PICK of the MONTH
At first glance this could look an odd choice for Pick of the Month. Since releasing its interim results to end-June, the share price discount on empowerment company Brimstone Investment Corp’s intrinsic net asset value (NAV) seems to have narrowed.
This would be based on the share price movements of its two biggest investments: fishing conglomerate Oceana and private hospitals specialist Life Health.
The interim NAV was reflected as R17.69/share and R16.73/share on a fully diluted basis. This would mean the share price was offering a 21% discount on the intrinsic NAV and 16% on the fully diluted measure. At the time of the interim report in August, ordinary shares offered an attractive 24% discount on intrinsic NAV, and a 33% discount on the more tradable N-shares.
IM, though, reckons Brimstone is worth a closer look now that it has confirmed its rumoured intention to spin out and list its fishing subsidiary, Sea Harvest, on the JSE.
The deal should be value enhancing on several fronts.
First, the interim accounts show that the 85% stake in Sea Harvest is valued at close to R1.3bn on a discounted cash flow, enterprise value and earnings before interest, tax, depreciation & amortisation valuation.
Brimstone’s recent circular outlining plans to list Sea Har- vest shows the fishing company posting R43m at the bottom line. That would suggest Brimstone is valuing Sea Harvest on an earnings multiple of more than 30 times.
But investors need to look higher up the income statement to understand the real profit potential of Sea Harvest. The company turned revenue of R1.365bn into operating profit of R114m. It was a large interest bill of more than R50m that smacked the bottom line.
Sea Harvest’s R1.5bn private placement will result in the debt being retired, leaving a few hundred million rand to pursue opportunities locally (where the run-up to the 2020 fishing rights allocation process could spur deal making) and offshore (where Sea Harvest already has a beachhead with its controlling stake in Australian Stock Exchange-listed seafood business Mareterram).
About R575m of Sea Harvest’s private placement proceeds will be earmarked for paying back loans and retiring preference share positions held by Brimstone. In other words, Brimstone secures R575m in cash over and above retaining a 52% stake in a recapitalised (and deal-hungry) Sea Harvest.
The listing of Premier Fishing, spun out of empowerment counter African Empowerment Equity Investments, should reveal how big the market’s appetite is for medium-sized specialist food companies. gut feel is that the strong cash-
Brimstone has been cleaning up its portfolio, shedding interests that no longer appeal or where value could not be added
generation qualities, the succulent margins and potential for consolidating parts of the fishing sector will appeal to adventurous institutional investors.
Brimstone, which has been meticulous about paying dividends for the past 15 years, has also reinforced its balance sheet for possible deal making.
The firm has been cleaning up its portfolio, shedding interests that no longer appeal or where value could not be added. This included two listed companies, fast food franchisor Taste Holdings and fashion retailer Rex Trueform.
Further rationalisation is possible. Brimstone is part of an empowerment arrangement at Tiger Brands, holding rights to 1.8m of the conglomerate’s shares in a deal that matures at the end of the year. Whether Brimstone cashes out or remains in is open to question.
There has also been speculation that, rather than chase new investments, Brimstone could leverage its stronger balance sheet to increase its stake in Oceana, where Tiger sits conspicuously as the largest shareholder in an industry where the right to operate is largely premised on meaningful levels of black ownership.
Brimstone has reiterated its caution in chasing new deals, wary of excessive expectations from business vendors. So if nothing fits its strict deal-flow criteria, it might not be unreasonable for directors to make the payouts more generous or even pay a special dividend.
Brimstone offers affordable access to quality assets and a management team determined to alleviate risk in building long-term value. For patient and risk-averse investors, the share is worth accumulating at current levels.
Share: JSE share code: Share price: Average volume traded: Brimstone Investment Corp BRT & BRN R14.00 N/A