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03 Nov General

One might have expected a fairly strong turnout of shareholders at the AGM of a R10bn empowerment investment company.

The FM counted three shareholders at last week’s AGM of Hosken Consolidated Investments (HCI) — including representatives from Element Asset Management, which surely can’t be the only institutional investor in the company.

Brimstone and Grand Parade Investments (GPI), Cape-based empowerment companies considerably smaller than HCI, woo hundreds of shareholders to AGMs in large halls.

While both Brimstone and GPI can claim sizeable community investment bases, HCI has the SA Clothing & Textile Workers Union as an anchor shareholder. Presumably the lack of bodies at the AGM means a vote of confidence from union members in the manner in which their former comrades, CEO Johnny Copelyn and executive chairman Marcel Golding, are running the show.

A quick scan through the annual report should support this notion, especially the fact that HCI’s cash flows from operations have stretched to a reassuring R3,2bn while long-term borrowings have been culled to a far less imposing R2bn and current borrowings have been slashed from nearly R1,5bn to just over R800m.

Indeed, HCI — one of the few conglomerates successfully assembled on debt — these days enjoys more than a passing resemblance to JSE investment stalwart Remgro. Two similarities stand out: HCI’s major investments, gaming group Tsogo Sun and free-to-air television broadcaster e.tv, are strongly cash generative; and, perhaps more importantly, company executives look determined to make investors understand they are holding a long-term hand.

Predictably, there were questions at the AGM around efforts to unlock value at HCI. A possible separate listing of e.tv was specifically mentioned. Officially HCI shows its net asset carrying value at 8267c/share, but De Wet Schutte at Avior Research estimates an underlying value of around R12bn or R100/share.

If that estimated value is robust then HCI trades at a discount (around 20%) that is roughly what the market has traditionally applied to large investment trusts, and perhaps justifies shareholder queries about unlocking value.

Copelyn was diplomatic in his response (“we are not ruling out any opportunities”), but the sense one gets is that HCI, like Remgro, will be contemplative about its portfolio rather than chopping and changing.

Copelyn stressed HCI was intensely focused on shareholder value, asking somewhat acerbically: “I do hope we have the reputation of a management team that acts in the interest of shareholders?”

Element Investment Management’s Matthew Kreeve appeared to hit a nerve when raising the possibility of HCI creating a “Landco” — a separate vehicle to house the swathes of real estate held through group subsidiaries and associates like bus company Golden Arrow (which is rumoured to hold property worth R300m), Seardel, the Cape Town Film Studio, Gallagher Estates and KWV.

Kreeve suggested the Landco or property collective idea had been bandied about at last year’s AGM, prompting Copelyn to say executives did not intend to create the impression there was a major change pending in the way HCI managed its properties.

“We do look at the question of whether our land is well managed … but it would not be appropriate to announce something like this at an AGM. One also has to remember we don’t own 100% of the entities that house the properties in question. There is no change to the way the group runs its properties.”

Copelyn reiterated HCI’s contemplative strategy at last week’s AGM of KWV, a liquor producer in which it has a 34,9% anchor stake. Responding to questions from disgruntled minorities pushing for unlocking the value in KWV, he pointed out: “We bought our stake way above the current share price. Are we disappointed? No, we are indifferent. It trades where it trades; the share price makes no difference to running the business.”

While the jury may be out on HCI’s chances of turning old-economy investments like Seardel and KWV to good account, it might be worth recalling the scepticism that accompanied the company’s purchase of Golden Arrow around five years ago.

Certainly Golden Arrow’s profits ( buoyed by government subsidies) have more than covered the R280m purchase price over the years, and any downside in the business (whether from competition or regulatory changes) is covered by a sprawling property portfolio.

HCI’s foray into the coal segment, via Khusela Coal, is also turning out for the better.

Naturally the market remains focused on the casino assets held in the Tsogo Sun investment. But that should not cloud the fact that, barring a couple of dud investments, HCI has worked some inspired deals across a variety of sectors in recent years. As these smaller investments are brought to book, the discount on HCI’s underlying value should narrow.

What might also drive sentiment is a slightly more generous dividend policy, but at this juncture — despite the cash flows from the casino interests — it’s difficult to see a predatory HCI passing through much more than nominal distributions to shareholders.

At least while dividends remain token considerations, shareholders can hold some hope that HCI is in play for a big acquisition. That’s what may be needed to bring some balance to a portfolio in which Tsogo and e.tv represent around 75% of the value.

Source: Financial Mail – Marc Hassenfuss