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Prepared comments from RAC Shareholders Meeting
RECM and Calibre Limited
(Incorporated in the Republic of South Africa)
Registration number 2009/012403/06
Preference Share Code: RACP
ISIN: ZAE000145041
("RAC" or "the Company")
PREPARED COMMENTS FROM RAC SHAREHOLDERS MEETING
At a directors meeting with participating preference shareholders, which was held directly after the
Annual General Meeting on 26 July 2017, the following prepared comments were shared with
attendees. In the interest of sharing the information equally with all shareholders, the statement is
also published on SENS and on the RAC website www.racltd.co.za.
PORTFOLIO CHANGES SINCE YEAR END
As mentioned in our year end results, we have invested in a new fund launched by our sister
company RECM. The fund, called the RECM Flexible Value Prescient QI Hedge Fund (don’t ask!) has a
mandate to invest in deep value situations. Such situations tend to become more attractive as the
economic cycle worsens, and momentum investors (in this case index funds) get the bit between
their teeth. RAC has invested just over R40mn of its existing assets into the fund, in return for units.
RAC agrees with RECM that the value investing style has bright prospects. Additionally, this leaves
RAC free to focus on its core investments.
As discussed in our year end results, RAC supported the DAWN emergency recapitalization, which
was done in the form of a rights issue. RAC underwrote a substantial portion of the rights at a deeply
discounted price, and managed to acquire an influential stake of 16.8% in the business. We look
forward to working with the board and management to getting the business back to profitability and
sustainability.
We also sold the last of our shares in Sovereign Holdings, the embattled chicken producer.
Finally, we continued to increase our investment into a variety of situations which we currently class
as non-core investments. We are also in the process of reducing some other holdings. Only once we
have either completely disposed of, or acquired a large enough stake in these situations will we be in
a better position to offer more disclosure.
Goldrush (57.9% of NAV)
Since our financial year-end, the acquisitions of both Boss Gaming and Crazy Slots have become
unconditional and the economic benefit of these transactions will now accrue to Goldrush from 1
July 2017. Both acquired businesses will add notably to the profitability of Goldrush. We welcome
the entrepreneurs that built these businesses to the group.
The existing Goldrush business is doing well, with the team continuing the roll-out of Bingo Halls,
LPM’s and sports betting facilities. Goldrush is playing a leading role in the consolidation of the
sports betting industry and we intend building considerable scale in this area. A Bingo license was
moved from Centurion Lake, in Pretoria, to the old Morula Sun premises. The move allowed us to
increase our capacity on this license considerably.
The group will be able to initiate a roll out of the KZN Bingo licenses as soon as regulatory certainty
has been achieved. No new licenses were allocated in the period after our year-end. A 1000-
machine LPM route license that was under review at year-end, has been subsequently confirmed in
favor of Goldrush.
Transhex/West Coast Resources (11.2% of NAV)
At Transhex, the Lower Orange River assets (including Baken) are rapidly approaching their end of
life. Historically, management has executed well on reducing the cost base to extend the life of a
mine. However, there are limits to what can be done, and we are reaching those. West Coast is
starting to perform at better levels, and is exceeding budget for the year to date. It is still too early
to say whether this improvement is sustainable over the long term. Transhex’s third operation,
Somiluana in Angola, is performing very well and the prospects for this mine are bright. Exchange
controls are hampering cash repatriation at present.
Management continues to evaluate acquisition opportunities. Transhex’s supportive shareholder
base, strong balance sheet and experienced management increase the odds of success in this regard.
JB Private Equity Investment Partnership (7% of NAV)
The only asset in the JB Private Equity Partnership is its 37% ownership of Sentula Mining, which is
listed on the JSE.
Since year end, whilst still in the process of resolving some legacy issues, Sentula has placed its
operating businesses on a path to growth. The exploration drilling business Geosearch was awarded
new contracts in Botswana, South Africa and Mozambique. Nkomati Anthracite mine achieved
increased targeted open pit production. The planning for the reopening of the underground mine
and increased wash plant capacity were completed on the back of a secured offtake agreement with
Glencore. JEF Drill & Blast invested in 19 additional drill rigs, all of which were deployed on new long
term contracts. Ritchie Crane Hire acquired three new cranes.
To reflect the new direction of Sentula as an investment holding company, its name will be changed
to Unicorn Capital Partners, effective 31 July 2017.
College SA (4.5% of NAV)
The College SA group houses the tertiary distance learning activities of the group, which is operated
under three brands. The business is in a strong growth and investment phase.
College SA has maintained its focus on providing quality, efficient distance learning opportunities for
mostly South African students. Affordability remains a big issue for this demographic, but we are
encouraged by the continued growth in student numbers after a complete re-establishment of the
business’s sales function.
Tabaldi offers on-line support mainly to accounting students. The business has drastically expanded
its academic coverage in the second semester.
IASeminars, which provides training to Accounting professionals outside South Africa has maintained
strong growth on the back of the global roll-out of IFRS.
As College SA is still in a strong investment phase of its life-cycle, and RAC has only acquired its
interest over the past two years, we continue to value the investment at book value. Given some of
the valuations we have seen for similar businesses in the marketplace, RAC regards organic growth
to be a sensible course of action for College SA.
Outdoor Investment Holdings (4.3% of NAV)
The consumer goods sector is under pressure nationally and Outdoor Investment Holdings (OIH) is
no exception. With this backdrop, our retail and wholesale subsidiaries Safari & Outdoor, Formalito
and Inyathi Sporting Supplies, held their own for the first four months of the year, showing some
growth and trading ahead of budget.
LATEST NET ASSET VALUE (”NAV”) PER SHARE (ORDINARY AND PARTICIPATING PREFERENCE)
Directors' % of net
Cost
% Fair Value asset
Rmn
Ownership Rmn value
Core investments 699.8 1,196.3 84.8%
Goldrush 53.3% 386.9 816.4 57.9%
Trans Hex 25.5% 96.2 103.8 7.4%
JB Private Equity Investors Partnership 90.0% 72.3 98.9 7.0%
College SA 88.1% 63.4 63.4 4.5%
Outdoor Investment Holdings 28.3% 41.6 60.4 4.3%
West Coast Resources 27.2% 39.6 53.5 3.8%
Portfolio investments 209.2 261.9 18.6%
DAWN 16.8% 100.6 107.7 7.6%
La Concorde 5.1% 32.3 42.1 3.0%
RECM Flexible Value Prescient QI Hedge Fund 85.4% 40.8 40.2 2.9%
Conduit 3.0% 20.9 37.8 2.7%
Excellerate 6.2% 14.7 34.0 2.4%
Non-core investments 255.1 264.2 18.7%
Receivables 0.6 0.0%
Cash and money market fund 23.6 1.7%
Liabilities (mainly CGT) (129.4) (9.2% )
Long-term debt (206.2) (14.6% )
Net asset value 1,410.9 100.0%
NAV per share ("R") 27.58
As at 19 July 2017 the NAV per share came to R27.58 – just less than a 1% increase from the year-
end number of R27.35. This NAV has not been audited or reviewed by the company’s external
auditors. It should also be noted that this NAV only reflects changes in the prices of our listed or
traded assets. Our unlisted, untraded assets (over 70% of net assets) will only be revalued at the
time of our interim results, due to be released in October.
Most of our NAV is invested in businesses that are young and growing rapidly. Valuing such
businesses with any accuracy is not easy, and requires a high degree of judgement. We therefore
tend to err on the side of caution, building in a considerable margin of safety in arriving at our fair
values. Some of our listed or traded investments are “deep value” situations, a sector currently
being severely discounted by the market. It is not unreasonable to think that the “fair value” of
these investments, as indicated by their market price is not fair at all.
Recently there have been a few instances where investment companies have been aggressive in
their valuation methodology, incorporating a limited margin of safety. This was all done at “fair
values” as approved by their auditors, and ultimately led to disappointing results for their
shareholders. At RAC, we agree with Charlie Munger, when he says the key to a happy life is to have
low expectations. Our valuation methodology builds in such low expectations – or, in other words, a
wide margin of safety. This means our shareholders can sleep well, not having to worry about Mr.
Market’s gyrations.
It is probably fair to say that true “fair value” only emerges in transactions between knowledgeable
buyers and sellers. Our recent realizations of Dischem and Sovereign as well as the La Concorde sale
of its brandy assets have all been transactions which took place at prices well above our stated fair
values – and generated good returns for our shareholders. Our current portfolio undoubtedly
contains more such gems.
GENERAL OBSERVATIONS
Political uncertainty, a weak economy and the rise of indexation have dramatically reduced the
quoted prices of listed businesses which operate predominantly in the domestic market. Although
their intrinsic value has probably also declined, we guess a substantial gap is in the process of
opening up between these numbers. RAC is well positioned to take advantage of this gap. In the
private market we are seeing some interesting opportunities as well. As a result, we believe
prospective returns are increasing.
RAC’s preferred investment strategy is to acquire influential interests in privately owned businesses
– specifically good businesses with good management, available at a fair price. If you are involved in
a business that meets these criteria, and needs capital or a responsible owner with true long-term
orientation, please give us a call. We don’t make many promises, but we promise not to waste your
time.
Any forward-looking statements in this announcement have not been reviewed or reported on by
our auditors.
Cape Town
26 July 2017
Sponsor: Questco (Pty) Ltd
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