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WHAT WILL HCI DO TO UNLOCK SHAREHOLDER VALUE?

31 Oct General

More focused on developing property assets.

CAPE TOWN – Diversified investment holdings company HCI is increasingly including property among its portfolio of business interests. Though it has always been a property owner by virtue of its investment in clothing factories, bus terminuses, TV & film studios, it is now actively commercialising some of this property.

The latest project is the re-development of former Seardel factories into industrial space. Speaking at the HCI annual general metting (AGM) held in Cape Town on Monday, CEO Johnny Copelyn said that the group had begun developing the rest of Seardel’s New Germany site in Pinetown as well as the Mobeni, Durban, site. “We are increasingly developing an interest in property as a separate section in the business.”

When the two projects are finished, mid 2013, HCI will have 152 000m2 available for letting and will have signed leases for 130 057m2 of this space.

HCI is also not averse to working alongside other developers. This is the case with two retail projects it has invested in – one in Upington and one, which is shortly to commence, in Seapoint.

Other promising sites in its portfolio include the 20ha the company owns as part of Gallagher Estate which is just 1km from the Gautrain line. “Midrand is an interesting area,” says Copelyn.

The company’s other property investments comprise an office block in Umhlanga Ridge and a 50% stake in another office block in Claremont, Cape Town.

Though HCI is best known for its investments in Tsogo Sun, eTV and Golden Arrow Bus Services, some of its smaller investments are looking more viable than before – in particular HCI Coal, which includes Palesa mine near Bronkhorstspruit and Mbali mine, near Ogies.

Palesa increased its coal production, which it supplies on contract to Eskom, and more than doubled headline earnings to R51.7m. Things are also looking up at Mbali, with the recent award of a High Court order that requires the State to correct the mis-award of its mining rights there. It has also been awarded a water licence.

The one issue the directors were shy about was whether investors could expect any further attempts to unlock value in the company. HCI trades at an estimated 22% discount to net asset value. In August the directors took one small step towards unlocking some of this value. This was the listing of Niveus Investments (JSE:NIV) which includes HCI’s roughly 40% stake in KWV, the limited payout machine gaming company Vukani, some electronic bingo interests, its rather poorly trading industrial engineering business Formex, and R74m in cash.

“Niveus is managed by a close-knit team that has grown within HCI,” says Copelyn. He says that the separate listing and decentralised management will allow them an opportunity to show the market what they have been doing in the shade [of Tsogo and eTV].

Niveus is expected to generate earnings of around of R100m/year, and is committed to generous dividend payments. It will also chart its own way forward. “We will not be in the same space for deals.” The reason, Copelyn says, is the relative size of the two companies: HCI has a market capitalisation of about R12bn while Niveus has a market cap of R1bn.

Whether there are other interesting assets that are hidden in the shade remains to be seen. But there are no promises. “We are interested in the long-term growth of HCI. Eliminating discounts tends to create a short term focus,” Copelyn says. “We would unbundle and eliminate the discount, but is that good for the business in the long term?

“We would have to think carefully.” Both eTV and Golden Arrow Bus Services are highly cash generative assets. HCI’s business model has been to fund growth from the profits of mature assets coupled with some debt. This has allowed it to grow without diluting its current shareholders.

This model has worked well for the company which this year produced headline profits of R1.5bn.

All of the resolutions were accepted. One shareholder noted the recent appointment of Barbara Hogan, former minister of public enterprises, as a non-executive director. She is a welcome new addition to a board that has not rotated much in recent years.

Source: Moneyweb – Sasha Planting