Brait must have been worried on morning of Brexit shock
IWILL never forget the day of Brexit. What a horrific morning it must have been for Brait executives! With UK clothing retailer New Look representing 45 percent of their investment portfolio, they must have been very worried. Thanks to Brexit, denim and the strong rand, their crown prince New Look diminished to only 15 percent of the Brait portfolio.
Consumer patterns in the UK changed and New Look wasn’t ready. Being a leading clothing retailer in the UK, they quickly learnt a few things from their changing environment.
The net asset value (NAV) of Brait and the share price collapsed in the aftermath of Brexit. From being a darling of the JSE, and trading at a premium to the sum of the parts or NAV, it was dumped by both foreign and local investors. The share price reached a high of more than R166 in December 2015. In the middle of 2015 the share traded at a premium in excess of 50 percent of the published NAV!
The day before Brexit the share price was R157, and last week it traded as low as R66.50. A drop of almost 60 percent.
Last week Brait reported a NAV of R78.15 per share, a far cry from the R136.27 reported 12 months earlier.
The loss of NAV comes from two sources:
• Investment loss of R15 billion due to a writedown in the value of New Look.
• Foreign exchange loss of R13bn, primarily due to the rand having strengthened 20.5 percent against the pound sterling, from R21.21 at March 31, 2016 to close the financial year at R16.87. Brait’s investment portfolio: Percent of Brait’s NAV Virgin Active 33% Premier Foods 26% Iceland Foods 15% New Look 15% Other investments 4% Cash and cash equivalents 7% Total: 100% Three of the Brait businesses, representing 75 percent of the investments, performed very well. The crown jewel seems to be Virgin Active, which has 1.2 million active members worldwide, and in constant currency its EBITDA earnings grew 13 percent. Only 32 percent of revenue now originates from South Africa, and the Asian business in particular has great prospects.
Iceland is now firmly established as the UK’s leading frozen food specialist and was recently voted the number one online supermarket store. It has weekly deliveries in excess of 45 000, with average user spend over £50 (R820).
Can New Look recover? It has been a difficult year, with conditions expected to remain challenging. The great thing is that this management team are innovative and young, and have clearly identified their past mistakes.
They have put robust plans in place to address specific issues. I think the worst is behind New Look and that things can only get better.
In pound terms, the NAV of Brait dropped only 28 percent per share, from £6.43 to £4.63.
The NAV analysis shows that Brait values its unlisted assets at very conservative multiples, for instance the Virgin Active earnings multiple of 11.4 compares very favourably with the average peer group multiple of 12.4.
Buying the share below the current NAV of R78 will probably lead to satisfactory future share price returns.