Remgro hopes for strong Cyril win

Worst-case scenario: weak ANC left to court EFF as kingmaker

31 March 2019 - 07:49 By CHRIS BARRON
Cyril Ramaphosa. File
Cyril Ramaphosa. File

Remgro is hoping for the best but has planned for the worst, says Neville Williams, chief financial officer of the Stellenbosch-based investment company controlled by Johann Rupert.

The worst-case election scenario is "not an outright majority for the ANC, with political instability going forward and the EFF as a political kingmaker", says Williams.

"We have to hope for a turnaround but we are ready for a worst-case scenario."

Remgro, one of SA's top-performing investment companies, has ensured that its companies are resilient enough to be profitable whatever happens.

"You make sure your underlying companies will survive in a worst-case scenario. That's what we've been doing for the past three years, and we're comfortable with the strength of the balance sheets in these companies."

Remgro has R17bn on its balance sheet, he says. "That's our dry powder, our war chest.

"We don't want to see a worst-case scenario, but if it happens there will be opportunities. And we are poised to capitalise on those opportunities.

"Our companies will be like the last man standing if something catastrophic happens."

The resilience of the anti-Ramaphosa faction in the ANC "is a concern for us. That's why the ANC needs to get a strong mandate from the people."

Remgro maintains that, without a strong mandate, President Cyril Ramaphosa's ability to make the necessary policy changes and reforms will be severely constrained.

But its scenario planners are telling it there will be "a good outcome, a strong vote for Cyril more than for the ANC".

They're confident that this will secure his position in the ANC.

"That's what we expect. If Cyril gets a good mandate, the ANC would be stupid to recall him."

He says Remgro bases its optimism on the insight that nonexecutive board members like former deputy finance minister Jabu Moleketi and ANC veteran Murphy Morobe give it about internal ANC mechanics and developments.

Remgro's investment focus is on financial services, consumer goods, health care and SA's growing broadband network.

It has a R5bn, 54% stake in Community Investment Ventures Holdings, which owns Dark Fibre Africa, which has a network of 12,000km of fibre in the metros. Remgro also owns 35% of last-mile fibre provider Vumatel and wants to buy the remaining 65%.

According to its latest six-month results, FirstRand is giving Remgro the most joy at the moment, growing its earnings 6% and return on equity 22%, making it the most profitable bank in SA and "very cash-flow generative for Remgro".

As for disruptors in the sector, bring them on, Williams says.

"We're well set to take on the new guys in the digital space."

However, RCL Foods, which it controls with a 77% investment, has taken a knock thanks mainly to sugar and poultry dumping.


What Remgro has on its balance sheet

The department of trade & industry (DTI) has been deaf to its pleas for tariff protection against below-cost chicken imports, and RCL has had to close plants, causing significant job losses.

An administrative "blunder" in 2017 resulted in no tariff protection for sugar either, leading to "massive dumping".

Remgro is not allocating any new capital to the agri side of the business, he says.

"Government needs to address the tariff protection challenges first."

He says it's another own goal that SA is scoring.

"In the sugar business we have thousands of small black growers. Over the past 10 years, RCL's sugar subsidiary has backed them to grow and supply sugar to the mills. Over the last two years, the reserves accumulated over 10 years have been wiped out," he says.

"The DTI must come to the party to protect sugar and poultry farmers."

Remgro is also heavily invested in private health care, where a looming issue is the impact of National Health Insurance.

"We're concerned about NHI, but don't think government will have the funding or the capacity to go ahead with it. We think sanity will prevail."

Through its R2bn, 43% stake in Business Partners, Remgro is closely involved in the SME sector. Business Partners is creating 12,000 jobs a year in the sector, and could create a lot more, he says.

"SMEs are struggling with red tape. They haven't seen any improvement. I don't think the government has listened to the SME sector. Or they listen but they don't hear."

In addition to a hostile regulatory environment, the SME sector is being hammered by load-shedding and Eskom tariff increases.

Remgro is forecasting economic growth of between 1% and 1.5%, but no more than 1% if load-shedding continues.

Williams says they've planned for continued low economic growth, so this won't be a train smash.

"Our companies must have strong balance sheets. If there's no top-line growth they have to cut costs and become more effective and efficient in their processes."

Remgro "exerts influence" on its companies through the appointment of professional executive management teams and participation in nomination and audit committee meetings.

But though it is "geared" for a low-growth situation, growth of at least 4.5%-5% is needed to "make a dent in unemployment".

Business needs to do more to influence structural reforms in the economy, he says, but this is proving much easier said than done.

"You can't just say to government, do this and do that. You have to partner with government, it must be a partnership.

"We've been lacking that for the last 10 years. Not because we never made an effort. The government didn't take us seriously. Hopefully, this attitude will change going forward."

Remgro wants to see businesses investing more in the country, he says, because this is the only way the economy will grow.

"But the thing is, businesses will only invest if there is policy certainty.

"If you sit with a capital project of R3bn and you don't have certainty over the next 10 years on that project, then businesses won't invest.

"So you need policy certainty in all sectors of the economy before you will get this big investment drive that the president wants."