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Reinet share analysis |
2011-12-17 Is it better to invest directly in British American Tobacco shares or via Reinet - 84% of Reinet's NAV consisted of BAT shares at 30 September 2011, but you pay roughly 1% p.a. & 10% of the increases in value (see further on for details), for the pleasure of investing in BAT via Reinet.
On 17 Sep 2011, I estimated Reinet's NAV per depositary receipt as being R19.44, and since Reinet depositary receipts were trading at R14.30 on the JSE, it was trading at a 26% discount. At first sight this looks great value, but further analysis estimates that a roughly 35% discount to NAV is required to compensate for the leakage through the Reinet structure (as opposed to investing directly). Some of the assumptions used were a bit conservative though (looked at from a potential buyer's perspective), and did not take into account the fees which would have to be paid to invest directly in the underlying private equity structures.
Since the management fees paid are certain, it makes sense to discount at the risk-free rate - without going into further intricacies let's just assume an 8% p.a. discount rate. The present value of 1% p.a. payable 6 monthly in arrears in perpetuity, is some 13%.
In the interim results to 30 Sep 2011, the operating expenses had a management fee of €12m, but also an extra €3m of transaction-related expenses, charges, legal & advisory fees. There was also tax paid of €8m. Assuming these costs remain constant in relation to management fees, then they have a present value of 12%.
You also know that you're giving up a 10% performance fee - this is complex to analyse, but the bottom line is that the longer you hold the share and the more it progresses upwards, the closer the total given up will tend to 10%.
So, Reinet is approaching a price which interests me in buying, as it approaches a level 35% below its NAV.
When doing calculations of Reinet market capilisations from JSE prices, it's important to bear in mind that "Reinet Investments S.C.A. ordinary shares are listed on the Luxembourg Stock Exchange and Reinet Depositary Receipts (`DR`s"), each representing a one tenth interest in a Reinet Investments S.C.A. ordinary share, are listed on the Johannesburg Stock Exchange".
On 30 Sep 2011 BAT was trading at R17.60, and increased to R20.10 at the time of writing, a percentage increase of 14.2%. Let's assume that 84% of Reinet's NAV increased by 14.2% and the remainder stayed level, then the updated NAV at the time of writing was R38,452m (1.142 * 84% * R34,354m + 16% * R34,354).
On the JSE a Reinet depositary receipt was trading at R14.30 at the time of writing, and as 10 depositary receipts represents the interest in one Reinet share, it represents a market capitalisation of R28,014m (10 * 14.3 * 195.9m). So Reinet was trading at a discount to NAV of 27%.
I've got a model which looks at each of the remaining investments outside of BAT, and how their values have changed. At the moment it calculates the NAV per depositary receipt as being R19.44, which means that Reinet is trading at a discount to NAV of 26%.
In consideration of the services rendered under the Investment Advisory Agreement, Reinet Fund has agreed to pay the Investment Advisor an annual management fee, to be determined on the basis of the net asset value of Reinet Fund attributable to each asset class (adjusted proportionally for the net indebtedness of Reinet Investments (if any) outside Reinet Fund) (the "Management Fee") and an annual performance fee, to be determined on the basis of the total shareholder return generated by the Company and calculated by reference to the appreciation in the share price and distributions to Shareholders of Reinet Investments (the "Performance Fee").
The Management Fee will be calculated by reference to the net asset value by asset class, payable semiannually
in arrears and equal to the sum of:
• 1% p.a. of the NAV of Reinet Fund (as defined below) which is attributable to Invested Assets (as defined below);
• 0.25% p.a. of the NAV of Reinet Fund which is attributable to cash; and
• 0% p.a. of the NAV of Reinet Fund which is attributable to interests in funds managed by third parties, minus any reimbursements of expenses in respect of the relevant period payable or already paid by Reinet Fund to Reinet Fund Manager.
The "NAV of Reinet Fund" is the opening net asset value of the consolidated assets and liabilities of Reinet Fund as reported in respect of each semi-annual reporting period. The NAV of Reinet Fund attributable to an asset class is adjusted proportionally for the net indebtedness of Reinet Investments (if any) outside Reinet Fund.
"Invested Assets" consist of the consolidated assets of Reinet Fund other than: (i) cash and (ii) interests in funds managed by third parties.
The Investment Advisor has agreed that it will not charge a Management Fee in respect of the period from the date of the admission of the Reinet Shares to trading on the Regulated Market of the Luxembourg Stock Exchange to the end of Reinet Fund's first financial period (being the period ending 31 March 2009).
Reinet Fund will pay the Performance Fee to the Investment Advisor within 30 days of the end of the Performance Measurement Period. The Performance Fee for each Performance Measurement Period will be the higher of:
• 10% of the Cumulative Total Shareholder Return (as defined below) in that Performance Measurement Period less the sum of all Performance Fees paid in previous Performance Measurement Periods; and
• 0%
The "Cumulative Total Shareholder Return" for any Performance Measurement Period is calculated as being an amount equal to the sum of:
• the difference between the Closing Price (as defined below) and the Initial Price (as defined below), multiplied by the number of Reinet Shares outstanding at the beginning of the Performance Measurement Period; and
• the total of all distributions (including dividends and returns of capital) made to Shareholders from the Initial Date (as defined below) to the end of that Performance Measurement Period.
The first "Performance Measurement Period" shall be the period beginning on the third trading day on the Luxembourg Stock Exchange after the New Shares Settlement Date (the "Initial Date") and ending on the last day of the second full financial period of the Company, 31 March 2011. Subsequent "Performance
Measurement Periods" shall be the periods corresponding to the financial years of the Company. The "Initial Price" shall be the volume-weighted average market price for the Shares on the Regulated Market of the Luxembourg Stock Exchange over the first 60 trading days ("Trading Days") following the Initial Date.
The "Closing Price" in respect of any Performance Measurement Period shall be the volume-weighted average market price for the Shares on the Regulated Market of the Luxembourg Stock Exchange over the last 20 Trading Days of that Performance Measurement Period. In calculating the Performance Fee, adjustments will be made by Reinet Fund Manager to the Initial Price and the Closing Price to compensate for changes to the share capital of the Company that are not neutral to shareholder value (i.e. dilutive or anti-dilutive), including, inter alia, share issues, consolidations and splits, spin-off events, rights issues, bonus issues and reorganisations. Any such adjustments must be approved by the Board of Overseers.
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