CHIEF EXECUTIVE OFFICER’S REPORT

Remgro’s intrinsic net asset value per share increased by 6.1%

JANNIE DURAND
CHIEF EXECUTIVE
OFFICER

INTRODUCTION

Remgro’s intrinsic net asset value is the best indicator of the value added for our shareholders. Over the year under review the intrinsic net asset value per share has increased by 6.1% from R288.89 at 30 June 2015 to R306.44 at 30 June 2016. Over the same period the JSE all share index has increased by 0.8%, while Remgro’s share price decreased by 0.5%. Refer to the tables below where the relative performances are set out in more detail.

This report aims to provide shareholders with a better understanding of the methodology behind the calculation of the intrinsic net asset value, especially relating to the valuation of our unlisted investments. A summary of our investing activities during the year under review is also provided.

INTRINSIC net asset VALUE

The intrinsic net asset value of the Group includes valuations of all investments, incorporating subsidiary and associated companies and joint ventures, either at listed market value or, in the case of unlisted investments, at directors’ valuation. The net assets of other wholly owned subsidiary companies consist mainly of monetary items (included at book value) and property (included at fair value).

The following factors are taken into account in determining the directors’ valuation of unlisted investments:

  • Market value and earnings yield of similar listed shares, taking into account that the marketability of unlisted investments is limited and, in some cases, also the tradeability
  • Growth potential and risk
  • Underlying net asset value
  • Profit history
  • Cash flow projections

 

 

It is Remgro’s policy not to apply a control premium to the valuation of investments where it holds a majority interest. Where Remgro holds a minority interest a 10% tradeability discount is applied.

Remgro’s unlisted investments were valued as follows:

Air Products

The discounted cash flow method was used to value this investment. No tradeability discount is applied to the valuation due to the 50% shareholding.

Business Partners

The net asset value was used.

CIV group

The discounted cash flow method was used.

Kagiso Tiso Holdings

The annual external valuation was used.

PGSI

The discounted cash flow method was used.

PRIF

The annual external valuation was used.

eMEDIA

A comparable market price was used.

Seacom

The discounted cash flow method was used.

Total

The discounted cash flow method was used.

Unilever

The discounted cash flow method was used.

Wispeco

The discounted cash flow method was used.

Refer to the table below for a detailed analysis of Remgro’s intrinsic net asset value.

RELATIVE PERFORMANCE OF INTRINSIC NET ASSET VALUE AND REMGRO INTERNAL RATE OF RETURN (IRR)

The tables below compare the relative performance of the Remgro intrinsic net asset value per share with certain selected JSE indices. Dividends paid by Remgro were not taken into account.

   30 June
2016 
30 June
2015 
30 June
2014 
30 June
2013 
30 June
2012 
30 June
2011 
31 March
2010 
Intrinsic net asset value – Rand per share  306.44  288.89  245.96  204.83  152.61  135.97  121.64 
JSE – All share index  52 218  51 807  50 945  39 578  33 708  31 865  28 748 
        – Fin & Ind 30 index  73 134  71 344  63 467  48 801  35 943  30 834  26 592 
        – Financial 15 index  14 715  16 498  14 501  11 176  9 618  8 128  8 061 
        – Resource 10 index   30 302  39 130  56 968  42 428  47 234  53 933  51 854 
Remgro share price (Rand)  254.66  255.94  230.00  189.95  131.49  111.60  98.00 

 

Relative performance  Year
30 June 2016
(% year on year) 
Period from 28 October 2008 to
30 June 2016
(% compounded per annum) 
Intrinsic net asset value  6.1  18.3 
JSE – All share index  0.8  14.4 
        – Fin & Ind 30 index  2.5  19.5 
        – Financial 15 index  (10.8) 13.6 
        – Resource 10 index  (22.5) (0.1)
Remgro share price   (0.5) 20.5 

The following table compares Remgro’s IRR with that of certain selected JSE indices. For this purpose it has been assumed that dividends have been reinvested in either Remgro shares or in the particular index, depending on the specific calculation.

   IRR from 28 October 2008 to 30 June 2016 (% compounded per annum) 
JSE – All share index  17.8 
        – Fin & Ind 30 index  22.9 
        – Financial 15 index  18.3 
        – Resource 10 index  2.8 
Remgro share  23.5 

The following table compares the value at 30 June 2016 of R100 invested on 28 October 2008 in either the relevant index or a Remgro share. For this purpose it has been assumed that dividends have been reinvested in either Remgro shares or in the particular index, depending on the specific calculation.

   R100 invested on 28 October 2008 until 30 June 2016 (Rand) 
JSE – All share index  351 
        – Fin & Ind 30 index  488 
        – Financial 15 index  362 
        – Resource 20 index  123 
Remgro share  507 

INVESTment ACTIVITIES

During June 2015 Remgro acquired a 29.9% shareholding in Spire Healthcare Group plc (Spire) for a total purchase consideration of £431.7 million. The transaction was concluded early in July 2015 and Remgro financed the transaction through a combination of its own cash and external funding. Simultaneously, Remgro and Mediclinic International Limited (Mediclinic) concluded an agreement whereby Mediclinic would acquire Remgro’s interest in Spire, subject to Mediclinic raising the appropriate funds in order to conclude such a transaction. During August 2015 Mediclinic raised R10.0 billion through a rights issue in terms of which 111.1 million new Mediclinic shares were issued at a price of R90.00 per share. Remgro, by following its rights and by underwriting the balance of the rights issue, subscribed for an additional 51.3 million Mediclinic shares totalling R4.6 billion. Following the successful conclusion of the rights issue, Mediclinic acquired Remgro’s shareholding in Spire during August 2015 for an amount of R8.6 billion, equal to the purchase price, transaction and funding costs.

On 15 February 2016 Mediclinic and Al Noor Hospitals Group plc (Al Noor) combined their respective businesses pursuant to which Al Noor acquired 100% of the issued share capital of Mediclinic. However, given the relative size of Mediclinic and Al Noor, the combination was classified as a reverse takeover of Al Noor. The combined group was renamed Mediclinic International plc (Mediclinic plc) and retained its premium listing on the Main Market of the London Stock Exchange (LSE). Mediclinic plc also obtained an inward secondary listing on the main board of the Johannesburg Stock Exchange (JSE). Mediclinic shareholders received 0.625 Al Noor shares for every Mediclinic share held by them, based on the five-day volume weighted average price up to and including 1 October 2015 of the Mediclinic shares on the JSE and of the Al Noor shares on the LSE (which was £5.20 and £8.32, respectively). In addition to the Al Noor shares received by Remgro and as an indivisible component of the combination, Remgro also subscribed for an additional 72.1 million shares in Al Noor at a subscription price of £8.32 per share for an aggregate amount of £600.0 million.

During the year under review Remgro committed a further R150.0 million to Pembani Remgro Infrastructure Fund (PRIF), bringing the total committed funds to R650.0 million. As a result of the additional commitment and PRIF’s successful second and third closes, Remgro invested a further net amount of R28.6 million in PRIF, thereby increasing its cumulative investment in PRIF to R211.9 million.

On the international front, Remgro also invested a further $14 million in the Milestone Capital Funds, increasing Remgro’s total investment in China to $202 million. Despite the current problems in the Chinese economy, Remgro believes that its partnership with the Milestone Funds will produce value over the long term.

The following table represents the cash effects of Remgro’s investing activities for the year to 30 June 2016. These activities exclude the investing activities of Remgro’s operating subsidiaries, i.e. RCL Foods Limited and Wispeco Holdings Limited.

Investments made and loans granted  R million 
Existing investee companies    
Mediclinic (Al Noor)  12 891 
Mediclinic (rights issue)  4 621 
Milestone Capital Funds (offshore)  194 
Invenfin  99 
PRIF  56 
Premier Team Holdings  47 
Other 
   17 914 
Investments sold and loans repaid   R million 
Britehouse  84 
Kagiso Infrastructure Empowerment Fund  31 
PRIF  27 
Other  15 
   157 

The acquisition and disposal of Spire to Mediclinic are excluded from the above tables as it was cash neutral.

INVESTment commitments

The table below summarises the investment commitments of Remgro as at 30 June 2016.

Investment commitments  R million 
PRIF  438 
CIV group  428 
Milestone Capital Funds (offshore)  133 
Invenfin  130 
Other  11 
   1 140 

 

Jannie Durand
Chief Executive Officer

Stellenbosch
20 September 2016

 

INTRINSIC net asset VALUE

   30 June 2016  30 June 2015 
R million  Book value   Intrinsic value   Book value   Intrinsic value  
Food, liquor and home care             
Unilever  3 589  10 650  3 384  8 688 
Distell(1)  3 500  10 723  3 157  11 098 
RCL Foods  7 294  9 278  7 346  11 514 
              
Banking             
RMBH  13 132  22 356  12 267  26 409 
FirstRand  4 652  9 857  4 300  11 720 
              
Healthcare             
Mediclinic  33 629  69 691  13 227  36 727 
               
Insurance             
RMI Holdings  7 157  18 526  6 717  19 096 
              
Industrial             
Air Products  933  4 241  882  4 164 
KTH  1 631  2 723  1 876  2 696 
Total  1 575  1 879  1 428  1 785 
PGSI   734  734  672  672 
Wispeco  702  1 055  603  920 
              
Infrastructure             
Grindrod  1 986  1 986  4 016  2 329 
CIV group  1 871  3 166  1 795  2 797 
SEACOM  655  1 043  566  1 001 
Other infrastructure interests  540  540  480  480 
              
Media and sport             
eMedia  1 116  1 342  1 126  2 094 
Other media and sport interests  328  328  374  382 
              
Other investments  3 737  3 717  3 047  3 266 
              
Central treasury             
Cash at the centre(2)  3 778  3 778  4 019  4 019 
Debt at the centre  (16 452)  (16 452)       
              
Other net corporate assets  2 779  3 149  1 832  2 224 
Net asset value (NAV)  78 866  164 310  73 114  154 081 
Potential CGT liability(3)      (6 526)     (5 466) 
NAV after tax  78 866  157 784  73 114  148 615 
Issued shares after deduction of shares repurchased (million)  514.9  514.9  514.4  514.4 
NAV after tax per share (Rand)  153.17  306.44  142.12  288.89 
Remgro share price (Rand)     254.66     255.94 
Percentage discount to NAV     16.9     11.4 
(1) Includes the investment in Capevin Holdings Limited.
(2) Cash at the centre excludes cash held by subsidiaries that are separately valued above (mainly RCL Foods and Wispeco).
(3) The potential capital gains tax (CGT) liability is calculated on the specific identification method using the most favourable calculation for investments acquired before 1 October 2001 and also taking into account the corporate relief provisions. The increase in the potential CGT liability is mainly the result of the increased CGT inclusion rate. Deferred CGT on investments "available-for-sale" is included in “other net corporate assets“ above.
(4) For purposes of determining the intrinsic net asset value, the unlisted investments are shown at directors’ valuation and the listed investments are shown at stock exchange prices.
(5) Intrinsic net asset values have not been audited.