Brace for a bumpy ride ahead
Shareholders shouldn’t hold their breath waiting for a quick turnaround at problem child New Look
Investors who bought shares in Brait this time last year must be feeling particularly pained.
On June 13, the day the company issued results for the year to March, the share price closed at an almost three-year low of R62.51 — more than 50% off the heady levels at which it was trading 12 months ago.
It has recovered a bit since then, but not by much.
So what gives? Are Brait’s glory days gone or can it do another Pepkor? (In that deal, incidentally, Brait sold Pepkor to Steinhoff at seven times its cost price, earning a cool R26bn return.)
Unfortunately, New Look, the UK retailer for which Brait paid £763m in June 2015 (about R14.2bn at the time), remains a problem child.
When it bought the asset, Brait valued it at about R15bn. This was then ratcheted up to nearly R35bn at the end of March 2016, a peak from which it has tumbled to R7.1bn as at March 31 this year — less than it originally paid.
From accounting for 45% of Brait’s investment portfolio a year ago, New Look today makes up 15%. Its spectacular decline in value helped knock Brait’s own net asset value (Nav)/share 42.6% lower to R78.15, down from R136.27 at the end of the previous period.
In pound terms, Brait’s Nav/share is 27.9% lower, indicating the considerable effect a stronger rand has had on the company’s primary measure of value.
Still, a decline in New Look’s earnings, coupled with a lower valuation multiple applied to the asset by Brait, had a greater effect.
New Look’s full-year 2017 operational earnings fell 32% on a highly competitive UK retail environment, higher staff wages and increased investment into marketing initiatives and its China expansion.
Since Brait, headed by John Gnodde, values its businesses based on their most recent earnings, it then decreased the valuation multiple it applied to New Look from 13.3 times at March 2016, a 12% discount to peers, to 10.3 times at March 2017, a 29% discount to the trailing threeyear average multiple of peers.
Brait increased the level of the discount to account for New Look’s underperformance on revenue and earnings relative to its peer group, a spokesman says.
Shareholders shouldn’t hold their breath waiting for a quick turnaround. New Look expects the challenging retail environment in the UK to persist, but says it has improved its buying processes and supply chain to ensure it delivers what consumers want.
“Immediacy and convenience matter more than ever before in the search for great fashion,” says New Look CEO Anders Kristiansen. “We are renewing our determination to offer even more compelling lead-in entry prices across our ranges. By being faster on the ➦
Considering the change to New Look’s value, investors would be wise to take a view on Brait’s other investments, which are now a proportionally larger part of its portfolio