Understanding the business of Remgro

Remgro Limited / About Remgro / Understanding the business of Remgro

Understanding Remgro’s statutory reporting on net profit

In order to understand Remgro’s results performance and cash generation allocation, one first needs to understand its reported results.

Remgro’s statutory reported net profit consists primarily of the following:

Consolidated results of its separately operated subsidiaries, the material ones of which include RCL Foods, Rainbow, Wispeco, Siqalo Foods and Capevin;
Equity accounted results of its investments in associates and joint ventures (equity accounted investees), e.g. Mediclinic, OUTsurance Group, CIVH, Heineken Beverages, Air Products and TotalEnergies;

Profit/loss on the realisation of investments;
Net impairment of investments;
Dividends received from investee companies classified as portfolio investments, e.g. FirstRand and Discovery;
Interest received;
Interest paid (if applicable);
Net corporate costs, including remuneration and other benefits paid to employees; and
Taxation.

Given its nature as an investment company and the substantial amount of cash held and managed, the management of treasury risks is regarded as very important, which is covered in the Chief Financial Officer’s Report.

Capital allocation – Remgro’s most critical function

At Remgro we consider financial capital as an expensive and finite resource and the thoughtful allocation of this resource is one of our most important functions. Our capital allocation process must be responsive to the dynamic environment that we operate in and appropriately weigh the risks and uncertainties that we observe in the market, with the returns that are available to be earned.

It is important to be disciplined in our allocation of capital, to monitor changes in our perception of risks and opportunities and, where needed, to take decisive action to adapt to the changing landscape. We also seek to maintain a balance of investments with varying maturity profiles and a notable part of Remgro’s track record of value creation is attributable to being able to balance our investments with a mix of young growth companies and more established cash-generating companies.

There are two parts to the capital allocation decision – where we source capital and where we deploy it – and the decisions on how to balance the sources and uses of capital are informed by forces internal and external to the Company.

As a holding company we obtain our capital from four potential sources: returns from underlying investments (dividends, fees or interest), disposing of investments, increasing borrowings or raising equity capital. In turn, we can deploy capital to four broad uses: undertake investments (new or follow-on, organic or inorganic), repay borrowings, pay dividends or repurchase our own shares. The following table sets out pertinent considerations regarding our capital allocation decisions:

Sources of capital

Returns from underlying investments (predominantly dividends)

Remgro considers cash generation, and the ability to deliver cash returns to shareholders, as a requisite feature from its underlying investments. While mindful that an investment’s development through the maturity curve may cause changes to the dividend profile over time, Remgro looks for investee companies to return cash to shareholders after providing capital for value accretive growth opportunities, reinvestment and maintaining a sustainable capital structure. Dividends from the underlying portfolio are the primary source of sustainable, long-term capital formation that feeds the capital allocation process.

Increases in borrowings

While Remgro’s underlying investees utilise appropriate levels of borrowings to optimise returns to shareholders, Remgro adopts a cautious approach to overlaying further leverage at the holding company level. While the lumpiness of corporate actions may from time to time cause Remgro to utilise borrowings, this will be done in a manner that is mindful of business and interest rate cycles. Remgro will seek to maintain a conservative approach to borrowings at the centre in order to optimise costs and avoid potential structural inefficiencies.

Divestments

While many of Remgro’s investments represent long-term, core holdings, some level of asset velocity in the portfolio is healthy and Remgro continues to evaluate where divestments are supportive of its long-term investment thesis. Remgro’s portfolio holdings represent sources of shorter-term liquidity and in this regard divestment decisions are informed by market conditions, asset prices and opportunities to redeploy capital.

Equity issuance

To the extent Remgro has a requirement for capital, whether to pursue growth opportunities or otherwise, that is in excess of its internally generated funds, its liquid sources of capital or prudent borrowing appetite, Remgro will look to raise equity capital from shareholders.

Uses of capital

Investments

As an investment company, over time Remgro’s primary objective is to deploy shareholders’ capital into value accretive investment opportunities and to manage those investments in a manner that will optimise stakeholder value. In this respect, Remgro has a bias towards organic or brownfields opportunities, either with partners or within the investee companies, where the opportunity exists to internally generate goodwill. Remgro also remains mindful of inorganic growth opportunities through acquisitions, at investee companies or at the Remgro level, and in this respect Remgro’s appetite is shaped not only by the opportunities available to it, but also the external environment, including the regional economy, global macroeconomics, geopolitics and asset prices.

Borrowings

As noted before, Remgro adopts a conservative approach to borrowings at the centre and where growth opportunities or corporate actions merit the use of borrowings, Remgro will look to responsibly reduce such exposure over time.

Dividends

Remgro believes that a sustainable cash dividend has always been an important feature of its investment thesis and therefore it remains the priority mechanism through which cash is returned to shareholders.

Share repurchases

Remgro will dynamically use share repurchases in instances where the opportunity exists to purchase shares at a sufficient margin below Remgro’s internal assessment of the value of the portfolio and when Remgro has capital available in excess of other priorities, including value accretive growth initiatives in the portfolio, reduction of borrowings and the payment of dividends.

Building on its stated commitment to integrate Environmental, Social and Governance (ESG) principles and corporate sustainability into its core strategy, Remgro remains dedicated to responsible stewardship in asset management and new investments. The goal is to deliver sustainable financial returns, while endeavouring to create positive social and environmental impacts. Remgro’s ESG Investment Framework provides guidelines for capital allocation, aiming to foster environmental, social and economic change throughout its ecosystem.

Investment company

Remgro strives to enable investee companies to fulfil their growth strategies and targets that create value for all stakeholders over the long term. The support we provide, irrespective of our level of influence, includes:

Strategic input and “thinking partners”
Capital allocation
- Financial capital to support growth strategies
- Human capital in management support
- ESG goals, principles, and disclosure guidance
Dealmaking ability

Treasury services (as required)
Internal audit
Risk management services (as required)
Formal and informal networks for broader opportunities and benefits

Supporting our operators

While dealmaking at the holding company level can create value for shareholders, the performance of the underlying investments is the primary value driver. This is why Remgro places great emphasis on retaining market-leading operators across its portfolio and partnering with those teams and individuals to deliver shareholder returns.

Measuring success

Remgro further measures its performance in terms of the increase in its intrinsic net asset value over time. This measures the growth in the value of the various underlying investee companies, measured by listed market value or, in the case of unlisted investments, applying the principles of IFRS 13: Fair Value Measurement. Refer to the Chief Executive Officer’s Report for a detailed analysis of Remgro’s intrinsic net asset value, briefly citing the differences between an IFRS 13 valuation and a transactional valuation.

We also believe that over the long term, intrinsic value is strongly correlated to cash flow and earnings generation and we complement our measurement of intrinsic value, with additional focus on cash and earnings generation as metrics that are objectively measured and transparently reported.