‘We’re not selling assets’
CEO Johnny Copelyn reckons the group can weather 18 months of virus-enforced limbo. But what comes after that?
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
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.
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.
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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