Hosken Consolidated Investments (HCI) – Its all about the cash flow to the centre!

The HCI group of companies have just completed their interim reporting. Some of the reported results were very good (Frontier, Southern Sun, HCI Coal) and some were average (Tsogo Casinos, Emedia and Deneb). However, the key theme across the portfolio was the strong underlying cash generation with all listed subsidiaries returning to a dividend paying situation. This confirms our HCI “degearing at the centre” thesis which could provide the catalyst for an HCI restructuring.

While at first glance, it appears that HCI’s net debt went up YoY, HCI in fact had a very strong period of cash generation at the centre.  A few points worth noting:

· HCI invested R369m in quasi cash/high yielding unit trusts. HCI is treating this as an investment, however it is still clearly cash. Adjusting for this item alone, means that the HCI net debt levels were lower YoY by cR200m.

·  2023 was a heavy investment year into Impact Oil and Gas (IOG) as HCI needed to fund its share of IOG’s exploration campaign. This amounted to R1.25bn. However, given the farm-out announced in January, all of the cash raised is still sitting on IOG’s balance sheet and will be returned once the deal closes (just regulatory approvals outstanding). We anticipate this could happen in the next few months.

·  Before the funding of IOG, HCI generated cR1.5bn at the group centre, with R1.1bn coming from subsidiaries upstreaming of cash and R350m from the sale of the their stake in the Karoshoek solar project. Given how the underlying subsidiaries have de-geared we believe that HCI should now sustainably be receiving R1bn+ cash flow at the centre.

Below is a summary of the dividends declared by HCI’s various subsidiaries in the past week. Together with the Impact dividend ($50m) which we also expect in the next 3 months, HCI’s pro-forma debt levels reduce to below R900m.

We therefore believe that HCI will be in a debt free situation within the next 6-12 months. As we highlighted in our previous note, this scenario raises the prospect of HCI embarking on a restructure of its entire portfolio with an unbundling of their listed portfolio being the most value enhancing option.  This would be a fantastic opportunity CEO, Jonny Copelyn, to create enormous value for himself and shareholders and cement his legacy as one of South Africa’s great capital allocators.