Brimstone waits for dust to settle

• Cape Town-based BEE investment pioneer says the pandemic has made it more difficult to value potential acquisition targets

Brimstone Investment, the largest shareholder in food producer Sea Harvest, says Covid-19 has forced it to become “leaner and meaner” and it is waiting until there is more market certainty before making any new investments as the pandemic has made it harder to accurately value potential acquisitions.

Brimstone Investment, the largest shareholder in food producer Sea Harvest, says Covid19 has forced it to become leaner and meaner and that it is waiting until there is more market certainty before making any new investments as the pandemic has made it harder to accurately value potential acquisitions.

The Cape Town-based BEE investment pioneer says it is also far more comfortable about its financial position after repaying lenders more than R1bn to reduce its debt-to-asset ratio in accordance with its borrowing agreements.

The group reported a loss of R43.8m for the year ended December 31 2020 compared with a profit of R75.3m the previous year, mainly due to the downward revaluation of listed investments, including Equites.

“We’re just sitting on our hands at the moment — we don’t know if it’s the right time to go out into the market,” said CEO Mustaq Brey. “We talk to people all the time but when they show you an income statement you have to adjust for Covid-19. So it’s very difficult to get to a set of numbers where we can say, ‘let’s negotiate on that’. People want to put through all these adjustments that are making it much more difficult to do a deal than two years ago.”

Brey said Brimstone is sitting on “a few hundred million rand” of unused debt facilities, which it could add to its cash reserves to look for new opportunities, but that its focus now is on reducing debt and becoming as lean and mean as possible.

Part of the reason for this is to improve its debt-to-asset cover to 2.75 times or more, as this has prevented it from either paying a dividend or buying back shares due to covenant agreements with lenders.

“We applied [to our lenders] for permission [to pay a dividend] and we weren’t granted the permission,” said Brey. “They restricted us because of our covenants. They said they are not strong enough. We’re supposed to be at 2.75 times asset cover, we’re at about 2.6 times at the moment.”

Though Brimstone’s total asset value was R6.47bn as at end-December, Brey said that by the end of April, when the group has fully traded out of its Life Healthcare investment and reduced its total debt to about R2.1bn, its assets will be worth about R5.5bn. That would improve its asset cover ratio to about 2.61 times.

Brimstone sold R321m worth of shares in Equites Property Fund in its year to end-December 2020, bringing its stake to 2.3% from 6.3% previously.

The group also disposed of R441m worth of Life Healthcare shares during the year, bringing its stake to 2.3%, with these shares used as collateral for a R1.2bn loan. The group is handing them over at pre-arranged prices rather than opting to repurchase them. After the yearend, Brimstone sold half the remaining 33-million shares in Life Healthcare for R449.6m, with the rest expected to be disposed of during April.

Proceeds from disposals of stakes, including in Equites Property Fund and Life Healthcare, were used to reduce debt, which stood at a net R2.1bn at end-December 2020 — after excluding R898m in debt related to Life Healthcare. Brimstone also sold shares in MultiChoice’s BEE scheme, Phuthuma Nathi, for R175.3m, reducing its stake to 2.8% from 5.6% previously.

At end-December, Brimstone also had a 5.3% stake in private higher education group Stadio worth R130.76m, as well as 54.2% of Sea Harvest and 25% of Oceana.

ANCHORS

While investments in Sea Harvest and Oceana are still the anchors of Brimstone’s asset base, and were worth R2.3bn and R2.1bn, respectively at endDecember, uncertainty over the allocation of long-term fishing rights is limiting further investment in the two businesses. While Brimstone expects more clarity on this from the government by the end of 2021, Brey said it is not a foregone conclusion that the 15-year rights will be renewed after a one-year extension of the expired rights in 2020 due to Covid-19.

“They’ve expired but were extended for a year as the minister wasn’t in a position to make a decision in 2020,” said Brey.

“If we don’t get the quotas we anticipate there will be retrenchments. It will be very sad if it does happen, but it could happen.”

Brey said Brimstone undertook a number of measures to reduce its cost base by about 20% during its 2020 financial year, which included giving up a third of its premises when renewing its lease, closing its Johannesburg office and cutting salaries. It is also in the process of selling off machinery and laying off production line staff at clothing manufacturer House of Monatic, which it plans to sell to a “manufacturer and retailer” with which it is negotiating.

Overall, the company remains confident about its financial position amid ongoing Covid-19 uncertainty and has “weathered another storm”, said Brey. “We are sure there are going to be a lot of opportunities when the dust settles,” he said.

Brimstone’s ordinary share closed 0.13% higher to R7.91, having risen 12.84% over the past year, but falling more than a third over the previous five.