Financial Mail - Investors Monthly - - Opening Bell - Marc Hasen­fuss

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

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