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Fallen giants: How are the turnarounds going?

Six once-large groups, and what the prognosis looks like for each.
Nampak’s Bevcan exports have been surprisingly resilient, but the group’s share price is still way down. Image: Waldo Swiegers, Bloomberg

Excluding the property and construction sectors, below is a table of formerly-large groups that have collapsed:

  Share price return
Code 5 years 1 year
Blue Label Telecoms BLU -71% 138%
Brait BAT -98% -29%
Grindrod GND -40%* 54%
Nampak NPK -86% 130%
Omnia OMN -67% 100%
Sun International SUI -83% -22%

* Including accounting for Grindrod Shipping’s unbundling

Source: Profile Media (intra-day, April 22, 2021)

How are these fallen giants doing right now?

Blue Label Telecoms: Core remains strong

Blue Label Telecoms’ challenges started with its acquisition and recapitalisation of Cell C.

Although one can understand why Blue Label invested into a failing Cell C (the group’s bottom line is materially exposed to the telcos), the investment didn’t just bring debt onto the group’s normally cash-rich balance sheet, it has also been impaired to zero.

More recently though, Blue Label has shed non-core assets, exited loss-making geographies, paid down central debt and its core business continues to deliver both growth and cash flows.

Perhaps these improvements are best reflected by the share price more than doubling in the last year.

Read:

Brait plc: Dead giant

Formerly high-flying private equity and investment holding company Brait made some nasty missteps with its acquisition of New Look in the UK.

Pre-pandemic, this high-street retailer was already struggling but – along with most of Brait’s other portfolio investments, such as Virgin Active – the pandemic was the straw that broke the camel’s back.

Far from turning itself around, though, Brait has exited previous management and pulled in the private equity houseEthos, with a clear mandate to realise its investments and, basically, wind this company up.

Sometimes, fallen giants do not recover.

Read:

Grindrod: May benefit from tailwinds

Following a decade-long collapse in the global shipping market and a stodgy domestic market, Grindrod’s wonderful portfolio of assets has struggled.

The group decided to unbundle its shipping business – Grindrod Shipping (GSH) – while it is also simplifying its core business lines.

Listen to this MoneywebNOW podcast with Simon Brown (or read the transcript here): 

Finally, the group has put non-core assets up for sale (its private equity book, property and, quite probably, its bank) to focus on a clear ports, terminals and freight corridor strategy.

More recently, progressing on the asset sales and streamlining strategy while the commodity cycle is potentially swinging upwards all add to a much rosier picture for the logistics group.

In fact, some of the things that counted against its high fixed-costs operations may work in its favour if trade and commodity volumes both continue to pick up.

Read:

Nampak: Canned

The largest packaging player in Africa has been struggling with dollar-backed debt that was invested into risky pan-African assets with illiquid forex markets. Add to this toxic mix some domestic competition, and the group was heading for trouble.

While many of these problems have not been resolved, the market seems optimistic that they may be improving. A stronger rand helps with the group’s brutal USD debt, while its Bevcan exports have been surprisingly resilient. Finally, the group has complied with all its debt covenants in the first quarter.

Of all the turnarounds – other than Brait – Nampak still feels the riskiest.

Indeed, the group’s share price is still down 86% over a five-year period.

Omnia: Brutal dilution helped …

Omnia always ran a high fixed-cost model with a lot of backward integration leaning into rising mining and agricultural volumes. While the volumes were good, this counted in its favour and it became a market darling.

Unfortunately, the cycle turned about five years ago when a drought collapsed agri volumes and global mining production stagnated – and culminated in the group doing a desperately underwritten R2 billion rights issue.

Unfortunately, pre-rights-issue shareholders have been diluted.

But if you look at Omnia’s share price post-dilution, it has doubled over a 12-month rolling period.

Some non-core assets have been flogged, others have been streamlined and costs have been cut, but in all honestly, the combination of improving macro drivers (growing agricultural and mining volumes) and a degeared balance sheet appear to be the key drivers in this chemical group’s recovery.

Read:

Along with Grindrod, Omnia is looking well positioned for any global and domestic recovery. Sorry for those historical shareholders who were diluted into oblivion, though.

Sun International: Remains a gamble

Like Brait, Sun International was struggling pre-pandemic and the pandemic delivered a killing blow.

For years, the group has been lagging its larger and arguably better-run contemporary Tsogo Sun (now Tsogo Gaming and Tsogo Hotels) while also struggling with its international expansion. It has an infinitely complex group structure reaching into African and South American markets, with an underperforming gaming side and Sun City (an eternal loss-maker) squeezing the group’s heavily geared balance sheet.

And then the pandemic shut everything down. Literally.

Lucky for Sun International, Value Capital Partners had bought into the leisure group and, from 2016/2017, had been driving a turnaround. Part of this was a change in the management team, then asset disposals to pay down debt, reduce losses and simplify group structure and, finally, a large rights issue to recapitalise its balance sheet.

It has been a hard – and recently, unlucky – road for Sun International and, quite honestly, with the economy still locked down and consumers wary of crowded indoor spaces, it could still be a tough road ahead for some time.

Revenue was down 49% in FY20, but that was hardly Sun International’s fault.

The real questions are: (1) What will ‘normal’ operating results look like for the group; and (2) When will this ‘normal’ trading period arrive? Sooner will be better than later, even for the recapitalised group.

Keith McLachlan, investment officer – Integral Asset Management.

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