AFRICAN Rainbow Capital Investments (ARC), majority owned by Ubuntu-Botho Investments (UBI) with investments such as TymeBank and Rain in its portfolio, flagged in its 2023 annual report that it is not sure that remaining listed on the JSE remains in its best interests, despite it being on a robust growth trajectory.
This is due to the sizeable discount to net asset value. A discount to net asset value refers to when the market price of a listed entity is trading below its net asset value.
ARC chairperson Mark Olivier said: “The sizeable discount to net asset value and the low free float will receive more focus in 2024. These structural issues need resolving as they affect the fund’s ability to raise capital.
“The present focus is on organic growth and smaller add-on acquisitions. Therefore further funding is not currently needed. However, the discount reduces our ability to raise capital as a listed entity should a compelling but sizeable investment opportunity arise. It is a constraint that removes much of the benefit of being a listed entity.
“The board’s challenge will be to deal with the listing, particularly securing access to capital for growth over the medium term,” Olivier said.
ARC co-CEOs Johan van der Merwe and Johan van Zyl said in the annual report, released on Friday: “We will continue efforts to address the issue. In the current environment, it remains prudent for management and the board to continue to consider whether there is value in being listed, should the discount remain excessive.”
A variety of initiatives had been implemented to narrow the gap between the intrinsic and market values in the past year, including efforts to reposition the portfolio, by reducing the long tail and upweighting future-focused companies and sectors.
Portfolio valuations were validated through several disposals at full value.
The CEOs said: “Much of the listed portfolio that can readily be acquired in the market has been sold, so that the unlisted portion of the fund, which is only accessible through ARC Investments, has grown to 89% of the portfolio.”
Disposals included Afrimat; Humanstate and Payprop; Capital Appreciation, MCH and RMH.
Furthermore, management and participation fees had been reduced substantially after the general partner fee structure review was approved by shareholders at the annual general meeting last year. The management fee for the year was R98 million (2022: R225m).
ARC, with a market capitalisation of R7.7 billion, has seen its shares trend 112.22% higher over three years.
The JSE has seen a spate of delistings with other companies in the same boat as ARC, although the JSE recently reformed its listing framework to make it more user-friendly.
Refiloe Nkadimeng, the chief financial officer of ARC and UBI, said multiple unfavourable factors had an impact on the investment portfolio in the year under review.
These included a contracting economy, strained trading conditions, interrupted electricity supply, coupled with increasing interest rates, high inflation and volatile exchange rates.
“All these factors put pressure on consumers and harmed some of its entities’ growth. Despite these challenges, the diverse investment portfolio has shown remarkable resilience against the persisting challenging macroeconomic environment,” she said.
Substantial corporate activity took place during the year to reposition the portfolio.
The R2bn increase in Indicative Net Asset Value comprised R2.2bn of net fair value gains, disposals of R1.4m, acquisitions of R2bn, a cash balance decrease of R169m, a debt increase of R498m and a R49m decrease in net other liabilities.
During the year under review, ARC’s effective share of the invested assets (or the IPV) increased by 19.8%, from R13.7bn at June 30, 2022 to R16.4bn at June 30, 2023.
The IFRS net asset value (NAV) per share increased by 13.5% from R10.08 at June 30, 2022 to R11.44 at June 30, 2023 as a result of the increase in the number of shares, Nkadimeng said.
BUSINESS REPORT