Brait all healthy, except for one in ICU
UK fashion retail business New Look’s valuation has plummeted, but remedial steps are being taken to restore it
When Christo Wiese acquired 34.6% of Brait in July 2011, a phenomenal growth phase was set in motion. By December 2015, the company, converted from a private equity to an investment business, had grown its net asset value (NAV) per share from R16.50 to R136.34.
For Brait, which has NAV as the central measure of its success or otherwise, the huge kicker came from a 37% stake in Pepkor. Acquired in July 2011, the Pepkor stake was sold to Steinhoff in March 2015 at seven times its cost price. Brait had by then grabbed the market’s attention, with investors wanting to climb aboard, paying a 20% premium to its NAV at the end of 2015.
But those who bought at that time and have held on for dear life have been burnt badly. Brait’s share price has halved in the wake of a slump in its NAV, which began slipping in the second half of 2016. Its very high exposure to UK assets hit it hard following June’s Brexit vote, which set in motion the country’s EU exit.
In pound terms, Brait’s NAV fell 28% from a peak of £6.73 in June to £4.86 at the end of December.
The damage was far more severe in rand, which strengthened markedly against the pound following the Brexit vote. Brait ended 2016 with its NAV at R82.45, a fall of 39% over 12 months.
With the rand now trading at about R16/£1, Brait’s NAV is just on R78, assuming there are no big changes in valuations of its holdings. It puts Brait’s current share price virtually on par with its NAV.
After having been halved, Brait’s share price is technically very oversold.
Never underestimate the Christo Wiese factorAbri du Plessis
But that does not mean it will suddenly stage a spectacular rebound. Much depends on the rand/pound exchange rate. As always, this is a matter of conjecture.
Just as important will be Brait’s ability to lift its sagging NAV, especially in pound terms.
By far the biggest challenge for the company lies in putting its UK fashion retail business, New Look, back on a sound footing.
An 89% stake in New Look, acquired in June 2015 for £780m, brought with it the UK’s second-largest womenswear retailer. It also brought exposure to arguably the world’s toughest retail market, where clothing price deflation totalled 12% in 2015 and 2016 owing to cutthroat competition. That makes for a market in which errors are punished harshly.
New Look made too many errors, including misreading fashion trend changes and being too slow to market in response to those changes.
The retailer’s earnings before interest, depreciation and amortisation (Ebitda) fell 28.7%
year-on-year in the six months to September 2016 and a further 25% in the 13 weeks to December 31. It has cost Brait dearly. New Look’s valuation was hauled down from 13.3 times Ebitda in September 2015 to 10.1 times in December 2016, and its discount to its listed peer group’s average valuation increased
from 13% to 25%.
The 867-store New Look’s NAV, which weighed in at R36.8bn in December 2015, slumped to R8.7bn a year later. It slashed New Look’s weighting in Brait’s investment portfolio from 51% to 17%.
Remedial action is being taken by New Look, including steps to increase speed to market, tighten stock control and improve product offering through what it terms “our new brand proposition”.
A confident Wiese says: “New Look outperformed its market for eight quarters and now it has underperformed for three quarters. It just is that way in the fashion market.”
New Look’s valuation slump has left Brait’s 70.5% stake in health club group Virgin Active as its largest holding at 32.7% of investment assets.
A successful investment for Brait, Virgin’s valuation, based on 11.4 times Ebitda, stood at £896m at the end of December, up 30% from the £691m Brait paid for its stake in July 2015.
In rand, Virgin’s NAV fell 7% from R16.3bn in September 2015 to R15.2bn in December 2016.
Operating through 247 clubs in the UK, Europe, SA and Southeast Asia with a total membership of 1.2m, Virgin is proving to be a solid performer. In the nine months to September Virgin delivered a 24% rise in earnings before interest and tax in constant currency terms.
Virgin has set itself an ambitious target of rolling out 13-14 new clubs annually. Emphasis is on what it sees as its two big growth markets: Africa and Southeast Asia.
Brait will also be expecting big things from UK food retailer Iceland, in which it has a 57.1% stake. The smallest of Brait’s four core holdings, Iceland’s R7.3bn NAV (nine times Ebitda) equates to 16% of total investments.
Iceland’s focus is on frozen foods, where its 15.8% market share places it second only to UK food retail giant Tesco. On an upbeat note, Wiese says: “Iceland weathered the UK food retail sector price war well.”
Indeed, Iceland has been growing its share of the UK’s total grocery market at a time when
all major food retailers have been losing ground to German discounters Aldi and Lidl.
Iceland’s total share of the UK food retail market lifted from 1.9% in 2014 to 2.1% in 2016. That’s a big move in a £180bn annual sales market.
SA food producer Premier, in which Brait has a 92% stake, has also acquitted itself well. With a NAV of R13.2bn, Premier weighs in at 28% of Brait’s investment portfolio.
Given Premier’s positioning primarily as a staple foods producer with a strong slant towards volatile maize and wheat milling sectors, it did well in the six months to December to lift Ebitda 10%.
There are bigger plans for Premier.
The strategy, says Wiese, is to transition it from being a staple foods producer to a fast moving consumer goods-branded business.
Brait has three solid investments and one, New Look, in ICU. If New Look’s turnaround succeeds, it could put Brait back among the market’s big winners.
There are no guarantees, but as Gryphon Asset Management CEO Abri du Plessis points out: “Never underestimate the Christo Wiese factor.”