Financial Mail - Investors Monthly
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
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.