The life and times of two BEE con­tenders

Com­pa­nies with strong Cape com­mu­nity roots couldn’t be more dif­fer­ent

Finweek English Edition - - Companies & markets - MARC HASENFUSS

FOR TWO CAPE-BASED em­pow­er­ment com­pa­nies formed with largely the same ideals in the late Nineties, Brim­stone In­vest­ment Cor­po­ra­tion and Sekunjalo In­vest­ment Group could not have drifted fur­ther apart.

In the early years there were cer­tainly some sim­i­lar­i­ties, both hold­ing mean­ing­ful grass-roots or com­mu­nity sup­port, both suf­fer­ing cor­po­rate set­backs that smashed their share prices as well as sen­ti­ment, and both hav­ing to fend off cor­po­rate raiders in their weak­est mo­ments.

With both com­pa­nies hav­ing a large ex­po­sure to the fish­ing sec­tor, there was even talk not too many years ago that Brim­stone and Sekunjalo should merge to form a “su­per re­gional em­pow­er­ment en­tity”.

But at­tend­ing Brim­stone’s year to endDe­cem­ber 2006 fi­nan­cial re­sults pre­sen­ta­tion and Sekunjalo’s AGM on the same day last week, it’s quite ap­par­ent that two very dif­fer­ent em­pow­er­ment beasts have emerged.

Brim­stone is no doubt the more ro­bust con­tender – which is con­firmed by its share price that trades at a pre­mium to the last­stated 675c/share net as­set value (NAV).

Brim­stone has re­li­able cash flow from its in­dus­trial and fi­nan­cial in­vest­ments such as pack­ag­ing group Lenco, fash­ion-brand group House of Monatic and short-term in­surer Lion of Africa. Per­haps more im­por­tantly, Brim­stone has been tagged as a pre­ferred BEE, which ex­plains its par­tic­i­pa­tion in ma­jor cor­po­rates such as Old Mu­tual, Ned­bank, Life Health Care and Oceana.

Brim­stone has also paid steadily in­creas­ing div­i­dends for the past four years, cul­mi­nat­ing in the 16c/share de­clared for fi­nan­cial 2006.

By con­trast, Sekunjalo trades at dis­count to its group NAV of 102c/share and com­pany NAV of 250c/share, with the mar­ket seem­ingly de­ter­mined to dis­count the group’s claims that sub­stan­tial value will be un­locked in the fore­see­able fu­ture via cor­po­rate ac­tion.

Sekunjalo, to date, has lacked cash flow, and its as­set reg­is­ter – aside from Pre­mier Fish­ing – is an as­sem­blage of small en­ter­prises, many of which have been ac­quired in pa­per-funded deals in the last 30 months. Sekunjalo has not pulled any ma­jor em­pow­er­ment ac­tion in­volv­ing ma­jor listed (or un­listed) cor­po­rates. Nor has it paid a div­i­dend.

Brim­stone CEO Mus­taq Brey says the group now rep­re­sents a well- di­ver­si­fied in­vest­ment op­tion, not­ing that its in­vest­ments are mostly busi­nesses that at­tract non-dis­cre­tionary spend­ing (ba­sic food, pack­ag­ing, health­care, in­sur­ance, cloth­ing etc). “We be­lieve we have a sus­tain­able model now, backed by a strong bal­ance sheet. Our latest fi­nan­cial num­bers (where head­line earn­ings topped R1bn) have in­tegrity…we at Brim­stone know main­tain­ing our cor­po­rate dig­nity is what it’s about.”

He adds: “Our share price is re­flect­ing the in­her­ent value of our un­der­ly­ing in­vest­ments and brands, and Brim­stone is be­com­ing a prom­i­nent fix­ture of the port­fo­lios of ma­jor fi­nan­cial in­sti­tu­tions and private in­vestors alike.”

While there’s a cool, con­fi­dent con­sol­i­da­tion mood at Brim­stone, Sekunjalo’s AGM last week was a fre­netic af­fair some­what akin to a pep talk to share­hold­ers about prospects.

CEO and chair­man Iqbal Surve – no doubt aware that the group’s share price has been rather stag­nant of late – reck­ons the mar­ket will be very pleas­antly sur­prised by Sekunjalo in the months ahead.

At last week’s AGM, an ebul­lient Surve claimed the group was not overly con­cerned by its rat­ing in the mar­ket. But he also stated: “Don’t say we didn’t tell you about the po­ten­tial of our busi­ness,” adding that Sekunjalo’s “com­pany” NAV of R930m would ac­tu­ally be proved much higher in the process to un­lock value.

Surve pre­dicts that Pre­mier Fish­ing – still the group’s an­chor earner – could gen­er­ate prof­its of over R100m within the next 24 months. The group’s tech­nol­ogy clus­ter – set for a list­ing in the next 12 months – has pen­cilled in prof­its of be­tween R20m and R25m, with the prob­lem­atic health­care di­vi­sion chip­ping in be­tween R10m and R15m.

Per­haps the big­gest dif­fer­ence be­tween Brim­stone and Sekunjalo is that Brim­stone is look­ing very much like a black Rem­gro – packed with strong brands, strong cash flow and pay­ing reg­u­lar div­i­dends.

Cash flow in­deed is a prickly is­sue at

Sekunjalo – which has adopted a some­what dis­con­cert­ing “fix, con­sol­i­date and grow” mantra to its un­der­ly­ing op­er­a­tions. In the last fi­nan­cial year, op­er­a­tional cash flow was neg­a­tive to the tune of R7m.

But in a “high-level strate­gic up­date” to share­hold­ers, deputy CEO Norman Nolan pointed out that cash out­flows in the pe­riod com­prised in­vest­ments of R55m, in­vest­ments in prop­erty, plant and equip­ment of R16m and loans to group sub­sidiaries of R25m.

He reck­ons the ben­e­fits of this ex­pen­di­ture will “come through strongly in the next fi­nan­cial year”.

The one sim­i­lar­ity be­tween Brim­stone and Sekunjalo is that both em­pow­er­ment groups have largely com­pleted their di­ver­si­fi­ca­tion ef­forts and now sim­ply have to de­liver on that strat­egy.

It seems Brim­stone is the more com­fort­able with its present po­si­tion and is un­likely to court any fur­ther cor­po­rate ac­tion to un­lock value. And why should it? Div­i­dends are grow­ing, cash flow is re­li­able, the stock is highly rated and the group’s strate­gic in­vest­ments as well as home­grown op­er­a­tions are pan­ning out well.

Brey notes: “We are not in a hurry for fur­ther cor­po­rate ac­tion…we don’t want to make mis­takes.”

Sekunjalo, on the other hand, is dan­gling quite a few cor­po­rate events in front of share­hold­ers as re­gards a long-awaited value un­lock­ing ef­fort. The group in­tends list­ing its tech­nol­ogy clus­ter on the JSE in the short term and also aims to take its biotech­nol­ogy sub­sidiary Bio­clones to the Nas­daq or Lon­don’s AIM within 12 months (see Good, Bad & Ugly on page 24).

Sekunjalo also ad­mits the sale or part sale of op­er­a­tions could be con­tem­plated as well.

While Brim­stone’s NAV of 675c/share is sup­ported by the mar­ket, pun­ters have been loath to ex­tend sim­i­lar sen­ti­ment to Sekunjalo’s “con­ser­va­tive” com­pany NAV of 250c/share.

The mar­ket pre­sum­ably will only take proper cog­ni­sance of the com­pany NAV (which sug­gests a val­u­a­tion of over R900m for Sekunjalo) when the sep­a­rate list­ings and sale/part-sale of op­er­a­tions even­tu­ally tran­spires.

While no one dis­putes the R900m plus val­u­a­tion Brim­stone direc­tors place on the group’s an­chor in­vest­ment, Life Health Care, there’s much scep­ti­cism about the value Sekunjalo ac­cords to Pre­mier Fish­ing. Sekunjalo’s Surve is adamant Pre­mier is “un­equiv­o­cally worth R700m – based largely on big­ger quo­tas for the south coast and west coast lob­ster op­er­a­tions.

Surve says Sekunjalo has en­ter­tained po­ten­tial trans­ac­tions worth R600m in the last 12 months – which would sug­gest pro­pos­als for a part­sale of Pre­mier were prob­a­bly to hand. “Some were very at­trac­tive deals, but we turned them down. We are here to build busi­nesses. We don’t trade, and we are cur­rently look­ing at new in­vest­ments that run into hun­dreds of mil­lions of rand.”

While Brim­stone seems con­tent to be in a con­sol­i­da­tion phase with most of its in­vest­ment cylin­ders fir­ing, there must also be po­ten­tial for some cor­po­rate ac­tion in the medium term. Deputy chair­man Fred Robert­son con­cedes that Lion of Africa (which gen­er­ated R33m in af­ter-tax prof­its this year) is “listable” – es­pe­cially with a paucity of short-term in­sur­ance stock in cir­cu­la­tion.

One would pre­sume House of Monatic – now re­vamped as a sex­ier fash­ion-brand house – could also list once prof­its tick over the R30m mark. Robert­son is cir­cum­spect and adds “that we know it’s best to feed the mar­ket when the mar­ket’s hun­gry”. The ques­tion for in­vestors at this point is whether the “meat and pota­toes” tan­gi­bil­ity of Brim­stone should pre­clude pun­ters chanc­ing their arm on the more fan­ci­ful facets of Sekunjalo.

One must give credit to Sekunjalo for sur­viv­ing the hor­ren­dous im­plo­sion of its core in­vest­ment in LeisureNet in 2000. At that time, the group had a neg­a­tive NAV and was lum­bered with gear­ing of 140%. Tan­gi­ble “group” NAV is now over 100c/share, and gear­ing is down to a far more man­age­able 14%.

But can Sekunjalo re­ally un­lock the value sug­gested by its ex­ec­u­tives? The mar­ket clearly thinks not. Even af­ter a sis­ter pub­li­ca­tion re­ported on pro­ceed­ings at Sekunjalo’s AGM, the share shifted down (al­though the mar­ket was all a-jit­ter at that point).

Fin­week reck­ons the big­gest con­trib­u­tor to a change in sen­ti­ment for Sekunjalo – aside from its pro­posed sep­a­rate list­ings and sug­gested sales – is to con­vince the mar­ket it can take a lead­ing role in se­cur­ing ma­jor broad-based black eco­nomic em­pow­er­ment (B-BBEE) trans­ac­tions.

Sen­ti­ment for Brim­stone changed about three years ago when it be­came clear the group was a pre­ferred em­pow­er­ment part­ner – based mostly on ex­ec­u­tives hav­ing forged a rep­u­ta­tion for be­ing up­front, straight­for­ward, re­li­able and able to add gen­uine value to in­vest­ments. One of Sekunjalo’s main goals this year, ac­cord­ing to Nolan, is to par­tic­i­pate in larger B-BBEE trans­ac­tions. If a multi-bil­lion rand cor­po­rate hauls aboard Sekunjalo to spearhead a large B-BBEE con­sor­tium, the de­vel­op­ment would en­hance the group’s cor­po­rate sta­tus markedly and erase con­tentions that ex­ec­u­tives were only ca­pa­ble of rop­ing to­gether rats and mice.

One has the feel­ing that now is the time for Sekunjalo to de­liver on its prom­ises, or risk fur­ther “diss­ing” from the mar­ket. Brim­stone, con­versely, has all the time in the world to mull any sig­nif­i­cant strate­gic de­vel­op­ments.

And time is money, as they say in the clas­sics…

We be­lieve we have a sus­tain­able model. Mus­taq Brey

Adamant

that Pre­mier is worth R700m. Iqbal Surve

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