Is Brait on the verge of whittling down its investment portfolio?

Already trading at a gaping discount to its NAV, Brait has a debt bill of more than R11bn coming due.

The investment company’s decision to peg lower ratings on its main holdings didn’t much affect that discount as per last week’s annual results. But the FM reckons the new valuations could prove significant as Brait works at whittling away its loans.

With this debt difficult to service from central cash flows, and with chunks of it maturing next year, it would seem clear that Brait will need to sell something fairly soon.

A rights issue is, of course, off the table with the share price at such desultory levels — which raises the question around Brait selling off a large investment.

Officially, though, it looks like knuckle-down time for the foreseeable future. This means, save for the details of the new executive incentive scheme which are expected shortly, there might not be much in the short term to spark keener sentiment for Brait.

Spokesperson Katharine Spence says the incremental increase in cash flows is the priority now. "There are no plans to sell assets at the moment."

Still, in commentary accompanying the results for the year to end-March, Brait CEO John Gnodde stresses that the group is focused on materially reducing debt on its balance sheet in anticipation of the possible redemption and repayment of Brait’s convertible bonds, due in September 2020. He says Brait is progressing a number of opportunities to generate cash proceeds from its investment portfolio.

Specifically, Brait was to receive about R610m in June following completion of Virgin Active SA’s debt refinance.

The most obvious, and arguably most marketable, investment — thanks to ongoing consolidation in the food sector — would be food and consumer brands conglomerate Premier. It might be coveted all or in part by RCL Foods, Pioneer Foods or even recently listed Libstar.

Some form of asset sale or reshuffle might be the only possible way for Brait’s executive team to rekindle market confidence, especially if engineered in such a manner that the portfolio retains some of the potential upside of an investment, asset diversity is maintained and debt is meaningfully chipped away.

The FM maintains that Premier, which owns household brands including Blue Ribbon bread and Snowflake flour, is the obvious investment to leverage off.

A possible scenario could see an influential investor like the Public Investment Corp (PIC) stumping up for a significant minority stake in unlisted Premier. If the PIC was willing to pay at the inferred multiples then even the sale of just a 15% stake could raise close to R1.5bn to mobilise for debt relief.

Perhaps a more convincing deal — though perhaps unlikely to be consummated in the short term — is to sell Premier to Remgro-controlled RCL Foods. On paper, such a deal would suit RCL. It has been making a concerted effort to build a higher-margin grocery segment to offset the cyclical nature of its commodity-like sugar and poultry operations.

If Brait accepted settlement in cash and RCL paper for Premier (which is valued at about R10bn), then a holding in an enlarged SA food conglomerate would go some way to addressing concerns around the concentration of investments in the UK consumer sector.

Whether Brait can wield its dominant 71.9% stake in cash cow Virgin Active to raise proceeds for debt reduction is potentially more intriguing. The value of Brait’s stake in Virgin Active is around R18bn — but there could be potential to sell minority equity stakes separately in both the SA operations and the UK gyms business.

For the record, Virgin Active SA saw revenue up 5% and earnings before interest, tax, depreciation and amortisation (ebitda) up 4%. But the big shift was the growth in its Vitality membership sales after a new contract was signed to run until 2025.

The UK managed 2% growth in revenue but a muscular 25% increase in ebitda, after strong cost control and a refurbishment programme that targeted selected clubs.

It’s hard to think that Brait once traded at a premium to its NAV.

At the end of March Brait pencilled in a markedly lower NAV of R41.80 a share. This was after it lowered the earnings multiples applied to mainstay investments in Virgin Active, Premier and UK-based grocery chain Iceland.

At the end of September NAV was over R55 a share, though Gnodde says that if the "old valuations" were maintained the NAV at the end of March would have been R51.37 a share.

So the Brait share price — based on the latest NAV(s) — offers a 52% discount on the "downgraded NAV" and over 60% on the NAV figure that used previous metrics.

In the past 18 months, discounts, generally speaking, on investment counters have widened from the traditional 15% to 25% range.

But a discount of more than 50% would usually mean the market had lost faith in management, doubted the quality or management valuation of certain assets, or saw little prospect that value could be unlocked in the short to medium term.

In Brait’s case, all of these might apply. Brad Preston, head of listed investments at Mergence Asset Managers, says there seems little reason for Brait to exist in its current format. "The group currently incurs R200m a year in net operating costs. We would ask if shareholders are really getting value for this cost."

That said, there is a gradually growing consensus that the much-depleted Brait share price is now closer to "reasonable value" — albeit coupled to overriding concerns around how, in the current structure, value will be unlocked for shareholders.

Value aside, Lentus Asset Management CIO Nic Norman-Smith says the difficulty in working up enthusiasm for Brait is that other large investment companies — like Reinet Investments, Hosken Consolidated Investments and Remgro — currently look more attractive in terms of assets, track records and the ability to unlock value.

"It’s clear the old value metrics were too positive, but the new valuations are still not aligned to the market perceptions."

With Brait’s value down around 90% from its April 2016 highs, such an impasse in investor sentiment is something the company can ill-afford. Clearly, something has to give, sooner rather than later.