Brait’s net asset value per share is R8.30. The share price is R3.65. The market is trying to tell us something here and Ghost Grad Karel Zowitsky used the release of Brait’s integrated annual report as a good excuse to dig into the two major investments in the group.
It’s not unusual to see an investment holding company trading at a discount to net asset value (NAV) per share. It is unusual to see a large discount like over 55% at Brait. Either the market doesn’t believe the valuations or doesn’t like the prospects (or both).
Perhaps the market is just scared. After all, Brait has a wonderful example of how things can go terribly wrong:
For market enthusiasts, Brait has also a pretty good example of why timing is important, as that terrible chart hides the recent performance:
There’s clearly a story here that needs to be told.
Brait is an investment holding company that has a primary listing on the Luxembourg Stock Exchange and a secondary listing on the Johannesburg Stock Exchange (JSE), offering investors exposure to unlisted companies that operate in the broad consumer sector.
One of these businesses will be extremely familiar to you: Virgin Active. We’ve all had a contract at some time in our lives. The difference lies in whether we actually used it.
So, let’s start with the gym business.
Farewell, masks
Of all the businesses out there that took pain in the pandemic, gyms were among the worst hit. Nobody enjoys exercising with a mask on.
Total membership is currently at around 75% of December 2019 levels. The important question to ask is whether these numbers will increase to pre-lockdown levels or stagnate.
From January to May 2022, Virgin Active saw a 12% increase in members. With masks out the way, it seems logical that this growth trend can continue for a while at least. Before getting too carried away, we need to remember that there are many factors at play.
Many people are hesitant to sign a contract that locks them into paying for a gym membership for at least 12 months when they might be unable to utilise the facilities for a period of time. I know many people who attempted to cancel their gym memberships during lockdowns and their calls and emails simply went unanswered. This is bad practice that does not create goodwill with members.
Affordability is another major concern. In the high inflationary environment we currently find ourselves in, families are feeling the crunch in their budgets rather than their abdominal muscles. Fuel and food prices are taking their toll and many are cutting out luxuries and unnecessary expenditure. Sadly, for many people, a gym a contract is one of the first expenses to be cut from the monthly debit order list.
Brait also highlights the negative impact of working from home trends. It makes sense – many people used to rather go to gym than sit in traffic.
Brait originally paid R12.7 billion for a 78.2% stake in Virgin Active in July 2015.
Today, Brait holds 70.6% (due to the dilutionary effect of subsequent capital raises) with a total cost including the initial purchase of R15.3 billion.
The value of the stake plus proceeds received to date is less than R9.3 billion, so you can see how shareholder value was destroyed by the lockdowns.
In case you need further proof of how severe the lockdowns were for the business, revenue fell from £602 million in FY19 to just £296 million in FY20 – literally less than half of the pre-pandemic level!
With a high proportion of fixed costs (the clubs don’t stop costing money just because they are shut), the lockdowns were a catastrophe.
You should note that a further dilution to a 67.4% stake is expected if the deal to acquire Kauai and Nu from Real Foods Group gets regulatory approval.
Taming the Tiger?
Brait owns a business called Premier that would remind you of Tiger Brands in terms of its product line, but not its recent performance. Brait is planning to separately list Premier, which is tricky in terms of getting the market timing right.
“Premier has completed its IPO readiness plans and will potentially proceed with the listing, market conditions permitting.”
Brait Integrated Annual Report 2022
Brait originally acquired 49.9% in Premier in 2011 for R1.07 billion. After the subsequent exercise of options and the implementation of a management incentive scheme, the current stake is 96.5% and the carrying value is nearly R9.3 billion vs. a total cost of R4.8 billion. Proceeds of R1.9 billion have been received over the years, so the correct comparison is value of R11.2 billion vs. a cost of R4.8 billion – easily Brait’s best investment.
Premier enjoys South African market share of 26% in bread, 26% in flour, 17% in maize, 17% in confectionary sugar and 17% in feminine care. These numbers sound similar but there’s obviously some rounding off. Still, it’s odd to see such consistent share across categories!
Over the past two years, Premier grew its revenue from R11 billion to over R14.5 billion and improved adjusted EBITDA margin from 9.3% to 10.3%.
This means that adjusted EBITDA increased by 44% over the two years of the pandemic, a vastly different result to the pain at Virgin Active.
It’s worth noting that R11.9 billion of the R14.5 billion revenue came from the Millbake division. I now understand why “making dough” is slang for making money! This division produces bread, maize, wheat and baking products and has achieved a revenue CAGR of 15% over the past three years. A newly commissioned bakery in Pretoria is expected to drive further growth.
If you are a Brait shareholder and you want to support your team, then Blue Ribbon bread is the one to put in your trolley.
With inflation top of mind for all of us, you’ll be interested to know that wheat constitutes around 50% of the cost of a loaf and fuel is 6%. A R1/litre increase in the fuel cost adds around 3.5 cents to the cost of a loaf of bread.
Much of the market share in confectionary has come from the R419 million bolt-on acquisition of Mister Sweet. Despite only being included in this result for 10 months, it contributed R540 million of the R763 million confectionary revenue. This sweet deal makes Premier a major player in the South African market in this category.
Will you take the Brait?
Things are looking up at Virgin Active and there’s an argument to be made that momentum will be strong from here. Premier has certainly been a star performer throughout the pandemic.
An investment decision regarding Brait needs to go a lot deeper than just the two major investments, as Brait’s balance sheet has had a tough journey. For example, there was an issue of R3 billion in exchangeable bonds, with accounting rules recognising R624 million as equity and the rest as debt.
