HCI: THE VALUE OF MANY WORKING PARTS

Hosken Consolidated Investments (HCI) is a stalwart of empowerment investment in SA.

Since the 1990s there has been a slew of investments, BEE partnerships and acquisitions by the company. The battle in 2005 for control of Johnnic and its valuable stakes in casino assets is one example of the friction HCI has caused in its empire building.

Sometimes HCI has overextended itself. Its early backing of eMedia and e.tv and the material losses the business made saw HCI choose to support its media assets at the expense of selling its stake in Vodacom.

HCI owns 80% of eMedia, presently worth R880m, whereas 5% of Vodacom today is worth R12.6bn.

That stake was sold in 2013 for R1.5bn - having been valued at R90m at point of initial acquisition. A healthy return in any event.

HCI used the Vodacom proceeds to settle debt, buy back a large percentage of its shares and invest in e.tv, its free-to-air television station. At the time it also tried to take the company private, but wrangling from a dissenting institutional shareholder and the resultant litigation saw that buyout offer flounder - a rare setback for HCI management.

HCI is no stranger to controversy, with a history of combative actions: fighting with the government over the encryption of set-top boxes; sparring with the gaming regulators about its casino interests; or in court for years with lottery operator Ithuba.

HCI can trace its roots back to union savings. An initial investment of R2m came from the Southern African Clothing & Textile Workers Union (Sactwu) into the newly formed Sactwu Investment Co, alongside a R14m loan from the Industrial & Development Corp (IDC). Sactwu remains the largest shareholder in HCI, with 27%, and has inherited clothing and textile manufacturing interests from HCI subsidiary Deneb Investments (the old Seardel Group that was rescued from the banks more than a decade ago).

Current CEO Johnny Copelyn was a leading light in the labour movement. He was general secretary of Sactwu and later became CEO of the union's investment arm that is today HCI. Between 1994 and 1997 he also found time to serve as an MP. He became CEO of HCI in 1997.

That was a pivotal year for HCI as an agreement with the investment arm of the National Union of Mineworkers (NUM) saw both union investment arms reverse assets into HCI in exchange for shares. From the NUM, Marcel Golding, also an empowerment stalwart, joined the HCI board as chair and with Copelyn presided over a period of rapid investment activity in HCI.

That honeymoon ended in 2014 when Golding resigned as chair.

Golding and HCI had an acrimonious spat over governance regarding share dealings by Golding in Ellies Holdings. Amid the furore, Golding's wife, the COO of e.tv, also resigned. After the tears, this left Copelyn in full charge of HCI and its direction.

Today, HCI has a market value of R5.6bn and a basket of direct listed and unlisted investments.

The company's dominant investments are in hotels, gaming and leisure via JSE-listed Tsogo Sun Hotels (41% stake) and Tsogo Sun Gaming (50% stake).

The current value of these HCI stakes in Tsogo are roughly R7bn, or 25% greater than HCI's market value.

Other JSE-listed investments are Hosken Passenger Logistics & Rail (HPL&R), eMedia Holdings and Deneb. It holds a stake in Platinum Group Metals, listed in Toronto and New York, as well as a R100m stake in JSE-and Nasdaq-listed alternative energy company Montauk.

There also are unlisted investments in oil and gas, technology, coal, property, solar power and a wine estate. Some of these have blue-sky potential.

This spider's web of interests has been one of the key factors to the material discount to NAV that has bedevilled HCI for more than a decade. The discount is 55% based on a current share price of R65.50 a share and a NAV of R144.25 a share.

NAV over the past two years has declined 24%, mostly because of to Covid-related issues and the pandemic's impact on HCI's hotels, gaming and leisure interests, which were hard hit with the lockdown and trading restrictions.

The drop in revenue, profitability and dividends from hotels, gaming and leisure put a severe strain on the company's balance sheet.

Covid spotlighted the weakness of the HCI balance sheet as the company had sizable debt of R3.1bn. In 2020, that debt pile led to speculation of asset sales and/or an equity raise to placate nervous bankers.

But HCI has often been in tight corners and its tenacious management has been adept at sidestepping issues that would normally crush similar debt-laden businesses.

In the end, HCI reorganised terms with its bankers and has seen its debt fall to R2.8bn at its recent March 2021 year-end. That is forecast to drop to R2.5bn into 2022. Aside from some noncore asset sales, no material assets were sold. It also helped that a R400m cash infusion from the Ithuba court claim came at a judicious time.

What further aided HCI was the material dividend flow that has come back to the centre from its listed investments in eMedia, HPL&R and Deneb, with unlisted HCI Coal, an unglamorous but profitable entity, contributing R180m.

At R65.50, what is HCI's future?

At the AGMs of many of the listed HCI businesses it was clear that in the past 12 months there has been a tightening up of the HCI balance sheet, with many of the underlying investments having recovered strongly in share price value.

Tsogo Sun Hotels is up 103%, Tsogo Sun Gaming 102%, HPL&R 39% and Platinum Group Metals 24%. eMedia and Deneb are both down 15%, but HCI itself is ahead 15% for the year.

From the AGM, the key point gained was that there are many potential blue-sky investments and opportunities in HCI.

HPL&R, which operates Golden Arrow buses and the Cape Town MyCiTi bus service, has ambitions to expand into complementary areas of transport and logistics. Its management talked boldly of perhaps becoming an energy company and constructing a solar and wind operation to generate its own off-grid electricity to power a fleet of new energy-efficient electric buses.

eMedia, after years of losses, is now at breakeven and should swing into profit in FY2022. About 2.5-million homes now have OpenView set-top boxes, with ongoing sales of 35,000 units a month. With a growing market share of viewership, eMedia has attracted good advertising, which has driven a rebound in the subsidiary. The offering of a low-cost subscription video-on-demand service to consumers adds an additional revenue and profit stream.

In the unlisted space there are many potential growth assets, though all have a degree of risk.

HCI has investments in oil and gas exploration with a 49% stake in Impact Oil & Gas, which includes a 36% stake in Sweden-listed Africa Energy. The business has a range of oil and gas exploration blocks around the coast of SA, Namibia, Senegal and Guinea-Bissau, many in partnership with energy giant Total.

IM sees these as somewhat speculative, as is the nature of exploration drilling. Some well success has been seen but commercialisation of any proven reserve would lead to significant capital commitments.

The same is true of Platinum Group Metals, in which HCI has a 29% stake worth R810m. The share price is off its best and the company needs major funding to exploit reserves of platinum group metals (PGMs). With a price of $2.66 a share, HCI has more than doubled its money on initial investment.

In the case of oil and gas and PGMs, IM believes that HCI, upon any material successes, may choose to sell these assets and scamper away back to Sea Point with healthy gains rather than stump up material capex to fund expansion and development.

So, there is potential in HCI where realisation of assets via judicious sales could be used to further pay down the group debt and provide funding for other investments that may need capital, such as HPL&R and eMedia.

The real key to meaningful share price movement in HCI is for the large Tsogo assets to return to form and regain their cash cow status. That may be another year away as the country eventually evolves from 550 days of lockdown restrictions.

A narrowing of the wide 55% discount to NAV may be a tougher nut to crack.

From its mid-2014 share price peak of R17, HCI has been in steady share price decline alongside a widening NAV. The stock, currently at R65.50, is back at trading levels last seen in 2010.

A restructuring of the disparate asset base to realise value would need to happen. That may not be possible as long as Copelyn is CEO.

At the HCI AGM, Copelyn commented, after being asked about succession planning: "If my health changes then I will make a plan, otherwise - I'm 71 years old - I have no plans to depart as long as there is board support."

There is clearly value at HCI, but realising the value is the issue. With the union control and feisty nature of management, IM cannot see any activist ever daring to scale the HCI valuation parapet.

HCI has many indeterminable prospects. Some may fall by the wayside and some, like the original Vodacom stake, may generate great returns.

The next 12 months should be interesting as some of the many moving parts start to reignite the earnings and dividend flows back to HCI.

Until that happens and is noticed by the market, IM cannot see any meaningful reason to rush headlong into the stock, despite its bargain-basement price.

Source: Business Live - Anthony Clark