Money&investing
offers a cheap entry point into Sea Harvest and Oceana ... presuming punters covet both seafood servings. The gross value of the fishing investments is about R4bn, which
minus group debt of just under R2bn
is roughly the market value of Brimstone.
Brimstone’s ordinary and N shares are both up about 26% in the past three months. But at an intrinsic NAV of about R13.64 a share, the discount still sits at about 40%.
It’s one thing punting Brimstone as a proxy for cash-spinning assets, but shareholders might want to see a little more corporate action involving Oceana and Sea Harvest.
Deals in the sector have been few in the past three years thanks to the government’s prolonged fishing rights allocation process (FRAP). At face value, Sea Harvest and Oceana seem in good shape, with the government having taken into consideration huge investments by incumbents in vessels and processing plants, as well as employment. “The group’s fishing businesses were pleased with the outcomes of the allocation process. There have been no material changes to previous rights allocated,” says Brimstone.
But Brimstone’s influence at two large fishing companies will inevitably raise issues about ownership concentration. This was raised by various detractors during the allocation process.
So, logically, it would seem prudent for Brimstone to unbundle one of its fishing holdings. Oceana, which was unbundled from major shareholder Tiger Brands in 2019, would be the obvious candidate. But could there be an alternative course that might not only unlock value for Brimstone but ensure continued dividend flows for future years?
First, one needs to understand how valuable Oceana and Sea Harvest are to Brimstone, much like tobacco’s reassuring blaze was to Rembrandt in its early days. In the 2020 financial year Brimstone received dividends of R78m from Sea Harvest and R128m from Oceana, and in 2021 these came in at R72m and R36m respectively. This month Brimstone will receive an R81m dividend from Oceana, and an R89m payment from Sea Harvest. With Brimstone determined to pay dividends and whittle down its debt of nearly R2bn, these distributions are key.
But back to the value conundrum. An unbundling of Oceana is largely predicted because empowerment regulations governing the fishing sector would make it quite difficult for Brimstone to fund a buyer for a stake. A seller may only sell to an entity that is equally or more empowered, which makes the pool of possible bidders much smaller.
Brimstone CEO Mustaq Brey isn’t keen to say which way the company might flip, but talk in the Brimstone berth is that an alternative plan could unfold for the fishing assets. This could involve combining Sea Harvest and Oceana into a mega fishing and food conglomerate, remembering that Sea Harvest has a significant position in the butter and cheese markets and Oceana has moved into baked beans and canned meats. The combined business would have turnover of more than R12.25bn, with a market capitalisation of close to R12bn.
The initial reaction would naturally be that the competition authorities, and political overseers in the fishing sector, would blow such an idea right out of the water. But a black-controlled SA fishing champion might not be the worst development, with an enlarged group still facing stiff competition in its most viable niches of frozen hake and canned pilchards (Lucky Star).
On paper, a merger makes perfect sense. For starters, a combined Sea Harvest and Oceana entity would rank among the top 10 fishing companies in the world. There is little (if any) overlap between Oceana’s prime focus on canned fish and fishmeal/fish oils and Sea Harvest’s hake operations. Even their respective offshore operations — Oceana’s Daybrook in Louisiana and Sea Harvest’s Mareterram and MG Kailis in Australia — are oceans apart.
Sea Harvest, courtesy of its recent acquisition of Viking Fishing, offers Oceana the foothold to develop a comprehensive aquaculture offering (including abalone farming). The combined marketing muscle (especially about best-selling protein brands such as
Lucky Star and Sea Harvest frozen hake) would be impressive, and there is also the opportunity to improve distribution channels, develop new product lines and take out a chunk of central costs.
A combined group would have the muscle to buy international companies and chase local nonfishing food ventures, too. Brimstone’s 25% holding in SA Enterprise Development, for example, offers access to holdings in specialist food assets like Tombake and Specialised Food Investment Holdings.
Brimstone’s other investments
including empowerment scheme Phuthuma Nathi and MTN’s Zakhele Futhi — might suddenly become more prominent, if it merged the two fishing assets and unbundled them.
Worth about R1bn, they also include a 5.1% holding in private tertiary education group Stadio (R160m) and 1.5% in property group Equites (R320m). Its muchreduced Equites holding (which paid a dividend of R22m in the past year) might be considered currency to cut debt, drive dividends or launch a deal.
But the real gems are unlisted holdings in private education business Milpark Education, reinsurance business Aon Africa, health-care products group Obsidian and retail real estate specialist FPG Property Fund.
Brimstone is a key empowerment partner in Stadiocontrolled Milpark, with a 14.5% stake that yielded R17m worth of dividends in 2021. The 18% stake in Aon Africa returned equity accounted earnings of R12m and a dividend of R8m. The
9.9% stake in FPG
Property Fund, which mainly owns properties in the retail convenience market, paid dividends of R2.6m. Brimstone’s stake in FPG was valued up by R47m to R230m.
Perhaps the biggest surprise was the performance by 70%-held Obsidian Health, best known for its stents as well as its parts for new knees and hips. The business chipped in a not insubstantial R20.7m to Brimstone (R6.9m in 2020). Point of care unit sales outperformed targets as Obsidian branched into the sale of rapid antigen Covid test kits and HIV test kits.
While these investments are not nearly on the scale of the fishing assets, their successes do testify to Brimstone’s ability as a trustworthy and value-adding empowerment partner. Brey points out that Brimstone made an initial R2m cash investment into Aon. “It’s phenomenal to get back R5m-R6m a year. It’s a great business ... once the fixed costs are covered it prints money.”
If a meaningful portion of an enlarged fishing business can also be sold to new investors, Brimstone could end up with a balance sheet able to seek out more deals of between R85m and R300m. Presuming the fishing segment is effectively shrunk via a partial unbundling, such new investments will have the ability to move the needle while adding more operational diversity to the portfolio.