A tale of two titans

Marcia Klein, SA Sunday Times, 29 June 2003

Rembrandt Group (Remgro) and Richemont are often mentioned in the same breath. Both are headed by the Rupert family and both are fairly dependent on the fortunes of British American Tobacco.

But it is their differences which are being studied keenly by investors - now that some of Richemont's attractions as a rand- and economic cycle-hedge have waned and Remgro has produced strong profit growth for the year to March.

The big question is: which one of them is positioned for growth going forward.

This week Remgro reported 16% higher headline earnings and a 20% higher dividend for the year to March, bringing its compound growth in earnings over five years to 22% a year. Results were achieved on a 33% increase in revenue to R11.2-billion and a 50% increase in operating profit to almost R1.5-billion.

About 50% of total earnings, after converting to rands, come from BAT.

Financial services (including FirstRand and Absa) make up 23%, industrial interests (Nampak, HL&H, Robertsons, Medi-Clinic) 14%, mining interests are 7% and corporate finance and other interests 5%.

Remgro has a third and Richemont two-thirds of R&R Holdings, through which tobacco interests are held.

BAT sold 777 billion cigarettes, representing 14.6% of the global market in the year to March. At December 2002, BAT's adjusted earnings were 8% up.

BAT did not do enough, however, to help Richemont, which recently reported a 53% slump in net profit on a 5% drop in sales to à 3.65-billion. It showed a 46% drop in operating profit, worse than its own predictions.

Investors may feel the need to choose between the two if their primary intention is to get some exposure to tobacco.

Apart from its interest in BAT, Remgro is pretty much a large investment trust, with varied interests based largely in South Africa, while Richemont is focused on luxury goods internationally.

Over the last few years Richemont has lost its allure as its earnings have floundered, while Remgro has continued to produce steady growth.

This is reflected in their respective share prices. Remgro, at R64, is down 8% over a year but has increased by 24% in the past three months. Richemont, at just more than R12, has lost 46% of its value in over a year and 18% in just three months.

JP Morgan analyst John Poluta says Remgro has outperformed Richemont by 20% so far this year (or by 40% if one extracts the tobacco assets), largely due to the depreciation of Richemont's luxury goods business.

He believes this is looking overdone, but declining earnings in Richemont remain a near-term risk. But the improvement in equity markets creates a more conducive environment for investment in luxury goods. If the rand devalues from here, Richemont will benefit over Remgro.

Tobacco makes up 47% and 41% of Richemont and Remgro's asset composition respectively.

JP Morgan says the market capitalisation of Richemont's luxury goods business, after deducting for BAT, has declined to $3.5-billion from $8.5-billion in a year, not all of which can be substantiated. Recovery in demand for luxury goods will lag a broader economic recovery, but the signs are encouraging. However, restructuring of its non-performing divisions doesn't happen overnight.

Poluta says BAT is more significant to Remgro as investors buy the share for its tobacco interests. He thinks Remgro is likely to increase its stake in BAT in the future, while Richemont could be a seller of BAT over time.

Remgro's consumer-related investments, representing 30% of its portfolio, are set to benefit from the lower interest-rate environment.

"Richemont's attractiveness relative to Remgro has improved recently, we are nearing the . . . point where investors should seek their tobacco exposure through Richemont, rather than Remgro," says JP Morgan.

Despite their differences, the influence of the Ruperts on both Richemont and Remgro cannot be underestimated.

The Ruperts are well known for their long-term thinking, which could arguably be out of place in markets which are becoming increasingly volatile and which, it may be argued, require a flexible approach to investment.

But it would be difficult to accuse Remgro - with 22% compound growth - of plodding along.

Richemont too has been aggressive in the luxury goods industry, although in the current world climate this has been to its disadvantage.

Richemont has admitted a slowness in responding to its changing environment and is doing something about it.

Contrary to their reputation, the Ruperts are also risk-takers. They spun off Richemont in 1988 and, more recently, spun off Venfin, the higher-risk technology-focused company, in 2001.

Perhaps shareholders would be happier if high costs were cut at Richemont and if Remgro were to take a more aggressive view on its diverse investments.