Missing keys to the lock
Marc Hasenfuss
For investment firms, realising the worth of their assets is tricky, writes
nvestment companies, especially counters with an empowerment tag, are offering fat discounts to the intrinsic worth of their portfolios. There are often quality assets on display, but realising the true worth of these assets is no cinch. As recent events have shown, the keys to unlock value are not always readily available, and some empowerment locks are near impossible to pick.
For instance, underlying subsidiaries might — by regulation — require strong empowerment ownership, which rules out selling such an asset, unless it’s to another equally empowered entity.
In recent months there have been a number of attempts by investment companies to enhance or unlock value for shareholders. With Covid-19 still infecting sentiment on the JSE, these efforts have, so far, been underappreciated by the market.
Remgro — widely regarded as the share all South Africans should own — has unbundled the bulk of its banking interests (held in RMB/ Firstrand), while Stellenbosch-based PSG has followed a similar tack with the unbundling of most of its stake in Capitec Bank.
Market murmurings are that perhaps Remgro and PSG should be looking at reducing the number of access points to their portfolio constituents by
Ibuying out and delisting key listed investments.
Remgro, IM fancies, could certainly look at delisting consumer brands business RCL Foods, private hospitals group Mediclinic or beverages business Distell.
By the same token, PSG has the capacity to buy out minority shareholders in agri-business Zeder Investments as well as its private education subsidiaries Curro and Stadio.
Remgro’s share price continues to reflect a discount (at the time of going to press) of more than 20% — signalling the market is not holding its breath for a rapid succession of valueunlocking exercises. PSG’S discount to its updated sum-ofthe-parts value is about 17% — which suggests the market is starting to think there are more moves afoot to shake up the investment portfolio.
Even beleaguered Brait has made encouraging progress on its asset-selling initiative, which requires a delicate balance between degearing the balance sheet and ensuring there remains a semblance of longer-term value.
Brait has confirmed the sale of its stake in liquor group DGB (IM believes for about R750m) and, more significantly, its stake in UK grocery store chain Iceland for £115m. Brait’s discount still remains stubbornly distant from its more than
800c a share NAV.
However, things have proved a little tougher for empowerment investment companies, where the gaping discount (sometimes more than 50% of intrinsic NAV) tells a tale of difficulties in designing debt-culling plans.
Brimstone Investment Corp and Grand Parade Investments (GPI), two enduring empowerment companies based in Cape Town, find themselves at intriguing junctions.
IM would have included Hosken Consolidated Investments (HCI) — which has seen its share price massacred after Covid-19 closed down its key casino and hotel investments — as well. But the article was unfortunately timed just ahead of the belated release of HCI’S results, which would probably have dated or made irrelevant any speculation in this article.
African Rainbow Capital Investments also attracts an eye-popping discount. But it is at an early stage of its development, and growth initiatives will take precedent over valueunlocking efforts for many years to come.
Both the Brimstone and GPI share prices offer discounts that are compelling against the value of the asset register
African Equity Empowerment Investments (AEEI) has been struck down by ongoing controversy (especially around subsidiary Ayo Technology Solutions), which somehow makes assessing the last stated NAV figures superfluous. On the other hand, AEEI does have a balance sheet that could accommodate an acquisition or three if distressed opportunities do arise.
Both the Brimstone and GPI share prices offer discounts that are compelling against the value of the asset register. But the large discounts also reflect structural complications.
Both are lumbered with considerable — rather than crippling — debt. That said, in “normal” times both companies have investments and assets that generate enough cash flow (operationally or via dividend flows) to service that debt — and still pay dividends to shareholders.
In better times both companies could take comfort in being able to relatively easily exit investments to raise cash to bolster the balance sheet when gearing became a hindrance.
The pandemic has, unfortunately, ratcheted up gearing ratios in all three companies. Their underlying investments have lost (to different degrees, admittedly) value — but the debt levels remained the same, or increased if interest charges could not be serviced because operations were closed down in the lockdown.
GPI found itself in the unlucky position of entering the lockdown with two of its large assets — a 30% stake in limited-payout machine operator Sun Slots and the 96% stake in fast-food brand Burger King
— in the process of being sold.
The Burger King deal, due to the Covid-19 outbreak, is being renegotiated, and there is some fretting that a new deal will be concluded. The original price tag for Burger King plus allied food manufacturing operations was about R700m. IM imagines GPI would not want to veer too far from this price, considering the hard work undertaken to bring Burger King up to profitability.
There might be more hope that the Sun Slots deal can be concluded since debt-laden buyer Sun International, the gaming giant, is about to pitch a R1.2bn rights issue. Sun Slots is a reliable cash-generative asset, which offers some reassurance if Sun International doesn’t complete the proposed deal.
GPI’S big value play, of course, is its significant minority stake in Sunwest, which operates Cape Town-based casino Grandwest. That would be an easy stake to market — especially when casinos open again. But gut feel is that GPI would prefer to retain the reliable dividend flows from Sunwest.
Brimstone has been quite fortunate in that its two biggest investments — fishing companies Sea Harvest (which has a dairy element as well these days) and Oceana Group — operated throughout the lockdown.
Brimstone carries substantial debt at the centre, and it seems there is now a concerted effort to ease gearing.
Since the lockdown the group has sold down two of its mid-size investments — Phuthuma Nathi (a proxy on Multichoice) and property group Equites — to raise almost R500m.
Officially Brimstone has stated that the economic uncertainty had prompted a strategic review of the investment portfolio in terms of maintaining a long-term strategy.
“The board has identified assets it believes can be partially or fully disposed of at acceptable valuations without jeopardising this strategy.”
Reading between the lines, IM would suspect (see Anthony Clark’s story on the possible food sector shake-up) Brimstone would be keen to build on its formidable food sector niche as well as expand its new health-care footprint.
If there is some moving and shaking to be done in the aftermath of Covid-19, Brimstone would need a stronger balance sheet to ensure flexibility for deal-making.
IM is not sure what else Brimstone could offload in the short term. It would probably be the wrong time to exit stakes in private education business Stadio and logistics group Grindrod. There are also other unlisted property interests.
Brimstone’s stake in Life Healthcare Group is now subject to the R1.2bn raised in a share-backed zero-cost-collar funding arrangement over these shares.
On paper, it might make sense for Brimstone to sell off its 25% stake in Oceana and focus on its controlling stake in Sea Harvest. But such a decision seems a long way off (especially with the allocation of new fishing rights pending). Such a sale would also be made trickier by the need to involve another suitably empowered entity … with a big cheque book.
One possibility — and this resides in the mind of the writer rather than reality — could be for Brimstone to take a look at GPI’S Burger King stake, if negotiations with the current buyer fall away. Brimstone has previously shown an appetite for fast food, having held influential stakes in Nando’s (way back in the late 1990s) and Taste Holdings (which it wisely exited before the pizza hit the fan). Sea Harvest also has a factory shop/takeaway offering.
In terms of unlocking value, there is one big difference between Brimstone and GPI. Brimstone is still controlled/ managed by its founders, the redoubtable Mustaq Brey and Fred Robertson, while GPI now has shareholder activist Value
Capital Partners (VCP) as the shareholder of reference.
It would seem Brimstone would be content to bulk up its food segment — keeping its Oceana stake as collateral for a rainy day. Brey and Robertson have always steered Brimstone cautiously with their eyes on the far horizon.
For investment sentiment to firm, Brimstone will need to signal a resumption of cash dividends in the not too distant future as well as balance niche investing activities with degearing efforts.
A prolonged period of nonactivity at Brimstone will undoubtedly ensure the discount to intrinsic value remains around the 50% level.
GPI would seem to be the more obvious shorter-term “value-unlock play” — if the economy does not remain bedridden with an unshakeable case of Covid-19.
Burger King has, fortunately, shown its potential. In fact, the fast-food business might actually benefit from a Covid-19 induced slowdown in store openings — which might allow fatter margins to be built and operating models to be perfected.
Sun Slots — like other alternative gaming formats — has proved a resilient business. Gut feel is that Sun International has recognised this, and would want to complete the acquisition of the remaining 30% in order to bolster future cash flows.
If the Sun Slots sale can be banked in the short term, then GPI will have some breathing space should it need to woo another buyer for Burger King.
It’s also worth remembering that VCP is also a major shareholder in Sun International. IM would not rule out the chances of GPI’S stake in Sun International’s cash cow, Grandwest, coming into play as a part of a restructuring exercise of the gaming assets.
It would seem Brimstone would be content to bulk up its food segment — keeping its Oceana stake as collateral for a rainy day