Long4Life’s Joffe longs for life after quarteritis
Lifestyle business investment company Long4Life’s August interim results were slightly down on the comparative period, except for the 20% improvement in revenue to R1.8bn.
Gross profit margin fell from 40.4% to 39.1%, trading margin dropped from 11.6% to 9.6%, and headline earnings per share (Heps) fell 4% to 15.4c.
Compared with many listed consumer-facing companies, it was a good result indeed. Yet the share price languishes 25% below listing level and trades at a 30% discount to net asset value (NAV). Long4Life listed at 585c in April 2017, reached a peak of 702c in July that year and is now trading at 438c.
Founder and CEO Brian Joffe is disappointed with its performance and displeased with institutional shareholders who have dumped their shares in recent times.
“Originally, shareholders were partners, but this is no longer the case,” says Joffe. “Small and midcap companies do not have the same support from shareholders, and this kills entrepreneurship.”
He describes the status of this investment group as being in “no-man’s land”, too big to be small and too small to be big. With a poor rating and large discount to NAV, the company took back control with a share buyback programme, spending R109m on it during the interim period, compared with R159m in financial 2019.
Joffe’s frustration is noted. Back in the day, a corporate entrepreneur of his standing could make a handful of phone calls and secure undertakings from financial institutions to buy and hold the company’s shares. No longer. Afflicted by “quarteritis” (short-term thinking in a long-term business) and the obsession with short-term comparable investment performance, young and inexperienced fund managers often panic when shares fall substantially, and exit at the wrong time.
Investor sentiment towards domestic-oriented companies such as Long4Life is poor due to a stagnant economy, and earnings multiples are lower than they could be, which limits the scope for using equity as an acquisition funding tool.
The company is made up of four pillars: sport & recreation; beverages; personal care & wellness; and its recently acquired, seemingly incongruous, minority, and yet unexplained 14.4% stake in Spur Corporation.
Sport & recreation (Sportsman’s Warehouse, Outdoor Warehouse and Performance Brands) is the largest contributor to revenue (57%) and trading profit (64%). Though sales growth was strong, margins were squeezed due to challenging conditions at Performance Brands, leaving trading profit flat. A proactive stance on merchandising included accelerated promotional and markdown sales.
Beverages (Inhle and Chill) contributes 36% of revenue and 24% of trading profit. Inhle performed at near full capacity. Chill’s volumes and revenues increased, but with disproportionate increases in costs. Pricing pressure, an increase in marketing and expenditure, increased capacity and costs associated with Chill’s expansion strategy resulted in reduced trading profit. So while revenue rose 20%, squeezed profit margins resulted in trading profit declining 16%.
Personal care & wellness (Sorbet and Clayton Care) contributes 7% to revenue and 12% to trading profit. Like-forlike revenue growth was 13%, while trading profit rose 62%, due to first-time inclusion of Clayton Care. Sorbet had a good interim, with franchisee sales growing 11% on a like-for-like basis.
Performance at these divisions is seasonal, with the September-February second half being noticeably better. Last financial year, 86% of cash and 61% of trading profit was generated in the second six months and the group is targeting margin enhancements for the upcoming peak-season trading period. Overall, group outlook offers potential, with the limiting factor being the languid local economy.
“We shape our destiny, we aren’t shaped by events around us — and a lousy economy is no excuse not to perform,” says Joffe.
“There’s always space in a complicated market for entrepreneurs. We have chosen to concentrate on our four pillars and build on them. We’re not upset with where we’re at, but we want a more reasonable discount to NAV,” he says.
BACK IN THE DAY, AN ENTREPRENEUR OF HIS STANDING COULD MAKE A HANDFUL OF PHONE CALLS AND GET UNDERTAKINGS FROM INSTITUTIONS