Brait must have been wor­ried on morn­ing of Brexit shock

The Star Early Edition - - OPINION & ANALYSIS - Amelia Mor­gen­rood Amelia Mor­gen­rood: BCom (Hons) Fi­nan­cial Plan­ning, mem­ber of the South African In­sti­tute of Stock­bro­kers. Port­fo­lio man­ager, re­gional direc­tor. Faerie Glen Stock­broking & Fi­nan­cial Plan­ning

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.

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