Gaining from the private life
Trans Hex Group paid a dividend? Well, I never. After the diamond miner, once controlled by Remgro, delisted in late 2019, I honestly thought the next chapter in Trans Hex’s fourdecade history might well be business rescue or a similarly desperate fate. I picked up the R3.5m dividend disclosure when scanning the latest report from investment company Astoria (where I am a very small shareholder). Astoria, spearheaded by Jan van Niekerk and deep-value acolyte Piet Viljoen, offers a cheap entry into some cash-spinning alternative gaming assets (RECM & Calibre) as well as a left-field retail niche (outdoor paraphernalia and pet stores).
The group remained a shareholder in Trans Hex after the delisting — at a time when the diamond miner was struggling for traction with the Namaqualand mining assets it bought from De Beers. Van Niekerk says that being unlisted enabled the Trans Hex management team to move fast and effectively in restructuring the business. “Little did we know that positive operating results would occur so soon. We have a committed management team, an appropriate operating model and a like-minded partner.
With this foundation in place, we are looking for ways to expand the business.”
The Somiluana mine in Angola, in which Trans Hex owns a 33% interest, increased production by a quarter, while average realised diamond prices jumped 63%. What’s more, the positive impact of higher oil prices on the availability of dollars in the Angolan banking system made it easier to repatriate dollars to the Trans Hex head office. Astoria now puts its 35.7% stake in Trans Hex 81% higher at
R97m (based on a 32% discount to NAV) — which suggests Trans Hex is now worth more than double its value when it delisted. It seems delisting Trans Hex was a prudent move.
Van Niekerk argues that in private companies Astoria had found it much easier to discuss and understand the underlying “cuts and thrusts” of business.
“For instance, since Trans Hex was delisted, management has had the freedom to transform the business, and it shows.
“There are no circulars, no drawn-out shareholder voting processes, no opportunistic shareholders holding the company to ransom because of arbitrary differences of opinion about valuation, and so forth.
Just management rolling up their collective sleeves and getting on with the job, supported by shareholders who understand exactly what is happening and are therefore prepared to take the risk of providing capital to management at a fair price to help them achieve their aims.”
And we wonder why we have a small-cap company exodus from the JSE.
Bulking up
I know that more than a few of my acquaintances are relooking at Brait — paying particular attention to whether freshly funded Virgin Active can sweat its assets to regain levels of earnings before interest, tax, depreciation and amortisation (ebitda) of at least £100m in the next two years.
I was fascinated to see that Brait’s presentation at the recent Sun City investment conference disclosed that Virgin Active’s revenue had stretched to £86.3m in the quarter to endDecember 2021 with total membership of 807,000. The revenue figure is up from the £75.1m recorded in the three months to September 2021.
More importantly, Virgin Active’s ebitda came close to £15m in the quarter ending December (compared with £6.6m in the prior quarter).
That’s a big jump, but the improvement does reflect a number of territories experiencing easier lockdown restrictions, with all clubs being open from the end of October last year.
One would assume further noticeable improvements in ebitda for the first quarter this year, and then hopefully a steady pattern of growth.
If we annualise the fourth quarter 2021 ebitda, Brait shareholders are looking at annual ebitda of £60m. That does give a fair underpin to the
£634m (R12bn) valuation for Virgin Active — especially when compared with valuations of top international fitness chains and brands like Planet Fitness and Nike.
If Virgin Active’s ebitda can roll out between £75m and £80m for the
2022 financial year, Brait’s current valuation of the business looks much more reasonable. One also needs to consider the current valuation against the backdrop of the introduction of a new CEO and new health foods/ sports nutrition operations. Both of these developments — considering the new CEO Dean Kowarski is the prime mover in the sports nutrition and health food businesses — could bulk up ebitda in 2023. Virgin Active’s ebitda, it is worth remembering, was £140m in the 2019 financial year.