The life and times of two BEE contenders
Companies with strong Cape community roots couldn’t be more different
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
that Premier is worth R700m. Iqbal Surve