstate, PayProp, Capital Appreciation and Mooiplaats Coal Holdings, which was a subsidiary of ARC Services.
The acquisition side of the portfolio optimisation strategy was focused on strengthening the group’s financial services portfolio, particularly in the realm of fintech. That resulted in investments in TymeBank, Tyme Global and Arch Emerging Markets, as well as a small investment in mining services company SMS Holdings.
ARC Financial Services Investments also acquired a minority holding in Optasia, a provider of airtime credit services to prepaid mobile subscribers in more than 30 countries with more than 88-million monthly customers.
The result of these transactions reduced the group’s exposure to mining to 11.7% of the ARC Fund from 14.2% before, while the weighting of financial services increased to 30.9% from 28.3% .
Low-cost data provider Rain remains ARC Investments’ most valuable asset, with its value unchanged at R3.635bn, accounting for 26.6% of the fund. Rain remains on course to deliver ebitda (earnings before interest, taxes, depreciation and amortisation) of more than R2bn for the year ended February 2023, the group said.
The group’s effective investment in TymeBank, through the ARC Fund and ARC Financial Services Holdings, is R1.924bn. This follows a valuation adjustment on December 31 to reflect the $60m capital raise — half of which was contributed by the ARC Fund — that was required to fund the acquisition of SME-lender Retail Capital.
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