By Sithembile Bopela
Hosken Consolidated Investments is an investment holding company with a diverse portfolio of investments across various sectors including hotel and leisure, interactive gaming, media and broadcasting, transport, financial services, mining, and properties. HCI's major shareholder is the South African Clothing and Textile Workers Union.
Through its subsidiaries, the group is exposed to local and global markets including developed and emerging markets.
Investments
The group operates as a holding company that holds significant stakes in well-established listed and privately-owned businesses such as Tsogo Sun (49.7% stake), Southern Sun (40.8%), eMedia Holdings (80.3%), Frontier Transport Holdings (Golden Arrow Bus Services) (82.1%) and Impact Oil and Gas (49%), among others.
HCI's investment approach focuses on long-term value creation, operational excellence, and fostering strategic partnerships to enhance the performance of its portfolio companies.
Financial performance
Historically, the group has delivered robust earnings and revenue growth (returns of 40% and 15% respectively over ten years), despite weakness during the Covid-19 pandemic. FY23 was a strong year for the company, posting record earnings growth on the back of a broad-based rebound across its operating businesses (post-Covid).
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More recently, headline earnings for 1H24 declined 13% against a tougher base (FY23: +41% y/y), dragged by losses in oil and gas and palladium prospecting activities. The FY23 result was driven by a general improvement in the underlying businesses, but especially hotel operations, post-Covid.
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In terms of the balance sheet, cash amounted to R1.7 billion (FY23: R1.9 billion) at the end of the interim period, a 7% decline y/y. On a look-through basis, the group has been highly indebted over the years, with net debt (1H24: R13.5 billion; FY23: R12.9 billion) exceeding group equity by 0.6 times on average over ten years.
Nonetheless, interest expense (FY23: R1.1 billion) remains well covered by robust operating earnings (FY23 EBIT to Interest expense ratio: 3.2 times).
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Of note, net debt at the centre totalled R2.7 billion, an increase from R2.4 billion in FY23. This level remains elevated and is a key focus of the group. A lower debt burden could bolster the group's deal-making capabilities and improve the dividend yield.
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To focus on stabilising the balance sheet, management reduced (2020) and paused its dividend payments during the years impacted by Covid-19 (2021-2022). For FY23, a total dividend of 50 cents per share was declared. Management did not declare an interim dividend for 1H24, given the ongoing funding commitments for its oil and gas prospects (being Impact Oil and Gas).
Impact Oil and Gas - not quite the big deal
In 2022, TotalEnergies announced a significant oil discovery - a large block in deep water off the coast of Namibia, touted as some of the most significant oil finds in recent decades. This was met with broad-based excitement, with HCI's share price rallying strongly in anticipation that the group's 49%-owned associate Impact Oil and Gas (IOG) would sell its 20% interest in blocks 2912 and 2913B of the discovery.
However, leadership has since announced an agreement to offer only just over half of its stake to TotalEnergies.
This has dampened expectations of a large payout to shareholders or HCI paying off its debt from the proceeds. However, management remains confident that the upside potential in holding on to the exposure will still yield value over the long term.
In terms of the agreement:
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Impact will receive a full carry loan on its retained interest for all joint venture costs, i.e., all of its remaining development, appraisal and exploration costs on the blocks, until the first sales of oil materialise.
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The carry loan is then repayable to TotalEnergies from Impact's after-tax cash flow, and net of all joint venture costs (including capex from production on the blocks) once production begins. Impact will be reimbursed in cash for its share of past costs, estimated at $99 million (~R1.9 billion).
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Under the new terms, HCI (through Impact) secures a future stake in the oilfield without additional costs. However, without proven reserves, significant forecast risk prevails as estimates of how much oil is in the seabed and/ how long they can produce it remain subject to upward or downward revisions.
What we like about this company
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HCI's portfolio companies collectively contribute to its diversified investment strategy, providing exposure to various sectors of the South African economy, with an established presence and influence in key industries.
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Through its strategic investments in and strategic partnerships with leading companies, HCI has established a strong track record of identifying and nurturing successful businesses while seeking to create value, drive growth, and leveraging synergies in its portfolio.
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Their ability to weather the pandemic without coming to market showed agility and tenacity in the face of adversity where other similar debt-laden businesses struggled.
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We like the exposure to gaming and hotels that will continue to benefit from a global secular increase in travel.
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Investment in the oil and gas sector, particularly through Impact Oil and Gas, contributes to its diversified portfolio and exposure to the energy industry. The group's energy exploration and PGM assets are speculative and volatile in nature, however, a favourable opportunity to monetise these assets could support reducing a chunk of HCI's debt.
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The company benefits from its deep industry insights and experienced management team, that enables it to capitalise on emerging opportunities and navigate challenges within the market.
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HCI maintains a high BBBEE rating, amongst the highest on the JSE, with 75.5% black ownership- of which 50.5% is black women. The company has its roots in the trade union movement and is committed to Black Economic Empowerment.
What we don't like about the company
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The current CEO has served as such since 1997. Johnny Copelyn is 71 years old with no intention of departing, bar for deteriorating health reasons. We view management's "we'll make a plan" strategy as inadequate succession planning.
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Exposure to macroeconomic and infrastructure challenges in South Africa. HCI Coal is highly exposed to Eskom as it is contracted to supply coal to the Kusile power station. In FY23, the station experienced major damage which saw it operate at lower capacity.
That said, HCI Coal posted its most profitable year in 2023 (R120 million ahead of budget) as it was able to supply various other Eskom plants that require better quality coal, while taking advantage of the significant run on the price of export coal during the period.
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The impact of energy insecurity saw the group realise >R188 million in costs to run back-up power (including diesel costs), an increase of 260% y/y in FY23.
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As a holding company, HCI is dependent on the performance of its underlying portfolio companies and is thus vulnerable to economic and market fluctuations within specific sectors.
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The company is exposed to changes in consumer behaviour and spending patterns. For instance, eMedia, which holds a share of 34% of TV audiences, has realised a negative impact from load-shedding on viewership which has resulted in television advertising across the industry shrinking 7%.
Moreso, while pending a ruling by the Competition Tribunal, the efforts of DSTV to remove four of the group's digital channels from their platform remains a major drawback.
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The oil and gas prospecting operations are exposed to environmental activism and potential regulatory headwinds amid a global shift away from non-renewable fuel sources. However, amid South Africa's current energy constraints and a lack of adequate clean-energy resources in the pipeline to meet national demand, this is unlikely to deter further development in this or the coal mining space.
Valuation
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As a small conglomerate, HCI has historically traded at a significant discount to the value of its vast array of underlying assets.
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NAV over the past two years has increased ~22%, a strong recovery from weakness driven by Covid-related issues and the pandemic's impact on HCI's hotels, gaming and leisure interests that were hard hit by lockdown and trading restrictions.
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Moreso, the initial share price response to the discovery IOG's oil and gas prospects has also resulted in a significant narrowing of this discount.
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On a consolidated basis, the net asset value (NAV) per share increased 27% y/y to R224.66 in FY23, but this was less than the appreciation of the share price, bringing the discount down to 9.8% (FY22: 11.6%).
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Applying market values to the listed investments, the group trades at a current NAV per share of R200, representing a discount of 14% - against an average discount to NAV of ~25% historically. This seems a little stretched in our view.
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The group's long-term fundamentals remain favourable, underpinned by a diverse and robust operational portfolio and expansive blue-sky opportunities.
