Brexit: SA firms with UK ties brace for the worst
SA companies with UK links are in for some extra uncertainty as Britain stumbles towards its exit from the EU
SA companies are probably more familiar with economic and political uncertainty than most, but those that still have ties to the UK are in for an extra dose of the unknown.
Brexit negotiations are coming to a head and the reality, says Clive Black, head of research at Guernsey-based Shore Capital, is this: "Nobody can tell us what will be happening on April Fools’ Day in the UK this year — the uncertainty is growing by the day."
Some JSE-listed companies, including Netcare and Spur, quit the UK before Brexit negotiations reached a fever pitch.
Those that have remained have mostly kept mum about their Brexit hopes and fears; their UK peers have been far more vociferous.
In late January, major retailers including Waitrose, Marks & Spencer and McDonald’s UK warned legislators that a no-deal Brexit — where border checks are reintroduced and the UK’s future relationship with the EU is uncertain — could put Britain’s food security at risk and push up prices, an article in The Independent says.
For instance, 90% of the lettuces sold by that group of companies during the winter months are imported from the EU, along with 80% of tomatoes and 70% of soft fruits.
"As this produce is fresh and perishable, it needs to be moved quickly from farms to our stores. This complex, ‘just in time’ supply chain will be significantly disrupted in the event of no deal," the companies wrote in a letter.
Needless to say, this suggests similar complications for the likes of Gourmet Burger Kitchen (GBK), which Famous Brands bought for £120m just months after the 2016 Brexit referendum.
Partly because of declining consumer confidence and fierce competition in the premium burger market, that business has already stumbled. Famous Brands has closed stores and written down the value of GBK by more than half.
But should a no-deal, or "hard", Brexit materialise, things could get even worse.
"The UK wouldn’t starve, but there would be quite considerable logistical challenges for short shelf-life food retailers in particular," Black says.
GBK and its peers could face logistical hold-ups at ports, as well as "some specific product availability issues".
However, Black says while short-term pain is likely, the UK will probably adapt relatively quickly once the dust has settled.
"Having its own currency and a very adaptable economy probably means that in due course, while a hard situation would be potentially very volatile and challenging, I think the UK would come out the other side reasonably favourably. In the long run the situation is all right, but there are two very different outcomes potentially in the near term."
If the UK and Europe do reach a divorce settlement and a trade deal, that would remove uncertainty and Shore Capital would expect "a favourable reaction for virtually all of the consumer-facing businesses", including GBK.
"For all the political volatility and noise, the UK economy is actually in pretty good shape," he says, citing rising real living standards and record-low unemployment.
Electus Fund Managers analyst Damon Buss says that given what’s at stake, the UK and EU will probably extend Brexit negotiations to find a solution, rather than settling for a no-deal exit.
But a hard Brexit, should it happen, would complicate things for Famous Brands, TFG and Truworths.
TFG’s British chains include Phase Eight, Whistles and Hobbs, while Truworths owns Office Retail Group.
A no-deal Brexit could dent consumer confidence further and result in higher prices, says Buss, who expects Famous Brands’ UK business to almost double its losses in the year to end-February 2019.
That unit could make an operating loss for the year of up to R80m, from R44.7m previously, he predicts.
"A combination of buying at the peak of the hype in the overtraded gourmet burger market and acquiring a business with a different operating model to Famous Brands’ core franchiser skill set has resulted in significant shareholder value destruction," says Buss.
Meanwhile, JSE-listed landlords including Hammerson, Intu Properties and Capital & Counties Properties have all seen their market capitalisations dwindle since the Brexit referendum.
The uncertainty has come at a difficult time for mall owners, with online shopping surging in the UK in recent years.
Electus co-head Richard Hasson says more company voluntary arrangement (CVA) processes, whereby financially distressed businesses renegotiate their leases or shut outlets, are likely to happen — placing added pressure on rentals.
Under a soft-Brexit scenario, the reported asset values of UK-focused landlords will probably decline by 5%-10%, Hasson says.
"But if it’s a hard Brexit, you will probably see double those amounts, so a 10%-20% decline in asset values.
"Having said that, Hammerson and Intu are already trading at 40%-60% discounts to NAV, so we think they are pricing in a worse-than-likely scenario."
Hasson says the market is struggling to value owners of super-regional shopping centres because very few of these assets have changed hands, since owners are not willing to sell at current prices.
"Over and above that, you get a company like Intu announcing a ‘material cut’ to their 2018 dividend number, and they still haven’t told us what ‘material’ means."
But while Electus expects Intu to cut its dividend by at least 50%, Hasson says the fund manager is seeing value in the sector following the heavy sell-off.
"We recently brought some Hammerson and Texton into one of our portfolios — we think there is some good upside potential in those."
In the event of a more favourable Brexit outcome, landlords could be re-priced upwards, he says.
Meanwhile, Buss says TFG and Truworths could feel more short-term pain in the UK as more department store owners launch or consider CVA processes.
"A big portion of their sales go through the online portals of the big department stores, so those CVAs do have quite a significant impact on sales in the short term."