‘We’re not sell­ing as­sets’

CEO Johnny Cope­lyn reck­ons the group can weather 18 months of virus-en­forced limbo. But what comes af­ter that?

Financial Mail - - MONEY&INVESTING - Marc Hasen­fuss hasen­fussm@fm.co.za

Ice­land Foods: Val­ued at R3.8bn just over a year ago

Clearly, the mar­ket has no great faith in a big value un­lock.

Peter Hay­ward-butt, part­ner at Ethos Pri­vate Eq­uity, does not con­tra­dict this. He says this is not the time to re­alise value from Brait’s re­main­ing port­fo­lio which, be­sides the an­chor in­vest­ment in Vir­gin Ac­tive, also in­cludes a ma­jor­ity stake in con­sumer brands con­glom­er­ate Pre­mier Foods (R6bn) and a sig­nif­i­cant mi­nor­ity eq­uity in­ter­est and se­nior se­cured notes in UK fash­ion chain New Look (R940m).

Vir­gin Ac­tive, which spans a num­ber of ge­ogra­phies, is still in dif­fer­ent stages of op­er­a­tional re­cov­ery from the Covid-19 lock­down. Though there have been some pos­i­tive trends at clubs that have opened (es­pe­cially in Aus­tralia), cor­po­rate ac­tion around Brait’s big­gest in­vest­ment — last val­ued at a markedly lower R9bn — might still be 18 months to two years away.

The sale of Pre­mier is also not im­mi­nent. Hay­ward-butt be­lieves there is an opportunit­y to bulk up parts of Pre­mier, which con­ceiv­ably could lead to Brait ex­it­ing by float­ing an en­larged busi­ness on the JSE.

In­ter­est­ingly, Pre­mier gen­er­ated over R1bn in earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (ebitda) to end-march, with Brait bas­ing the value of its stake on a rea­son­able (by JSE stan­dards) ebitda mul­ti­ple of eight times.

If there is a curve­ball in Brait’s as­set sale plans, this would most likely en­tail an un­so­licited takeover bid for parts or all of Pre­mier by one of the JSE’S larger food en­ti­ties or food­in­clined in­vest­ment groups.

For now, Brait has suf­fi­cient breath­ing space.

Hay­ward-butt’s quote from a pre­pared press re­lease is prob­a­bly telling: “Hav­ing taken over the ad­vi­sory con­tract in March, Ethos is pleased with the re­cent DGB and Ice­land di­vest­ments ... ev­i­denc­ing ex­e­cu­tion on the new strat­egy.”

The mar­ket is un­likely to adopt man­age­ment’s sto­icism, which means Brait’s shares could drift into com­pelling value ter­ri­tory in the months ahead. Watch and wait. ý Hosken Con­sol­i­dated In­vest­ments (HCI), whose main as­sets have been in Covid-19 limbo, should be able to hold out for 18 months with­out hav­ing to take dras­tic ac­tion to curb its sub­stan­tial debt lev­els, says CEO Johnny Cope­lyn.

He is adamant the group will not need to em­bark on a rights is­sue.

HCI’S main­stay as­sets in the gam­ing sec­tor — the Tsogo Sun casino busi­ness along with Galaxy elec­tronic bingo and Vs­lots — have been idle dur­ing the lock­down, mean­ing that vi­tal cash flows have been cut off since the close of the fi­nan­cial year at end-march. At last count HCI’S over­draft was close to R3bn.

HCI also holds trans­port, me­dia, in­dus­trial and prop­erty as­sets, and has made re­cent for­ays into plat­inum group met­als as well as oil and gas ex­plo­ration.

The mar­ket took HCI’S shares as low as R16 re­cently, which strongly sug­gested a cap­i­tal raise was im­mi­nent. The shares have al­most dou­bled from that level as more of the econ­omy was un­locked.

Cope­lyn dis­misses, for now, the pos­si­bil­ity of sell­ing as­sets to curb debt. “We don’t want to sell off good as­sets … in bad times. We also don’t want to sell as­sets at fire-sale prices.”

Debt lev­els, how­ever, need to come down and, more im­me­di­ately, the in­ter­est bill has to be ser­viced.

So how will HCI en­dure un­til the gam­ing

(and ho­tel as­sets) are kick­ing through re­li­able cash flows again?

Cope­lyn’s sim­pli­fied equa­tion — for nor­mal times — pencils in HCI’S net cash flows from un­der­ly­ing in­vest­ments of around R900m.

Of that R900m, roughly R550m was gen­er­ated by the wider Tsogo op­er­a­tions, and R350m from the rest of the port­fo­lio.

HCI’S debt cost was about R250m and div­i­dends around R200m. Take out R50m-r80m of over­heads and cor­po­rate costs, and HCI was left with R370m-r400m to in­vest in new projects or ac­qui­si­tions.

But in the fi­nan­cial year ahead, HCI can­not bank on Tsogo’s R550m, and it’s al­most im­pos­si­ble right now to es­ti­mate what the casi­nos and ho­tels might earn.

So in a worst-case sce­nario, HCI will have to rely on the cash gen­er­ated from mid­sized in­vest­ments like Hosken Pas­sen­ger Lo­gis­tics & Rail (HPL&R), HCI Coal, broad­cast group eme­dia and so­lar en­ergy in­vest­ment Karoshoek.

The econ­omy won’t be play­ing ball, ei­ther. But if th­ese in­vest­ments can gen­er­ate net cash flows of R260m-r300m in the fi­nan­cial year ahead, HCI should be able to ser­vice its debt.

Ob­vi­ously the group will have to forgo div­i­dends. More painful, per­haps, will be pass­ing up new in­vest­ments, at a time when as­set prices might well be at­trac­tive.

“We can hold the fort for 18 months. If things don’t change af­ter that we would have to re­assess things al­to­gether,” says Cope­lyn.

There might, of course, be some un­ex­pected wins for HCI. For in­stance, the pro­longed le­gal case against lot­tery op­er­a­tor Ithuba could yield be­tween

R500m and

R600m if HCI se­cures its 1% of the lot­tery man­age­ment

MIND THE GAP

Hosken Con­sol­i­dated In­vest­ments vs JSE all share in­dex Daily – based to 100 fee.

The re­cent buyout of in­vest­ment sub­sidiary Niveus also gives HCI ac­cess to a cash hold­ing of more than R150m.

HCI, as ex­pected, passed its fi­nal div­i­dend for the year to end-march. But a big­ger sac­ri­fice that has to be con­sid­ered is fi­nan­cial sup­port for key in­vest­ments that burn cash — the largest two be­ing the in­vest­ments in Plat­inum Group Met­als (PGM) and Im­pact Oil & Gas.

Jun

Oct

While there have been calls for HCI to jet­ti­son th­ese in­vest­ments, Cope­lyn main­tains that fail­ing to pro­vide for busi­nesses that need share­holder sup­port is most dam­ag­ing — rob­bing the hold­ing com­pany of growth pos­si­bil­i­ties and its vi­sion for fu­ture suc­cesses.

Cope­lyn is de­ter­mined to stick with PGM and Im­pact, though this prob­a­bly means sup­port­ing them only un­til an ac­cept­able exit is se­cured.

Un­sur­pris­ingly, progress at PGM and Im­pact has been ham­pered by Covid-19.

PGM suf­fered a fur­ther blow when Im­pala Plat­inum, the pre­ferred de­vel­op­ment part­ner for its Water­berg project, got cold feet.

Cope­lyn, how­ever, is op­ti­mistic that the min­ing rights at Water­berg will shortly be granted, which will im­prove the mar­ketabil­ity of the project to other min­ing groups.

He is also hope­ful that Im­pact and PGM’S projects will show real progress by the sec­ond half of the cal­en­dar year.

As things stand, HCI’S 31% in PGM — about 20-mil­lion shares, trad­ing at $1.43 at the time of writ­ing — is worth about $29m.

At a share price of $3-$4, HCI’S stake would be worth be­tween R1bn and R1.4bn. But such ap­pre­ci­a­tion might de­pend on se­cur­ing an­other de­vel­op­ment part­ner for Water­berg (per­haps Sibanye-still­wa­ter?).

HCI’S fund­ing obli­ga­tions at Im­pact could be even more oner­ous — pos­si­bly as high as $1.5bn over the longer term. Again, the chal­lenge would be to hang in un­til there is a chance to make a prof­itable exit.

The key short-term ques­tion is how long it will take the Tsogo gam­ing op­er­a­tions to re­turn to a sem­blance of busi­ness as usual. At this junc­ture it seems un­likely Tsogo will

opt for a rights is­sue, as smaller ri­val Sun In­ter­na­tional has done.

Cope­lyn es­ti­mates that the com­bined cost of keep­ing Tsogo’s gam­ing and ho­tels busi­nesses alive dur­ing lock­down tops R200m a month.

Clearly this can­not con­tinue for much longer.

But while Cope­lyn re­mains char­ac­ter­is­ti­cally stoic, some HCI share­hold­ers are pon­der­ing whether the cur­rent predica­ment does not of­fer an endgame opportunit­y.

One share­holder ar­gues that Cope­lyn has proved a smart value ar­bi­trageur, ac­quir­ing good as­sets for well be­low their rea­son­able value.

The ques­tion then is whether HCI is now not it­self the ul­ti­mate value ar­bi­trage? In other words, might the South­ern African Cloth­ing & Tex­tile Work­ers’ Union (Sactwu), which owns 32.3% of HCI, be coaxed into sell­ing or swap­ping its stake?

Sactwu, which now has to fund cloth­ing and tex­tile as­sets ac­quired from HCI sub­sidiary Deneb, could find it rea­son­able to part with its 29-mil­lion shares at a de­cent pre­mium to the cur­rent price. Or Sactwu could swap its HCI hold­ing for all or part of HCI’S stake in a cash­gen­er­at­ing in­vest­ment such as HPL&R, or even eme­dia.

There might not be a bet­ter time to buy back a sig­nif­i­cant par­cel of shares. Buy­ing good as­sets at a bad time could pay off if cer­tain HCI in­ter­ests can be off­loaded to cull debt, leav­ing sub­stan­tial value to be un­locked in those non­cash-gen­er­at­ing in­ter­ests cur­rently over­looked by the mar­ket.

In­ter­est­ingly, last week HCI struck a R159m deal with Sactwu around buy­ing the union’s

30% stake in un­listed HCI In­vest6, which holds 323.3-mil­lion N shares in broad­cast group eme­dia.

With the way the deal is struc­tured, HCI will pay Sactwu a nom­i­nal R1 for its stake in HCI In­vest6 in ex­change for set­tling a R77.5m loan from Deneb and the R38m loan from Hciowned Solly Sachs House. The re­main­ing cash por­tion will be set­tled by HCI no later than the end of 2021, with 20-mil­lion Jse-listed eme­dia N shares also in­cluded in the set­tle­ment.

Does this point to an even­tual sep­a­ra­tion of Sactwu and HCI? With Sactwu off the share reg­is­ter, HCI would have about 60-mil­lion shares in is­sue, pos­si­bly open­ing the way for Cope­lyn and other larger share­hold­ers to make an of­fer to mi­nori­ties.

Apr

1,400 1,200 1,000

Chris Rat­cliffe/bloomberg

Peter Hay­ward-butt: There is an opportunit­y to bulk up parts of Pre­mier

Johnny Cope­lyn: We don’t want to sell off good as­sets in bad times

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