Brait’s John Gn­odde on re­val­u­a­tions

Brait’s FY net as­set value has leapt 141% — not sur­pris­ing, given the re­turns it made on the sale of its in­ter­est in Pep­kor. But its other di­vi­sions, like Premier Foods, have also ben­e­fited from a mas­sive reval­u­a­tion. Gi­uli­etta Talevi spoke to CEO John Gn

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Q Trad­ing con­di­tions have not been es­pe­cially easy for SA’s FMCG groups, so why the 170% in­crease in Premier’s val­u­a­tion?

A Premier has had another very good year. It laid out a very clear, co­her­ent strat­egy just on three years ago and is ex­e­cut­ing it ex­tremely well.

Off the back of that its prof­its are up and it’s gain­ing mar­ket share in its core prod­uct ar­eas. Par­al­lel to that, it has done a num­ber of very good ac­qui­si­tions over the past two to three years which it has bolted on to Premier and lifted its earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion even fur­ther.

So that with prof­its up sig­nif­i­cantly year-on-year and gain­ing mar­ket share, hav­ing a big­ger pres­ence, do­ing the right things, the mar­ket is start­ing to un­der­stand that Premier is a real player in that space.

Q But in your re­sults you talk about the change in val­u­a­tion mul­ti­ples to that of the peer group’s three-year trail­ing av­er­age, not just for Premier but for Ice­land Foods. Why the reval­u­a­tion?

A What we did was go back over the past three years, look at the com­pa­ra­ble peer group, take an av­er­age of that peer group and use that as a bench­mark val­u­a­tion.

What we found was that his­tor­i­cally we just used to keep the mul­ti­ple at the level at which Brait bought the as­set and [some­times] there was a big gap be­tween the mar­ket pric­ing and the un­der­ly­ing ac­qui­si­tion pric­ing. So this [reval­u­a­tion] was clos­ing the gap but not in its en­tirety. The dis­count that Premier has to­day to the peer group is still over 16%.

Q The sale of Pep­kor brought you R15bn in cash and 200m Stein­hoff shares, which at your fi­nan­cial year-end were worth R15,2bn. You’ve spent roughly £1,5bn buy­ing up Vir­gin Ac­tive and now 90% of UK fash­ion re­tailer New Look. What’s the ap­peal?

A We re­ceived our pro­ceeds of the Pep­kor deal only on March 30. We an­nounced the first deal in April, which was the Vir­gin deal, and the sec­ond deal in May, so within about two months.

But we’d been track­ing both those as­sets for a long time and done a lot of ground­work over the past two to three years in get­ting our­selves into the right po­si­tion.

The way Brait looks at things is as fol­lows: it looks for busi­nesses that have strong brands, strong mar­ket po­si­tion, dou­ble digit ebitda growth, high cash flow con­ver­sion, and a very strong pres­ence in their home mar­ket. And that off its home mar­ket the busi­ness has the op­por­tu­nity to move its prod­ucts ge­o­graph­i­cally and jump ge­o­graph­i­cal bound­aries.

Both these as­sets fit that equa­tion, but for us it’s not about go­ing to the UK or any­where else, it’s about the right fun­da­men­tal pa­ram­e­ters in each of the in­vest­ments we’re look­ing at.

What’s crit­i­cal from our point of view is that man­age­ment and the founder are part­ners with us and in­vest along­side us in those busi­nesses. And both those deals ticked all those boxes.

So we’re very ex­cited with where we’re at with these two busi­nesses; they’re two very strong busi­nesses.

New Look is what you call a value fast fash­ion busi­ness at the value end of the spec­trum. Its

prod­uct is very sim­i­lar in qual­ity to the Zaras and Pop Shops of the world, but at about a 40% or 50% dis­count to that, and that’s where the world is play­ing at the mo­ment. The world wants value. If you can of­fer a com­pa­ra­ble prod­uct at a good price, you’re of­fer­ing the con­sumer very good value and that is one of the big ap­peals for us.

Q You've also raised a £1,2bn bond on 12 June, which will cut the cost of debt fi­nance by al­most 3%. Were you chuffed with that bond sale?

A Yes. I was on the road with the man­age­ment team last week do­ing all the road shows in the place­ment of the bond and the man­age­ment team have a very clear and co­her­ent strat­egy which they’re ex­e­cut­ing well. They’ve demon­strated that over the past two to three years.

And just bear in mind that bond was done in quite a tough bond mar­ket, so the pric­ing is ac­tu­ally very good. That’s to the full credit of the man­age­ment team of New Look and how they get in­vestors be­hind the busi­ness.

So yes, a good re­sult and, as you rightly point out, bring­ing the cost of fi­nance down dra­mat­i­cally.

Q The US Fed­eral Re­serve is likely to hike rates this year. Will it make life tougher for Brait if de­vel­oped mar­ket in­ter­est rates start go­ing up? A If you take New Look for ex­am­ple, the debt is for seven years and it’s fixed, so we’re ac­tu­ally in a pretty good po­si­tion.

If in­ter­est rates do go up, we are on a safe and se­cure ba­sis be­cause it’s fixed for seven years.

Q Once again you have of­fered in­vestors the op­tion of a share bonus is­sue in­stead of a div­i­dend; what’s the think­ing be­hind that?

A We have ac­tu­ally been of­fer­ing that op­tion for about four years now be­cause a lot of feed­back we take from our share­hold­ers is that some want cash and some want stock, and so we of­fer both.

What has ac­tu­ally hap­pened over the past three to four years is that over 92% of the share­hold­ers al­ways want to take stock.

It is a cap­i­tal growth busi­ness, it is a fun­da­men­tal value play, so I guess that’s why peo­ple have al­ways cho­sen stock.

John Gn­odde CEO: Brait


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