Ethos upbeat as SA’s recovery beats expectations

Ethos Capital, an investment manager whose interests range from gyms to airtime credit services, believes it will continue to benefit from SA’s economic recovery.

Management changes, cost cuts as well as other tough decisions, had helped about three quarters of the group’s 23 portfolio companies to recover to above pre-pandemic core profit levels in the six months to end-December, CEO Peter Hayward-Butt told Business Day.

Even while consumers were still under pressure, Hayward-Butt noted that recent events in Ukraine had not yet significantly dented resilient SA consumer spending; however, that could change in time should the situation persist and inflationary pressure continue to build.

“I think consumers are still under pressure, but one thing I will say about SA is that consumers have been much more resilient than people give them credit for. We've seen it across our businesses,” said Hayward-Butt.

“We're passed the worst and things are looking a bit better for us,” he said.

Ethos, an adviser to Brait, of which it holds a 12.8% stake, reported that its net asset value (NAV) rose 10% to R2.6bn, or 10.08c per share, in the six months to end-December, the first half of the group’s 2022 financial year.

This means the group was trading at about a 50% discount at the end of December, when SA was still grappling with the Omicron variant. Using the share price of Brait, rather than asset value, NAV per share rose 24%.

Ethos has a portfolio of 23 companies, including a R267m stake in gym-owner Virgin Active, which makes up about 10% of its assets on a look-through basis, while its R673m stake in Channel VAS, a provider of airtime credit services, makes up 26% of assets. Ethos owns a fifth of Channel VAS, which fared well, with its return jumping 29% during the six months.

Channel VAS is active in more than 30 countries, but generates 84% of its revenue in Africa, where operators such as MTN are investing heavily in their network capacity.

Mobile phone operators were among the beneficiaries of Covid-19, which has led to more people working from home. Ethos said on Wednesday that Channel VAS was a market leader in terms of its ability to perform credit scoring and it had low default rates of less than 1%.

The group also holds 11% of fast-moving consumer goods group Premier, worth R280m, which also fared well, growing its return by 10%. Virgin Active’s return was flat, but Hayward-Butt said there had been a pick up in the past three months, with sales up and contract terminations down.

Premier had benefited from both increased volumes and price increases, with Ethos noting on Wednesday that while the war in Ukraine has had a significant effect on wheat prices, that business had secured a five-month supply.

Ethos said on Wednesday that given the discount at which its shares trade, and an uncertain economic outlook, it was not planning any new fund commitments, but would continue to deploy capital in its existing ones.

The group is looking for returns from existing funds first, said Hayward-Butt, but would continue look for opportunities to deploy capital, in fast-growing areas with strong structural trends, for example payments technology. The group is also considering share buybacks, given its shares discount.

“Since we’ve had Ethos Capital we’ve had eight exits, whether they be full-exits or partial exits, and all of them have been at a very substantial premium to the NAV we had in the books,” he said.

The sales on average had been sold at a 34% premium, he said, with the group also optimistic about deployment of its capital.

“It’s always the right time to do it, when people are fearful to buy assets, but you need to be extremely cautious about what you buy and you need to buy into tailwind sectors that give you a chance of success,” he said.

In afternoon trade on Wednesday, Ethos’s shares were up 0.37% to R5.48, valuing the group at R1.57bn on the JSE. The shares have risen 7.2% over the past two years, roughly the length of the Covid-19 pandemic.

Correction: March 16 2022
An earlier version of this article referred to the investment group as Ethos Private Equity, which is the fund manager of Ethos Capital.

gernetzkyk@businesslive.co.za