Investment philosophy

BROADENING RMBH’S INVESTMENT PORTFOLIO

After a period of research and reflection, we have concluded that RMBH has reached a point in its development where it is appropriate to give consideration to further investment opportunities that will allow RMBH to grow shareholder returns.

This view is based on three main considerations:

The relative stability and maturity of the FirstRand Group, our core investment –
Our investment in the FirstRand Group represents 93% of RMBH’s intrinsic value and in the last year produced some 88% of our normalised earnings. As such, it will always be the strategic core of our investment philosophy. That said, FirstRand has reached a level of maturity and has a clearly laid out strategy in place, allowing RMBH to focus on further investment opportunities;
The relatively insignificant level of borrowings within RMBH itself –
At the centre, RMBH is substantially without borrowings and, when viewed from a broader market perspective, could potentially be regarded as having an underutilised or “lazy” balance sheet. At the end of June 2007 our borrowings amounted to some R373 million, directed largely at the emerging markets portfolio discussed below and at meeting our working capital requirements; and
The level of dividend flows that we now derive from outside the FirstRand Group –
RMBH has succeeded in growing the dividends generated from non FirstRand sources at a faster rate, primarily due to our other investments operating with a lower dividend cover than FirstRand. In the last two financial years, approximately 20% of the dividends paid to RMBH shareholders (some R340 million in 2007 (2006: R250m)), were derived from non FirstRand sources.
Such accelerated dividend growth from our non FirstRand investments highlights the potential that could be unlocked by broadening our investment profile.

The RMBH board is acutely aware of the potential conflicts of interest that may be awakened within the greater Group by broadening RMBH’s interests. We take comfort from our past experience in recognising such potential conflicts and managing them appropriately. We do not believe there are any historical situations which suggest we have not been able to manage such positions appropriately.

Investment criteria

Shareholders will recognise the main investment criteria that we have developed for new investments as being classical “value investing” principles, namely:

RMBH will be seeking to make significant investments in established businesses with demonstrated, consistent earning power, expected to be mainly in financial services. We believe that our investments will probably not be less than R500 million at a time. It is unlikely that RMBH will invest in turn around or greenfield situations.
The businesses should have first class management teams, which should also hold a significant stake in the business, as we see RMBH entering into a long-term partnership with the management group.
It is intended that RMBH will fund its investments with debt. Only in exceptional circumstances will we revert to RMBH equity. Consequently, the investment will need to produce a good return on equity and have little or no debt.
Our shareholders should not readily be able to invest directly in the entity themselves. We do not believe that it would be appropriate for RMBH to have insignificant stakes in listed South African entities where a shareholder would be able to invest directly on a significant scale.