New look at Brait

Financial Mail - Investors Monthly - - Front Page - Paul Baise

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.

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