A bad time for small caps like Long4Life, but you can’t ignore the Joffe factor
Brian Joffe is arguably one of the finest corporate entrepreneurs SA has yet produced. His dedication to the task at hand, evidenced by his gutsy approach when establishing Bidvest in the 1980s, reflects this. Now, with his latest brainchild, leisure and lifestyle investment group Long4Life, he needs to convince the investment community that he will once again succeed and bring his magic touch to shareholder returns.
The share price has fallen 36% since listing in April 2017, in line with the trend of most small caps, some of which are actively considering delisting in this rather horrid market. It is trading at a 20% discount to net asset value, which is the unfortunate norm for listed industrial conglomerates.
The August 2018 interim results are the first numbers since the exchange listing that reflect significant activity in the business. Comparative interim figures are rather meaningless as they merely show interest income and corporate costs and predate the reporting of results from acquisitions.
For the first time, investors can now start to get a feel for the intrinsic nature of this lifestyle-orientated company.
The group is only halfway through its anticipated acquisition programme, Joffe says. Long4Life has three segments: sports and recreation; beverages; and personal care and wellness.
Breakdown of interim revenue of R1.5bn and R202m trading profit before central expenses was, respectively, 60% and 64% from Holdsport; 36% and 29% from Chill and Inhle Beverages; and 4% and 7% from Sorbet.
The typical working capital cycle for these lifestyle assets is cash flow absorption in the first half of the year and cash generation in the second.
There has been a seasonal ramp-up of inventory ahead of an expected strong second half, and the annual revenue split should be about 40:60 for the first and second halves of the year, respectively.
Within sport and recreation, foot traffic through stores held up well during the interim period, though basket sizes and values were flat. Revenue was R927m, up 6.3% in nominal terms but only 0.6% higher in comparable terms, which excludes the effect of new floor space. Trading profit in this division was R130m and trading margin 14%.
Beverages’ revenue was R549m and with a trading profit of R58m, trading margin was 10.5%. Revenue rose 21% and operating profit 37%. Brands include the upmarket Fitch & Leedes mixers, Score energy drink and Chateau Del Rei sparkling perle wine.
Personal care and wellness, represented by franchisor Sorbet, has the highest profit margin in the group, at 27%. Revenue was R56m and trading profit R15m. Net profit exceeded budget by 50% and there appears to be strong franchisee interest, with growth being limited only by suitable site availability. In a typical salon, services — which include facials, massages, manicures and pedicures account for 80% of revenue, while products bought account for 20%.
PERSONAL CARE AND WELLNESS, REPRESENTED BY FRANCHISOR SORBET, HAS THE HIGHEST PROFIT MARGIN IN THE GROUP, AT 27%
The group has R1bn cash for acquisitions. According to its business philosophy, if a potential deal is not right, it walks away and won’t overpay.
A case in point was the possible acquisition of fashion retailer Rage earlier in 2018. This very fast-growing chain, with almost 600 outlets, would have been the group’s largest acquisition so far. With a price tag of almost R4bn, it would have required all Long4Life’s cash plus a lot of debt and the issuance of many more shares. According to Joffe, while Rage was considered an outstanding company, its cash conversion ratio was too low, and the deal in progress was discarded.
In the middle of a recession, small-cap stocks such as Long4Life find it especially difficult to attract investor interest, even with a brilliant founder such as Joffe, who has an impeccable track record.
But perhaps this is the time to take a closer look at this share, while all the economic pessimism swirls around.
Joffe has been through too many economic cycles to get overly concerned about this particular downturn.