What's the the buzz on BEE dis­counts

Are there sweet long-term re­turns in 2019?

Financial Mail - Investors Monthly - - Front Page -

The dis­counts of­fered on the JSE’s hand­ful of em­pow­er­ment in­vest­ment com­pa­nies are bewil­der­ingly big … and per­haps a huge op­por­tu­nity, in some in­stances, to ac­quire a port­fo­lio of qual­ity as­sets that will of­fer re­wards on a sus­tain­able ba­sis.

En­dur­ing and div­i­dend-pay­ing em­pow­er­ment coun­ters such as Brim­stone In­vest­ment Corp, Grand Pa­rade In­vest­ments (GPI), Hosken Con­sol­i­dated In­vest­ments and African Eq­uity Em­pow­er­ment In­vest­ments (AEEI) are all trad­ing at dis­parag­ing dis­counts to their in­trin­sic NAV.

It’s ba­si­cally the same story for re­cently listed African Rain­bow Cap­i­tal (ARC), which holds a few in­ter­est­ing early-stage big bets. ARC at last count was of­fer­ing close to a 40% dis­count on its last stated NAV.

His­tor­i­cally, the JSE’s so­called in­vest­ment trust com­pa­nies would of­fer dis­counts of any­thing be­tween 10% and 25% — some­times, as has been the case with PSG Group, spo­rad­i­cally trad­ing at a pre­mium to NAV.

If an in­vest­ment counter trades at a dis­count of more than 25%, there would usu­ally be an in­dis­putable rea­son for this. Rea­sons could in­clude man­age­ment show­ing them­selves to be poor al­lo­ca­tors of cap­i­tal, the port­fo­lio con­sist­ing of in­fe­rior as­sets, a key as­set could be un­der­per­form­ing or there might be perception­s that there was only a scant chance that value could be un­locked for share­hold­ers in the fore­see­able fu­ture.

Another key is­sue is whether the in­ter­ests of ex­ec­u­tive man­age­ment of an in­vest­ment com­pany and the share­hold­ers are aligned. Noth­ing rubs share­hold­ers up the wrong way like high or un­de­served man­age­ment fees, es­pe­cially if the port­fo­lio un­der­per­forms.

Some of these rea­sons do ap­ply to some of the em­pow­er­ment coun­ters.

But whether it jus­ti­fies dis­counts of close to 70% is highly de­bat­able.

In par­tic­u­lar, the share prices of GPI, Brim­stone and AEEI — for dif­fer­ent rea­sons — have been bat­tered over the past 12 months. Ad­mit­tedly, small-cap coun­ters — and those three fall into that cat­e­gory — have been smashed this year. There is also scep­ti­cism over SA’s growth prospects, and all three com­pa­nies are firmly rooted in lo­cal op­er­a­tions.

The big ques­tion is whether the dis­counts will start nar­row­ing in 2019 af­ter the elec­tions, when hope­fully a new eco­nomic frame­work is more dis­cernible. If the dis­counts nar­row to even 40% and the un­der­ly­ing in­vest­ments show just slight growth in 2019 then there could be easy money to be made.

At the time of writ­ing, GPI was trad­ing at a dis­count of close to 70% of its in­ferred sum-of-the-parts (SOTP) val­u­a­tion of 718c a share re­flected

at the end of June. The dis­count shows mar­ket mis­giv­ings around the value of R838m ac­corded to the group’s mas­ter fran­chise agree­ment for Burger King, as well as a gen­eral dis­taste for other “light­weight” for­ays into the fast-food sec­tor.

In short, it could be ar­gued that GPI man­age­ment sold off most off its crown jewels — in the form of its cash-spin­ning gam­ing as­sets — to back food ven­tures that have eaten up cash with no flavour­ful re­turns yet. It’s cry­ing over spilt milk, but if GPI had re­sisted the temp­ta­tion of the fast-food sec­tor and sim­ply re­tained its gam­ing in­vest­ments, share­hold­ers would have been sig­nif­i­cantly bet­ter off to­day.

If we strip out to­tal value of GPI’s food seg­ment (which, aside from Burger King, also in­cludes Dunkin’, Baskin-Rob­bins, cater­ing equip­ment sup­plier Mac Broth­ers and a meat plant) then the SOTP value re­mains at­trac­tive … on pa­per.

The col­lec­tive value of the 15% stakes in the Grand West casino (R884m) and lim­ited pay­out ma­chine busi­ness Sun Slots (R707m) is about R1.6bn. Ig­nor­ing a smidgen of debt at the end of June, that would point to an SOTP value of 372c a share, which is well ahead of the rul­ing share price. If the value of the 18% hold­ing in JSE listed Spur Corp is added back in, then the SOTP shifts closer to 420c a share. Then there is GPI’s head of­fice build­ing on the Cape Town Fore­shore — which was pre­vi­ously up for sale — that might have a value of any­thing be­tween R120m and the of­fi­cially stated R185m.

On the face of it, GPI’s rul­ing share price would ap­pear to of­fer a sig­nif­i­cant safety mar­gin. But it seems the mar­ket is bet­ting on man­age­ment erod­ing value with its rapid Burger King roll­out, and also hes­i­tat­ing in shut­ting down Dunkin’ and Baskin-Rob­bins — which are un­likely to gen­er­ate an eco­nomic re­turn any time soon.

This predica­ment is, of course, why ac­tivist share­hold­ers have called for a board shake-up to bring renowned strate­gic and fast-mov­ing con­sumer goods ex­pe­ri­ence to GPI as quickly as pos­si­ble.

The board changes should usher in some much-needed ur­gency in cut­ting the food di­vi­sion’s losses, and per­haps — over the longer term — look to sell­ing off Burger King once sus­tain­able prof­its have been se­cured.

This should safe­guard div­i­dend flows from the re­li­able gam­ing as­sets, and al­low GPI to ap­proach new in­vest­ment op­por­tu­ni­ties more cir­cum­spectly. If the sta­tus quo re­mains, there could be fur­ther in­di­ges­tion for share­hold­ers — though the tilt on the board­room might light a fire un­der the seats of the ex­ec­u­tives.

Brim­stone’s in­trin­sic value is far less con­tentious — but the dis­count slapped on the port­fo­lio is still as­tound­ing. Ear­lier this month Brim­stone posted an up­dated in­vest­ment sched­ule show­ing fully di­luted NAV of R17.13 a share com­pared to share prices of around R10 for both its N-shares and or­di­nary shares.

Brim­stone is a pi­o­neer­ing em­pow­er­ment ven­ture formed in the mid-1990s, and long­stand­ing man­age­ment have proved to be re­li­able in­vest­ment part­ners and as­tute (per­haps con­ser­va­tive) al­lo­ca­tors of cap­i­tal over more than two decades. The port­fo­lio is solid rather than spec­tac­u­lar, and div­i­dends have flowed reg­u­larly (and gen­er­ously) over the past 15 years.

Con­sid­er­ing the steady long-term record, there seems no real jus­ti­fi­ca­tion for the share to trade at a 70% dis­count to in­trin­sic value.

If the value is un­packed it is pos­si­ble to ar­gue that Brim-

Pi­o­neer­ing em­pow­er­ment ven­ture Brim­stone has the con­trol­ling stake in fish­ing group Sea Har­vest.

Pic­ture: 123RF — FRAN­CIS DEAN

Grand Pa­rade In­vest­ments holds the US fast-food chain Burger King mas­ter fran­chise agree­ment for south­ern Africa.

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