Believing in Brian

f I had any spare change (I don’t) I’d bank on a decent value uplift from Long4Life’s review of its corporate structure and strategic focus. The mooted exercise has already spurred much speculation — which is understandable, because the prime mover is dealmaking doyen Brian Joffe.

He knows about value creation, and I suspect he knows Long4Life needs a shift to regain momentum. Not much additional detail was provided at the recent investor presentation, covering its year to end-February results.

Officially, the group is weighing up alternatives to maximise shareholder value. To quote: “These alternatives include, inter alia, retaining the status quo, a possible delisting from the JSE or the unbundling of certain focused assets.” Though there is a medium-term target, I am led to believe the actual review process might take only a few weeks to conclude.

Long4Life is hardly a complicated conglomerate, and the restructuring options are not exactly unlimited.

I would guess the most obvious way to unlock value is to unbundle and relist (for the third time!) the sports and recreation operations, which are by far the biggest profit contributor and most significant value slab.

At this juncture, I would argue that the sports and recreation hub — made up of Sportsmans Warehouse, Outdoor Warehouse and other niche operations — is worth at least the current market value of Long4Life. The old Holdsport was valued at around R2.6bn when acquired (mostly with scrip) by Long4Life in mid-2017. I’d say a fair bit of value has been added since.

In the year to end-February, the sports and recreation division reported sales down 10% to R2.1bn — a fair showing, considering Covid’s impact.

But it’s important to note the division made a strong comeback in the second half, when revenues matched the previous year’s number.

Gross margins improved slightly to

I47.2%, perhaps helped by the fact that a dip in “team sport” sales (soccer boots, hockey sticks and cricket balls) were offset by a tick-up in home gym equipment, running and cycling paraphernalia. I would assume the latter categories, especially the big(ger) ticket items, would earn a fatter margin. The division’s enhanced e-commerce offering led to online sales surging 98% year-on-year.

I’d expect this trend to continue (says he, relishing the convenience of boxes of tennis balls delivered to the doorstep).

My gut feeling is that the sports and recreation hub can continue to be scaled up with selective acquisitions and by building out some of the existing niches. That might mean sports and recreation comes to dominate Long4Life’s portfolio from an earnings and value perspective.

For discerning investors

The old Holdsport business was not the most popular retail counter, but discerning investors appreciated its competitive margins, strong cash flows and generous dividend policy.

As a standalone listing it might, in time, come into play again as mainstream retailers look to explore new niches that might offer superior margins. Assuming sports and recreation is unbundled, Long4Life — it might be argued — would not really hold a portfolio that justifies a continued listing.

I disagree. I certainly don’t see the sense of listing one segment and exiting the others. With a smaller portfolio Joffe could use his stout cash balance to pursue smaller deals that would move the needle at Long4Life. The portfolio could be more diversified with smaller deals that carry less risk.

There may be a few stressed “mom and pop” operations out there, where ingenuity is more plentiful than capital.

On the existing portfolio, I still think beauty therapy business Sorbet has potential when things get back to normal,

The beverages segment has legs and its continued success could trigger a price war with larger competitors Coca-Cola, Monster, Red Bull and Distell.

A rejigged Long4Life, it might be argued, would not really hold a portfolio that justifies a continued listing. I disagree