African Rainbow Capital: is there a pot of gold at the end?

African Rainbow Capital Investments (ARC Investments for our collective sanity) holds a highly diversified portfolio of investments. It’s notoriously confusing to know what is going on, as there is also a private investment holding capital called African Rainbow Capital and in some cases they are invested alongside each other. The same key decision-makers sit behind both groups.

In the past 12 months, the ARC Investments share price is up 57.6%. Before you get carried away with excitement, it is 23.5% down since listing in 2017. I don’t know how many more times I need to warn people about the risks of investing in a brand new listing. They inevitably happen at the top of a market cycle and patience is almost always rewarded.

One of the irritations for investors has been the rather lucrative incentivisation structure for the executives. When the company listed, it noted that this would be reviewed after five years. A new structure will be reviewed at the AGM in November 2022 and the share price performance since listing isn’t a great way to tee up that conversation.

The company has released an “investment update” to let the market know what has happened since interim results for the period ended December 2021 were released.

Believing in yourself

Before we move into the underlying investments, it’s worth noting that ARC Investments is effectively investing in itself by purchasing its own shares. Between December 2021 and March 2022, R24.1 million worth of shares were acquired for R6.85 per share. That’s above the current price of R6.43 per share. Since inception though, total purchases of R353.8 million have been executed at an average price of just R3.59 per share, which looks much better.

A rain dance (and other interesting businesses)

It starts off with rain, the company that is big on internet and low on capital letters. No self-respecting tech startup ever uses capital letters, in case you haven’t noticed. The company invested R1.43 billion in spectrum in the recent spectrum auction, a major step that ARC believes will positively impact the valuation that will be prepared for the June 2022 reporting date. The update also notes that demand for 4G and 5G services remains strong.

Not all internet businesses are created equal, of course. ARC chose to dispose of its investment in Metrofibre for a total price of R275 million, achieving a gain of R37 million in the process. R244 million has already been received and the remaining R31 million is receivable in June 2022.

Afrimat needs no introduction, as this mining and construction materials group has one of the finest track records on the JSE. ARC sells down this stake to raise capital for other purposes. Between December and March, R244 million worth of Afrimat shares were sold for a profit of R132 million. ARC still holds a 7.3% shareholding in Afrimat.

ARC is invested in the Elandsfontein phosphate mine via Kropz Plc, which is listed on the Alternative Investment Market (AIM) in London. The AIM is like the local AltX on steroids, offering a place for smaller and less developed groups to list and raise capital. With slower-than-expected progress in commissioning the mine, ARC has extended further funding for working capital purposes. ARC is committed to seeing this one through to completion, based on strong market demand for phosphate and fertilizer.

An unsolicited offer has been received by ARC for the 11.1% stake in Humanstate and the 43.2% stake in Payprop SA. ARC seems to be taking the offer seriously, noting that it is “considering a potential divestment” of these stakes.

ARC holds a stake in Bluespec, which offers a number of IT and logistics solutions. ARC highlights that financial performance has improved after the pandemic hurt the business. It is “materially reducing” its debt, which is always a clue that a company has been through several rounds with a heavyweight boxer. Bluespec’s investment in digital vehicle bidding platform Weelee is gaining traction.

By being invested in Fledge Capital, ARC benefits from having another team running around finding deals. Fledge invested in WeBuyCars (now held by Transaction Capital) and has cash to invest. It has acquired 20% in sports nutrition manufacturer USN already. Boet.

Right idea, wrong Tyme?

The listed ARC entity holds 49.9% in the financial services portfolio. The remainder is held by the unlisted ARC entity.

In the financial services portfolio, TymeBank is embarking on an international growth strategy. The group plans to launch in the Philippines with a digital bank called GOtyme. I feel like there were many discussions around how to use capital letters in this one.

As an aside, the Philippines is where Purple Group is planning to expand EasyEquities, so it is fascinating to see both financial services disruptors identifying an opportunity in this market. To be clear, Purple Group has nothing to do with ARC.

Tyme is acquiring 130,000 customers per month in South Africa. That’s lovely, provided they actually use the accounts. The group is focused on increasing the number of active accounts, which is proving to be challenging in this economic environment. It doesn’t help to grow accounts that lie dormant.

Another very important investment in ARC is the stake in Alexander Forbes Group Holdings. The business has rebranded to Alexforbes and is a far more focused business these days. ARC Financial Services Investments holds 41.47% in the company. The ARC fund has an effective 20.7% stake in Alexander Forbes.

Rand Mutual Holdings may sound like the lovechild of leading financial institutions, but it has nothing to do with Rand Merchant Bank or Old Mutual. Rand Mutual is an insurance business that is implementing a five-year growth strategy and ARC seems to be happy with the progress.

After years of disappointing the market, performance over the past year has been strong. I personally find it difficult to invest in such a diversified group, as it becomes tricky to really form a view on underlying prospects. In these cases, the main question to answer is whether you are happy to back this management team to continue the recent run of form.

INVEST IN SHARES