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Brimstone pays over R1bn in debt repayments

Intrinsic net asset value has declined 1.9% to R3.28bn, or R12.99/share; so no dividend payout again: CEO Mustaq Brey.

NOMPU SIZIBA: JSE-listed investment-holding company, Brimstone Investments – which has shareholdings in a number of companies that cut across different sectors in the economy – has released its annual financials. It has stakes in property, telecommunications and insurance companies, among others. For the 12 months ended December 2020, the company reported achieving revenue of R4.7 billion, up 6.2% on the year prior. Operating profit declined by 16.2% while the company reported the headline loss per share worsening on last year by 13%. Like last year, the company is not providing a dividend to shareholders this time around. It knows that its intrinsic net asset value has declined by 1.9% to R3.28 billion, which translates to R12.99 per share.

Well, to break down the performance for us, I’m joined on the line by Mustaq Brey. He’s the CEO at Brimstone. Thank you so much for joining us. You’re invested in a number of stocks in different sectors of the economy. Could you quickly give us examples, and tell us what Brimstone’s investment philosophy is.

MUSTAQ BREY: Well, we want to be in a basket of different investments, as we’ve tried through many, many seasons. Our major investments at the moment are in two efficient companies. We own 54% of Sea Harvest and we own 25% of Oceana. Those are the two main drivers. We also have a quite a big stake in Life Healthcare, which we are busy selling off. In 2019 we did a zero-cost collar with that investment of ours, and we are deep in the money at the moment. So we are busy trading out of that. We started with two tranches in November and December; we did another two in January of this year, and by the end of April we’ll have traded out of that completely, and we reduced debt by another R1.3 billion coming out of that transaction.

So what you’ve done in the last year basically is … and reduced our debt. We sold up part of our stakes in Phuthuma Nathi and Equities in the last year as well, and we’ll be down to about R2.1 billion debt once we’ve traded out of those zero-cost collars by the end of next month. That is quite substantial and will bring down our debt levels to under 40% compared to the assets.

NOMPU SIZIBA: Right. Just out of interest, why did you rack up so much debt in the first place? What were you using the money for in the debt?

MUSTAQ BREY: Don’t forget that the share market went down over the last two-and-a-half years. It has come back quite nicely in the last month or two. At one stage Life Healthcare was trading at R40/share; it’s now down to R18. With that our percentages were still okay. But when the market goes down your debt stays constant and your market in asset value goes down. We were caught on the wrong side of that graph, and that’s why we had to fix it. That’s exactly what we’ve done in the past year.

NOMPU SIZIBA: What about your portfolio in general? How did it do during 2020? We know that the market was volatile. It was really bad this time last year, but then it came up very nicely globally. How did your portfolio perform?

MUSTAQ BREY: Nompu, we were quite happy in that our two fishing assets were both declared essential services – Oceana and Sea Harvest – and they had quite a lot of additional cost. For that Sea Harvest loan, the additional cost of which is under R40 million for the year, the direct cost related to Covid, included stuff like organising special transport for all our workers. We were very worried about our workers, and we had a lot of extra expenses to make sure that they were safe.

At the other extreme we had the House of Monatic, formal clothing – that market just went down; our turnover went down by 57% during the year, which was quite damaging and we lost a lot of money. At the moment we are doing a transaction with another manufacturer and retailer that will take over our production facilities and our staff as well. During the year we retrenched about 120 staff at the House of Monatic, which was quite sad. But that’s just a fact of life at the moment in that people are not buying clothing, whereas on the food side people are buying food every day.

NOMPU SIZIBA: True, indeed. So for you guys, as an investment-holding company, one of the key metrics that you look at is the intrinsic net asset value. You’ve told the market that that’s declined by 1.9% in the period. What needs to happen, or what work do you need to do to improve that metric going forward?

MUSTAQ BREY: Well, we need to get our underlying investment companies to be rerated and to get to the real values. I mean, both Oceana and Sea Harvest, I believe, are trading under their real values at the moment. That’s probably related to the fact that the long-term fishing rights are due to be relooked, at the moment. But that was extended for a year because of Covid and the fact that there was a new minister appointed. So that was delayed for another year.

And I think when there’s certainty on that side, Nompu, that will rerate those companies as well. I think they did exceptionally well in the circumstances.

Another big thing that’s in our favour as well is that people look at our actual dividend income for the year, both from our subsidiaries and from our associates and that type of thing. At the moment our dividend income is in excess of R250 million per year already. So that’s quite substantial.

NOMPU SIZIBA: Yes. You’ve talked a lot about listed assets that you’ve either bulked up on or disposed of. Do you have a bit of a presence in the unlisted space as well?

MUSTAQ BREY: Not enough, I believe. But it’s a factor of where we are with our investments. In 2010 we brought Life Healthcare to the market. Before that it was unlisted. Automatically that tilts your scales in the other direction. Three years ago, in 2017, we brought Sea Harvest back to the market, so from being unlisted overnight, you are listed and therefore your scale tilts more in that direction. We are aware that we should have been in a few more unlisteds, and we are looking around. I think when the dust settles down post Covid and people can get to real valuations, we’ll probably relook at some of the assets that we’ve been offered, but at the moment we haven’t paid out a dividend this year as well.

NOMPU SIZIBA: Mustaq, you need to buy while valuations are low, while the Covid cloud is here, so that when it passes and things pick up, you can get the benefit.

MUSTAQ BREY: I, I agree with you. The issue is when you sit down with people who want to sell at the moment, they want to adjust their income statements and that type of thing. They want to unwind a lot of the Covid costs, additional costs. And it’s quite difficult to do proper due diligence where there are a whole lot of adjustments going through. In the end you say, look, what cash are you producing? I’m not disagreeing with your sentiment that we should be in the market buying at the moment, but it’s difficult in a market where your teams are really stationed at the moment, just trying to keep their heads above water in a game which none of us have lived through [before]. So I think we can see a bit of management fatigue coming out of Covid as well. It’s been very, very hard in the last 12 months.

NOMPU SIZIBA: We have to wrap up, but I was really just being cheeky. I know there are greater dynamics that they are involved in. I appreciate that you understand that you need to buy at lower valuations. We’re going to leave it there, but thank you very much, sir, for your time. That was Mustaq Brey, CEO at Brimstone.

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