New Look drags Brait down

New Look was the ugly stain in Brait’s trading update for the quarter to December 2016, as the UK clothing retailer’s valuation fell R10bn following a 42% drop in the previous quarter.

“The UK and European apparel and footwear sectors continued to face a challenging, promotion-led market with reduced footfall during the 13 weeks ended 24 December 2016 (Q3),” said Brait. It paid $1.2bn for New Look in 2015.

Brait revised New Look’s net asset value (NAV) to R8.7bn, from R18.7bn in the previous quarter. The business now comprises 17% of Brait’s NAV and has been replaced by Virgin Active as the group’s largest holding.

A recent rally in New Look bonds and a fall in Brait’s share price suggested that the market might be anticipating an equity issue to refinance New Look’s debt, which stood at about £1bn, said Brad Preston, portfolio manager at Mergence Investment Managers.

New Look was highly geared, with external net debt six times higher than operating earnings, Preston said.

Brait meanwhile had only R3.5bn in cash on its balance sheet and would be unable to de-gear New Look’s balance sheet and grow the retailer’s geographic footprint, he said.

This would also constrain Brait’s ability to do new deals, Preston said.

New Look grew revenue 0.8% quarter on quarter, as a result of strong performance outside the UK, particularly in China, Brait said.

While international sales had performed well, the bricks-andmortar UK businesses remained an important part of the retailer and were losing market share, said Preston.

New Look had faced a “double whammy” in the form of Brexit and a struggling UK retail sector, said Byron Lotter, equities analyst at Vestact.

But Brait was “ticking the right boxes for future growth” by expanding into China and pushing online retail, he said. “Fast fashion is an exciting theme going forward.”

It was unlikely that Brait would dilute its shares in issue by raising equity to refinance New Look’s debt, Lotter said.

Brait had been successful historically at raising funding in debt markets.

An imminent listing in London would give it access to additional capital, said Lotter.

Brait’s share price has fallen more than 50% over the past year and is down 11% year to date. It closed Tuesday up 1.34%, indicating the market had largely priced in the fall in NAV.

The group’s NAV fell 21.5% to R82.45 from September to December 2016, bringing it closer to Tuesday’s closing share price of R77 — a far cry from a 12-month high of R169.

“When the market bids share prices up to the extent that it did Brait, it’s virtually impossible to deliver on those expectations,” said Nic Norman-Smith, chief investment officer at Lentus Asset Management.

With the shares now trading at about the company’s NAV, Brait looked a lot more attractive, but was not yet trading at enough of a discount, NormanSmith said.

Looking ahead, it was not as clear-cut as it had been previously whether Brait would deliver on its investments, said Asief Mohamed, the chief investment officer at Aeon Investment Management.