Remgro's 'ace' up its sleeve

The appointment of Uys, who joins Remgro's investment team in April next year, was roundly welcomed by market watchers.

If anything, Uys provides extra cover on the deal-seeking front for Remgro now that former chief investment officer Jannie Durand has been elevated to chief executive after the death earlier this year of long-serving chief executive Thys Visser.

Uys brings experience from the cutting edge of new technological applications, especially in the broader telecom segment where the bulk of Remgro's technology interests are focused.

The bigger issue, though, is that Remgro is seriously underweight on the technology side, the current interests paling in size and profit contribution against those of the mainstay industrial and financial services segments.

At end-June Remgro's technology interests - mainly investments in fibreoptic network provider Dark Fibre Africa (DFA) and undersea cable group Seacom - chipped in R77m or 1,5% of the group's R5,1bn headline earnings.

These investments carry an intrinsic value of around R1,6bn, a smidgen of Remgro's nearly R80bn intrinsic value.

It would be unfair, however, to suggest that the Vodacom executive has been hauled aboard to sort out the lagging technology investment endeavours.

Remgro - or at least its predecessor Rembrandt - has been a dab hand at technology investment over the past two decades. The biggest success to date was the 15% stake in Vodacom, which was sold out of corporate cousin Venfin for R16bn in 2005.

Some argue that Remgro/Venfin might have enjoyed greater returns by holding on to the Vodacom stake (which would have been worth R23bn, excluding dividends, today). But that's a cheap shot considering that Rembrandt, which backed Vodacom from a greenfields operation, banked a massive profit on the sale.

Remgro (including Venfin, which was rebundled into the company a few years ago) has also managed to exit other sizeable technology investments profitably, such as services conglomerate Dimension Data, vehicle recovery specialist Tracker and financial services technology application Fundamo.

There were less impressive tilts - the hasty bailout from wireless group Xiacom (but not before coughing up US36m in development funding) and the surrender of the old Intervid security monitoring business.

The big question is whether Uys's presence will see Remgro build on its current technology holdings or look to secure new investments. That Remgro reports the technology investments separately from its media interests (mainly e.tv) suggests there is a separate and specific strategy to grow both these segments.

The difficulty with new technology investment is that it will require a sizeable transaction to register in a meaningful way in Remgro's portfolio.

DFA and Seacom rank as smaller investments, but with some inspired nurturing there is a reasonable prospect both companies can continue growing rapidly in the years ahead.

Lately DFA has been most impressive operationally speaking, with headline earnings in 2011 reaching R117m. Earnings for the year to end-June 2012 were down at R76m on a technicality, with a lag in cash flows from the investment in recently completed additions to the company's fibre-optic network.

Last year Remgro invested a further R248m in DFA, snaring a bigger slice of the company's 2,586 base receivers and the annuity flows from signed commercial leases with 38 telecommunication providers.

Not too much financial information is provided by Remgro on Seacom (as per an agreement between the company's shareholders), but the business is cash-flow positive despite ongoing bottom-line losses. Remgro has already collected R180m in dividends since acquiring its 25% stake in Seacom in August 2009.

Both DFA and Seacom have compelling business models and encouraging prospects, especially regarding annuity revenues. But neither is likely to grow into a megatech investment like Vodacom.

The likelihood of Remgro buying back into Vodacom seems remote, though, even if some punters insist on trumping up the Uys angle. Maybe Remgro would find the emergent appeal of Cell C, headed by another Vodacom stalwart, Alan Knott-Craig, more engaging?

Source: Financial Mail via I-Net Bridge