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Reinet vs BAT

Is there more to Reinet than just a proxy for British American Tobacco?

An investment in Reinet is, essentially, an investment in global tobacco group British American Tobacco, which accounts for about 70% of its net asset value (NAV) and has, since Reinet listed in 2008 been the major contributor to growth in NAV.

But it is also an investment in the investment skills of Remgro/Richemont chairman Johann Rupert, in whose judgement investors are putting their faith to make profitable and sustainable long-term returns.

It is, for Reinet’s South African shareholders, a pretty reliable rand hedge stock, much like Rupert’s Richemont.

Reinet, which is an investment fund not dissimilar to Remgro, but with a leaning towards unlisted investments, is centred on the initial investment in BAT, whose dividends and share price growth fund new investments.

When Reinet was formed in 2008, taking Richemont’s BAT shareholding as its primary holding, there was a flurry of excitement as investors envisaged a chance to participate in a private equity fund managed by none other than Rupert himself. The reality, however, has been more mundane as BAT has continued to dominate the fund and other investments have showed mixed returns. Initial speculation that Reinet would skew its purchases towards technology and high-growth sectors has been unfounded. It is, in fact, largely invested in other investment managers and traditional businesses like insurance, although there is some global spread.

The biggest concern for investors is whether it is worth investing in Reinet as opposed to a direct investment in BAT. Reinet, ostensibly, offers BAT as well as potential upside in the form of other elements of the portfolio.

Reinet’s share, at R33.40, has gained 34% over a year, 70% over three and 175% over five. BAT’s share, on the other hand, at R940, has gained 74% over a year, 77% over three and 214% over five.

Reinet, at a P:E of just 5 against BAT’s 23, looks considerably cheaper, but P:E ratios are not that informative for investing in NAV plays. Reinet’s dividend payments have been patchy, while BAT’s have not.

By the March 2015 year-end, Reinet’s NAV had increased 23% year-on-year to over €5 billion, reflecting a compounded return of 19% per annum since March 2009, including dividends paid. By end-March 2016, NAV was €5.2 billion, and increase over 2015 of just 4%. In the March quarter alone, NAV dropped by €140 million from €5.36 billion at end-December, which was in turn up €278 million from end-September.

Reinet trades at a huge (over 30%) discount to NAV, which is not uncommon for diversified investment groups. A May 2016 consensus forecast published by the Financial Times showed an expectation for Reinet to outperform the market.

Imara SP Reid shares the sentiment, saying it has a “positive call” on Reinet as the size of the discount more than compensates for fees.

Fees have been a contentious issue. In financial 2015, the performance fee was €78 million and the management fee €39 million.

On the one hand, there has been criticism that this is high given the passive nature of its investments. On the other, Reinet management has not been idle – having invested over €1.6 billion (by the March 2015 year-end) and committed to further funding of €405 million in a number of companies.

It has 74.3 million shares or 3.9% of BAT, valued at €3.8 billion at end-December, and while BAT’s percentage of total NAV has dropped to around 70%, it is still, essentially, the only unit in the portfolio showing positive returns.

The rest of the portfolio includes, among others, Pension Corporation, a UK-based provider of risk management solutions to defined benefit pension funds, Trilantic Capital Partners, a private equity firm focused on North America and Western Europe, 36 South Global, a fund manager and Milestone China, whose funds invest in Chinese high-growth companies seeking capital and US-based real estate.

NanoDimension is a venture capital firm that invests in the growth and commercialisation of nanotechnology, including pharmaceuticals and drug delivery structures, optical and electronic switches and film photo-chromatic coatings.

Reinet’s two South African diamond projects, which are hedged, are Rooipoort and Jagersfontein.

Moneyweb pointed out, after its interim results to September, that while the overall value of the investment portfolio rose, this was largely due to the performance of the BAT shares, which rose by 4.5%. This masked the performance of some of the individual investments in the portfolio, which “were highly unsatisfactory”.

In fact, there was not a positive return among them.

It did, however, make some new investments including a gold ETF and digital music. And since then, in the quarter to December, Pension Corporation has shown some strong growth.

For an investment in BAT and BAT dividends, it is better to invest in BAT itself. But for a value investment, access to investments which private investors would not be privy to and some risk and potential reward, Reinet could be a good option.

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