New look at Brait
From an early 2016 high of R174, Brait has undergone a spectacular reversal of fortunes, starting in June of that year. This was due to its prior sale of prize asset Pep Stores, its purchase of UK-based New Look at an inflated price and the weakening of the pound after the Brexit vote.
Brait used to trade at a premium to its NAV, due to its directors’ astute investment decisions. But it has, since its troubles, traded at a (currently significant) discount to NAV.
As Brait is a leveraged private equity firm with underperforming investments, its share price has dropped signif- icantly. It is currently trading at 2014 levels.
In its most recent results, Brait admitted problems with New Look and has written the investment — bought with the proceeds of the Pep Stores sale — down to zero. Revenue and sales both declined in the six months to end-September.
A turnaround strategy has been implemented at New Look, but it will take time to see how successful this is in the competitive UK clothing market.
The 71.9%-held Virgin Active (41% of Brait’s assets) performed well, with revenue up 15% in sterling, yet up just 5% in rand terms. Some gyms were
disposed of and 17 new ones opened, and debt was reduced by about R1bn. Virgin’s performance in SA was lacklustre, while revenues increased in Asia, the UK and Italy.
Brait values Virgin Active at an EV/Ebitda (enterprise value to earnings before interest, tax depreciation and amortisation) of 11.4 times. This is a 15% discount to its peers’ spot multiple, which seems reasonable.
The revenue of Premier Foods (28% of Brait’s assets) declined 10% in the six months to end-September, mainly due to the volatile maize price affecting its milling division. The firm’s five-year R3bn capex has ended, and it is now expected to generate returns on those investments to shareholders.
Brait values Premier at an EV/Ebitda of 12.4, a 10% premium to its peer groups’ spot multiple. This seems high, given its contraction in earnings.
The 60.1%-owned Iceland Foods (20% of Brait’s assets) continues to grow through new store openings and sales, with overall sales up 7.3% in sterling. It remains highly cash generative and the refinancing of most of its debt (resulting in an inter- est saving of £5.7m) contributes positively to its performance. Brait values it at an EV/Ebitda of nine, a 20% discount to its peers’ spot multiple — which seems low, given its improving growth prospects.
Overall, though Brait’s portfolio of assets tends to be highly cash generative, the prospects for growth are subdued. Virgin Active presents decent growth in the UK, Italy and Asia Pacific, but the SA operation is a damper. The high maize price is negative for Premier’s milling operations, but the baking side looks positive. And growth remains good for Iceland Foods, though competition has softened momentum.
New Look remains a challenge. The focus is on shortterm stabilisation and further implementation of cost controls — and possibly cash injections.
Brait’s end-September quoted NAV is R66.62/share. At about R37, the share has discounted a considerable amount of negativity. It remains cheap, though a break to the low R30s would indicate value. The share is currently a bet on revaluation and/or a weakening rand.