BROKERS’ NOTES: Buy Exxaro, sell Brait

Rowan Williams, portfolio manager: Nitrogen Fund Managers 

Buy: Exxaro

Exxaro is trading at a notable discount to the value of its underlying assets. The company operates two major segments: iron ore and thermal coal, and it has a growing renewable energy business named Cennergi. Additionally, Exxaro holds a substantial cash reserve on its balance sheet. The outlook for its iron ore and coal operations remains positive due to the resilience of both iron ore and coal prices. Cennergi is experiencing strong demand and continues to invest in new projects. Exxaro recently declared a special dividend, indicating its intent to return excess cash to shareholders. The stock trades at a forward p:e of 4.2 and offers a normalised dividend yield of 12%. This represents a significant discount when compared with peers in similar industries, such as Kumba Iron Ore and Thungela Resources, which have less favourable operating metrics.

Sell: Brait

Brait recently announced a R1.5bn capital raising in the form of a rights issue to recapitalise the investment holding company, priced at a significant discount to its reported NAV. The company has a R6.5bn convertible bond programme that was due to mature at the end of 2024. The group is having to restructure this debt to extend the period that it has to maximise the realisable value of its underlying investments. The group did list Premier and has sold down its shareholding, but not without significantly affecting the Premier share price. Certain of the other portfolio companies continue to face challenges, particularly New Look, a UK-based retailer that is facing tough trading conditions, and Virgin Active, which is battling against a tough consumer environment and rising costs. The rights issue will be undertaken at 59c, pegged at a 30% discount to the theoretical ex-price at the date of the announcement, thereby diluting those investors who choose not to follow their rights.