DIVIDENDS AT A DISCOUNT
Empowerment counters GPI, Brimstone and AEEI offer an opportunity to get in on quality assets — and there could be easy money to be made, writes
he discounts offered on the JSE’S handful of empowerment investment companies are bewilderingly big … and perhaps a huge opportunity, in some instances, to acquire a portfolio of quality assets that will offer rewards on a sustainable basis.
Enduring and dividend-paying empowerment counters such as Brimstone Investment Corp, Grand Parade Investments (GPI), Hosken Consolidated Investments and African Equity Empowerment Investments (AEEI) are all trading at disparaging discounts to their intrinsic NAV.
It’s basically the same story for recently listed African Rainbow Capital (ARC), which holds a few interesting early-stage big bets. ARC at last count was offering close to a 40% discount on its last stated NAV.
Historically, the JSE’S socalled investment trust companies would offer discounts of anything between 10% and 25% — sometimes, as has been the case with PSG Group, sporadically trading at a premium to NAV.
If an investment counter trades at a discount of more than 25%, there would usually be an indisputable reason for
Tthis. Reasons could include management showing themselves to be poor allocators of capital, the portfolio consisting of inferior assets, a key asset could be underperforming or there might be perceptions that there was only a scant chance that value could be unlocked for shareholders in the foreseeable future.
Another key issue is whether the interests of executive management of an investment company and the shareholders are aligned. Nothing rubs shareholders up the wrong way like high or undeserved management fees, especially if the portfolio underperforms.
Some of these reasons do apply to some of the empowerment counters.
But whether it justifies discounts of close to 70% is highly debatable.
In particular, the share prices of GPI, Brimstone and AEEI — for different reasons — have been battered over the past 12 months. Admittedly, small-cap counters — and those three fall into that category — have been smashed this year. There is also scepticism over SA’S growth prospects, and all three companies are firmly rooted in local operations.
The big question is whether the discounts will start narrowing in 2019 after the elections, when hopefully a new economic framework is more discernible. If the discounts narrow to even 40% and the underlying investments show just slight growth in 2019 then there could be easy money to be made.
At the time of writing, GPI was trading at a discount of close to 70% of its inferred sum-of-the-parts (SOTP) valuation of 718c a share reflected
at the end of June. The discount shows market misgivings around the value of R838m accorded to the group’s master franchise agreement for Burger King, as well as a general distaste for other “lightweight” forays into the fast-food sector.
In short, it could be argued that GPI management sold off most off its crown jewels — in the form of its cash-spinning gaming assets — to back food ventures that have eaten up cash with no flavourful returns yet. It’s crying over spilt milk, but if GPI had resisted the temptation of the fast-food sector and simply retained its gaming investments, shareholders would have been significantly better off today.
If we strip out total value of GPI’S food segment (which, aside from Burger King, also includes Dunkin’, Baskin-robbins, catering equipment supplier Mac Brothers and a meat plant) then the SOTP value remains attractive … on paper.
The collective value of the 15% stakes in the Grandwest casino (R884m) and limitedpayout machine business Sun Slots (R707m) is about R1.6bn. Ignoring a smidgen of debt at the end of June, that would point to an SOTP value of 372c a share, which is well ahead of the ruling share price. If the value of the 18% holding in Jselisted Spur Corp is added back in, then the SOTP shifts closer to 420c a share. Then there is GPI’S head office building on the Cape Town Foreshore — which was previously up for sale — that might have a value of anything between R120m and the officially stated R185m.
On the face of it, GPI’S ruling share price would appear to offer a significant safety margin. But it seems the market is betting on management eroding value with its rapid Burger King rollout, and also hesitating in shutting down Dunkin’ and Baskin-robbins — which are unlikely to generate an economic return any time soon.
This predicament is, of course, why activist shareholders have called for a board shake-up to bring renowned strategic and fast-moving consumer goods experience to GPI as quickly as possible.
The board changes should usher in some much-needed urgency in cutting the food division’s losses, and perhaps — over the longer term — look to selling off Burger King once sustainable profits have been secured.
This should safeguard dividend flows from the reliable gaming assets, and allow GPI to approach new investment opportunities more circumspectly. If the status quo remains, there could be further indigestion for shareholders — though the tilt on the boardroom might light a fire under the seats of the executives.
Brimstone’s intrinsic value is far less contentious — but the discount slapped on the portfolio is still astounding. Earlier this month Brimstone posted an updated investment schedule showing fully diluted NAV of R17.13 a share compared to share prices of around R10 for both its N-shares and ordinary shares.
Brimstone is a pioneering empowerment venture formed in the mid-1990s, and longstanding management have proved to be reliable investment partners and astute (perhaps conservative) allocators of capital over more than two decades. The portfolio is solid rather than spectacular, and dividends have flowed regularly (and generously) over the past 15 years.
Considering the steady long-term record, there seems no real justification for the share to trade at more than 40% discount to intrinsic value.
If the value is unpacked it is possible to argue that Brim-
stone’s share price merely reflects the value of fishing interests — the controlling stake in Sea Harvest and the significant minority stake in Oceana Group.
That means the 3.4% stake in private hospitals group Life Healthcare — worth more than R1bn — comes for free.
But perhaps that’s overly simplistic. What might be worrying the market is Brimstone’s debt levels of close to R1.9bn, and how effectively this can be serviced.
Brimstone’s assets comfortably cover the debt — and it’s worth noting that the collective value of smaller investments in property group Equites, logistics specialist Grindrod, empowerment scheme Phuthuma Nathi, investment company Long4life, private education business Stadio as well as various property interests tallies up close to R1.2bn.
There might also be an overriding “regulatory” concern that stakes in Oceana and Sea Harvest are not easy to monetise as such assets may only be sold to other suitable empowered companies, which restricts the pool of willing (and enthusiastic) buyers.
Brimstone could hope to narrow the discount on its value by buying back shares, but gut feel is that it might require sustained profit performances from key assets Sea Harvest, Oceana and Life Healthcare to turn the tide of jaundiced sentiment.
AEEI — which in the past 18 months has separately listed Premier Fishing & Brands and Ayo Technology Solutions on the JSE — officially reflected an NAV of 999c a share at the end of August. This means the share price offers a discount of nearly 60%.
But AEEI’S presentation to investors muddies the valuation issue somewhat by also showing a company NAV of R14.93 a share and a directors’ SOTP value estimate of R21.84. The latter, IM suspects, is based on prices at which AEEI directors might mull an offer from a suitor.
Thankfully, it is fairly simple to peg a more quantifiable val- uation on AEEI. IM calculates a conservative (read: “robust”) NAV of around R11 a share. That would be based on the market prices of AEEI’S investments in Premier Fishing and cash-flush Ayo, and takes into account only half (yes, “half”) of the value of the group’s strategic investments (stated as R600m) and half the indicated value of the significant minority stake in technology group BT-SA (stated as R950m). If just AEEI’S share of the cash balance in Ayo of about R4bn is considered then IM’S estimate of NAV is closer to 725c a share.
Ayo, which is AEEI’S biggest investment, got off to a terrible start by losing top executives, delaying a key deal and falling markedly behind pre-listings earnings forecasts. AEEI has obviously not escaped this fallout. But Ayo is certainly not a hopeless case, and as long as deal flows and contract wins are regularly registered, sentiment might start firming.
Just how confident the AEEI executives are around the value proposition will be reflected next year when the company is expected to embark on share buyback exercises.
The AEEI shares — mostly held by empowerment tycoon Iqbal Survé’s unlisted Sekunjalo Investments — are already fairly illiquid.
So it should not take too much capital and effort to mop up the weak holders of AEEI stock.
All three empowerment companies reviewed above have a flaw (or two) that a morbid market is fixating on. In all three instances there is more than a reasonable change that perceived drawbacks can be removed or negated in the medium term.
IM reckons holding a combination of GPI, Brimstone and AEEI — all determined dividend-paying entities — could see investor portfolios sitting in the black over the longer term as intrinsic values increase and discounts start to narrow.
All three empowerment companies reviewed have a flaw (or two) that a morbid market is fixating on