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HCI: DEALS, DEBT AND DIVIDENDS

01 Jun General

Though the diversified company is cash constrained, jittery investors can take heart from its sensible approach

Hosken Consolidated Investments (HCI) needs to be regarded a little differently from the JSE’s other large diversified investment counters.

Unlike Remgro, PSG, Brait, Brimstone, AEEI and even recently listed Universal Partners and Long4Life, there is a substantial dollop of debt at the centre of HCI.

At a shareholders’ meeting last year, HCI CE Johnny Copelyn admitted that the company was somewhat cash constrained in its deal-making endeavours with debt at the centre of R2.5bn. He noted that HCI preferred to do “sensible transactions” — somewhere in the range of R100m-R500m.

At the meeting Copelyn argued that the debt levels were not necessarily a bad thing. “We get lots of opportunities, but we are always anxious about what we can fund.”

Recently released results to end-March show HCI holding nearly R14bn in long-term borrowings, R5.4bn as a current portion of borrowings, and a bank overdraft of R2.3bn. The interest bill for the period was R1.6bn.

The breakdown of the debt is enlightening — especially in soothing jittery investors who are traditionally averse to heavy gearing. Group long-term borrowings comprise central borrowings of R1.75bn, central investment property-related borrowings of around R1.3bn and borrowings in Tsogo Sun of around R9.5bn.

The balance resides in other operating subsidiaries.

The central slab of borrowings includes R711m owed to major HCI shareholder the Southern African Clothing & Textile Workers’ Union — relating to its proportionate noncontrolling share in JSE-listed broadcast specialist eMedia Holdings.

There is roughly R3.4bn in short-term borrowings in Tsogo Sun, with R1.7bn of the overdraft facility also in the casino and leisure giant.

No matter how the numbers are unpacked, HCI shareholders don’t seem to fret too much about the debt levels. That’s probably because the group — anchored by a controlling stake in cash-spinning gaming giant Tsogo Sun — services the interest bill with consummate ease (and pays a dividend to boot). Cash generated from operations was over R7.2bn in the past financial year, with cash flow from operational activities topping R3.3bn.

Still, less of a debt load could unleash HCI’s deal-making skills to better effect, and buoy the dividend yield, which stands at around 1.5%.

There will be cash proceeds from recent disposals — most notably the sale of HCI’s controlling stake in liquor group KWV Holdings (held in listed subsidiary Niveus’s unlisted subsidiary La Concorde) and the sale of information technology business Syntell.

Perhaps these cash proceeds informed HCI’s decisions to embark on another share repurchase exercise — this time acquiring up to 2.7m shares from the HCI Foundation for a maximum price of R376m. This followed last year’s specific share repurchase when over 16m shares — mainly owned by directors and former executive Marcel Golding — were bought back in a deal that was settled by cash and share swaps.

The decision to embark on a share repurchase exercise cannot be faulted — not with HCI’s shares trading at a sizeable discount to the official (but conservative) net asset carrying value of over R170/share.

The enthusiasm for the share buy-back might also mean HCI is certain of securing a sizeable chunk of the cash sitting in La Concorde after the sale of KWV’s operating assets to Vivian Imerman’s Vasari group last year.

This might mean La Concorde declaring a special dividend into Niveus, which now appears to have a limited corporate lifespan after swapping its alternative gaming assets into Tsogo Sun. There are now plans to unbundle the gaming assets held under Gameco out of Niveus.

But there has also been increasingly audible speculation that HCI could reverse its coal mining assets into La Concorde, a deal which could give Niveus a new operating focus (aside from property and the SA art portfolio left in La Concorde).

The question would be whether HCI would sell the coal assets into La Concorde/Niveus for cash — a deal which could purportedly be underpinned by a rights issue to raise fresh capital. Of course, a transaction that involved swapping the coal assets for paper would leave HCI with a dominant controlling shareholding in Niveus/La Concorde — but a cash deal would enable HCI to cull some of the debt at its centre.

The bigger question is whether Niveus/La Concorde shareholders would prefer a cash distribution out of the KWV deal rather than the introduction of coal mining assets.

The Financial Mail suspects that having the cash in hand would suit most La Concorde and Niveus shareholders — especially if the rumoured coal transaction were tagged to a rights issue.

But last week HCI reported that the coal mining division had its best year to date with headline earnings exceeding R100m. There are suggestions that when coal contracts are renegotiated the performance could be even better.

There was a 15% sales volume increase at Palesa Colliery and a 35% hike at Mbali Colliery (where export sales prices were 48% higher).

More reassuring was that gross profit margins at Mbali Colliery increased from 32% to 48% following increased export sales prices. Around R90m of the increase in profit before tax in HCI’s coal division was attributable to the resurgent Mbali Colliery.

Whether HCI would consider adding its stake in energy explorer Impact Oil & Gas (IOG) to the coal mix seems unlikely at this point.

The group has upped its stake in IOG from 20% to 30%, but valuing such an early-stage (and by HCI’s own admission “speculative”) investment for inclusion in a listed vehicle would be difficult.

In any event, HCI reckons that the key to IOG’s future lies with government finalising amendments to the Mineral & Petroleum Resources Development Act.

Copelyn points out that these remain locked in a slow process through parliament.

Source: Financial Mail – Marc Hasenfuss