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Brimstone brings the Lion into line on losses

‘Underlying brands remain strong’ – analyst.

JOHANNESBURG – Mustaq Brey, CEO of Brimstone Investment Corporation, says it has replaced most of the top management team at Lion of Africa Insurance Company, after the short-term insurer in which it is the sole shareholder suffered a net loss for the six months to June of R105.2 million.

“There was ill discipline at the underwriting level and we’ve now put in the correct checks and balances,” Brey said, admitting the insurer “took risks that it shouldn’t have taken”, leading to a R102.5 million underwriting loss.

After allegations of fraud, both internal and external, Brimstone is undertaking a forensic analysis of the company.

Lion of Africa CEO, Adam Samie has been replaced with Iqbal Khan, a managing executive at Brimstone, who will act as interim CEO. Brimstone has shortlisted potential candidates for the position and hopes to make a permanent appointment by the end of the year, said Brey.

He said that “caretaker management and a turnaround artist” are currently involved and the insurer has moved into smaller premises, and reduced staff headcount by more than 30 to fewer than 150 people.

At the beginning of July, Lion of Africa entered into a joint venture with listed insurer, Zurich South Africa, in terms of which Zurich will underwrite the risks it takes in its corporate and local authority business.

Lion of Africa was further capitalised by Brimstone with R150 million during the period under review.

“We are turning the business around,” Brey maintained.

Anthony Clark, analyst at Vunani Securities, said that in a portfolio of R4.2 billion Lion of Africa’s losses are nothing more than a “blip”.

Group remains operationally strong

Clark said Brimstone remains an extremely well managed company with an inherently strong portfolio of brands, despite a reported loss of R480 million for the six-month period, compared with a profit of R309.7 million last year.

He said that the downward revaluations in three of its largest investments, Tiger Brands, Life Healthcare and Grindrod, had gone against it. “There is nothing significantly wrong with any of the three companies, they are just currently out of favour,” Clark said.

Clark added that it was “unfortunate” that Brimstone entered the Grindrod empowerment transaction at R25 a share and the share price subsequently halved, but said that is “the nature of the beast”. This exposed Brimstone to a R288.5 million loss.

“One wouldn’t have imagined 12 months ago that global commodity prices would’ve collapsed. That said, Grindrod is an inherently strong vehicle,” commented Clark.

Between July and August this year, Brimstone bought additional shares at the R13 level, boosting its shareholding to 5.2%

Brey argued that the group remains operationally strong and its long-term investments will deliver value to shareholders with time. He said Brimstone would continue to support its existing businesses, which include Oceana, Taste Holdings and Sea Harvest.

Brimstone plans to follow its rights in Oceana’s proposed rights offer. The fishing group recently acquired US-based Daybrook Fisheries for $382.3 million (R4.6 billion).

In the period under review, Brimstone followed its rights in the Taste Holdings’ rights offer, buying more than 8 million shares at R3.05 a share for a purchase amount of R25 million. It holds a 13.08% share in Taste, which recently announced an exclusive partnership with global coffee brand, Starbucks, in terms of which it will open full-format stores in South Africa.

Principally a deep-sea trawler of hake, Sea Harvest, in which Brimstone holds a 58.44% stake, reported a 35% increase in operating profits to R89.3 million.

Brimstone reported dividend income of R112.6 million from its investments for the period. It expects a R63.6 million dividend payment from Phuthuma Nathi, a BEE share-trading platform, in September 2015.

Both Phuthuma Nathi and MTN Zakhele, over-the-counter (OTC) share-trading platforms in which Brimstone holds a 5.13% stake and 2.71% stake respectively, are scrambling to comply with the Financial Services Board’s (FSB) OTC directive, which requires these and other OTC exchanges to acquire a stock exchange licence or restructure their businesses to fall outside the definition of an exchange.

In line with previous years, Brimstone did not declare a dividend for the half year.

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