The African Rainbow Capital offer is apparently fair to shareholders (JSE: AIL)

I’m just as surprised as you are

When the dust settles on this, many investors in African Rainbow Capital would’ve made money. Thanks to the performance of underlying businesses like Tyme and Rain, this ugly duckling ultimately turned into the least attractive swan in history:

The fact that things eventually ended in the green (albeit only just) doesn’t make it right. Over that period, management did far better than any of the investors did. The management fees were a source of constant criticism, with the company finally making changes along the way that made the fees slightly less ridiculous.

Now, the offer to shareholders is a price of R9.75 per share. Those who don’t want to accept the offer can continue to hold their shares in an unlisted environment. Given the way that minority shareholders were treated over the course of this journey while in the public eye, I would prefer to preserve the contents of my cat litter box – after my felines do their morning business – and display them on my coffee table rather than own unlisted shares in ARC.

The intrinsic net asset value (INAV) per share is R12.78, so the offer is at a 23.7% discount to that number. Due to the vast discount to INAV at which the shares trade, the offer price is actually a 21% premium to the 30-day volume-weighted average price (VWAP) before the deal was announced. You would therefore expect the independent expert to declare the deal to be unfair but reasonable, right?

Wrong.

Through some impressive mental gymnastics, BDO has in fact opined that the deal is fair to shareholders. How do they do this? Well, firstly, by only considering the detailed financial information of assets that represent 67.6% of the overall portfolio value. The materiality threshold they applied was that anything with a fair value of over R750 million would require detailed valuation work, whereas anything below that level would rely on an “Investment Report” – yes, a report prepared by the general partner in the fund, i.e. the management team.

So, to be very clear here, detailed work was done on just over two-thirds of the portfolio. As for the rest, it appears to have primarily been a case of “source: trust me bro” – and that’s not great in my books. I understand that it’s a large portfolio, but that’s a big chunk that didn’t get the benefit of a detailed review of the underlying financials. BDO is proud to include in the report that their work got very close to the management’s INAV anyway. Well, yes – across 67.6% of the portfolio, that is.

Even if we assume that this is a reasonable approach to valuing the full portfolio, we then arrive at the deferred tax liability for capital gains tax. Now, if I understand the circular correctly, this liability is a result of the plan to re-domicile the company to South Africa. In other words, they have valued the company based on a transaction that might be approved by shareholders, as opposed to the legal state of the company today. Again, I don’t like that. The deferred tax is responsible for taking the INAV down from R12.78 to R12.31 per share.

But how do we get from R12.31 per share to the BDO-suggested fair value range of R9.30 to R10.03 per share? Those management fees are back to haunt you, with BDO putting a negative value of R1.22 per share on the head office costs. In other words, the exorbitant cost structure impacts the valuation by roughly 10%!

It is correct to take into account costs? Absolutely, I would do the same thing. Should it have already been a feature of the INAV, thereby punishing management for loading up costs that negatively affect INAV over time? In my opinion, yes, although INAV rarely takes this into account at most investment holding companies. I think the issue just becomes more apparent when fees were already such a pressure point.

And finally, a holding company discount of 10% is applied, reflecting the underlying challenges that would be faced in disposing of all of the assets. Once this is done, the offer to shareholders falls neatly into the BDO fair value range, which means the expert has opined that the deal is fair to shareholders.

What this really does is send a message to the market that investment holding companies are where your capital goes to die. If you invested R100 at the INAV per share in a structure like this, you would immediately lose 10% to management costs and another 10% to a liquidity discount. Clearly, not all management companies are structured with such onerous fees, but the fact remains that these groups will always struggle to trade at anything close to INAV. This is why you’ll never see equity capital raises from these companies on the JSE anymore.

For the deal to go ahead, holders of more than 75% of shares eligible to vote will need to approve the delisting. Remember, each shareholder has the choice to accept the offer or not. If the delisting is approved, those who don’t accept the offer will move into unlisted territory. Perhaps this will make them fabulously rich, as assets like Tyme and Rain move closer to fruition. Personally, I suspect that any pot of gold at the end of this rainbow won’t be shared in a way that is any more equitable than what we’ve seen already.

Sirius Real Estate had a solid financial year (JSE: SRE)

The rent roll is up and so are the property values

Sirius Real Estate released a trading update for the year ended March 2025. Things went really well, as evidenced by a 6.3% increase in the like-for-like rent roll. Due to the effect of acquisitions, the total rent roll was much higher, up 12.8%. Like-for-like is the better way to judge performance though, with the group proud of the fact that this is the eleventh consecutive year of like-for-like performance above 5%.

To add to the strong rental growth, Sirius also expects property valuations to have increased during the year. As valuation yields have been pretty stable, an increase in the rent roll naturally drives an uptick in valuations.

Acquisitions will certainly be a feature of earnings in the year ahead as well, with Sirius having been very busy with deployment of the extensive amount of capital that was raised. After doing 11 deals worth over €250 million in the past financial year, they will be focused on actively managing the acquired assets to improve their values.

Investors will want to keep a close eye on financing costs. Although Sirius has a powerful balance sheet and enjoys strong support from its lenders, the reality is that recent debt raises have been at higher rates than the debt that was raised during the pandemic. This is simply a function of the interest rate cycle, leading to an increased overall cost of funding going forward. Provided that there is decent ongoing growth in the rent roll, that shouldn’t be too much of a problem.

Trematon’s INAV has dropped further (JSE: TMT)

This comes after decreases last year as well

On a day in which the troubles of investment holding companies were thrust into the spotlight, Trematon had the unfortunate timing of releasing its trading statement for the six months to February. Sadly, they weren’t positive.

The intrinsic net asset value (INAV) has decreased by between 15% and 18% year-on-year. This implies a range of 335 and 345 cents. The share price is sitting at R1.86, so that’s a fat discount of 45% to the midpoint of the INAV range.

In the comparable interim period, the INAV fell by 3%, so the decline has only gotten worse. Results are due for release on 10 April, at which time we will have full details.

Nibbles:

• Director dealings:
  • Here’s an unusual update: a non-executive director of Italtile (JSE: ITE) has obtained approval under a pledge agreement with a creditor to sell shares worth R10 million by the end of April 2025. Average daily value traded in Italtile looks to be around R4.5 million, so that shouldn’t be too difficult to achieve.
  • Des de Beer bought shares in Lighthouse Properties (JSE: LTE) worth R3.6 million.
  • A non-executive director of British American Tobacco (JSE: BTI) bought shares worth R2.6 million.
  • A director of Momentum (JSE: MTM) bought shares worth R413k.
  • A non-executive director of Glencore (JSE: GLN) bought shares worth over R290k.
  • A director of a major subsidiary of Shoprite (JSE: SHP) bought shares worth R198k.
  • I think it’s worth noting that all the directors and senior executives of Quilter (JSE: QLT) who received share awards only sold enough shares to cover the tax. Seeing a unanimous approach to this among the management team is unusual.

• Regular readers will be aware that Assura (JSE: AHR) has a couple of potential suitors at the moment, one of which is Primary Health Properties (JSE: PHP). In order for the board of Assura to give reasonable consideration to the part-share, part-cash indicative offer on the table from Primary Health, they’ve asked the UK Takeover Panel for an extension to the Put Up or Shut Up (PUSU) deadline. Primary Health now has until 5 May to announce that they will or will not make a firm offer. And yes, it really is called Put Up or Shut Up.

• Hyprop (JSE: HYP) has given itself some headroom by increasing the size of its domestic medium term programme from R5 billion to R7 billion. This doesn’t mean that they have already raised the additional debt in the market. It means that they are simply putting the steps in place to do so.