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Hindsight is a perfect science

Despite hiccups Brait may be a buying opportunity for the bold.

As far as value creation goes, investment holding company Brait picked a winner when it acquired a 34% stake in Christo Wiese’s Pepkor for R4 billion back in 2011.

It realised this value in 2015 when it sold this stake for a hefty R30 billion, which valued Pepkor on a 20x enterprise multiple, well above most SA retailers.

Most investors did not fault management when they used the proceeds to diversify Brait’s net asset value (NAV) both geographically and by business line with the acquisition of 89% of UK retailer New Look and 78% of Virgin Active.

Although the price tag was £2.5 billion (including New Look debt), both companies were acquired at reasonable enterprise multiples (10x) and were growing Ebitda in double digits.

These acquisitions complimented existing assets including UK supermarket chain Iceland Foods and South Africa’s Premier Foods.

Management was bullish about the new investments, as evidenced by the fact that New Look, in particular, was revalued almost immediately after the acquisition from R14.9 billion (or 26% of NAV) in June 2015 to R32.3 billion (or 45% of NAV) by September 2015.

“I think one could debate the wisdom of the New Look acquisition, but the mistake management made was to revalue the asset aggressively so shortly after they bought it. It’s usually better to be conservative for a year or so,” says Jan Meintjes, a portfolio manager with Denker Capital.

That said things initially proceeded swimmingly as New Look expanded into China and selected European markets, and focused on promoting its new menswear line. In 2016 the retailer showed positive growth in both revenue and Ebitda.

“Then came Brexit, the collapse of the pound and consumer confidence and rising inflation,” says Meintjes. “This was a disastrous combination for the retailer.”

As a result sales slowed and revenue for the year to March 2017 decreased by 2.4% (like for like sales fell faster at 6.6%). Earnings decreased by 32% as a result of the costs associated with the group’s aggressive expansion activities and rising inflation.

This caused Brait to cut the carrying value of New Look by about 80% to R7.1 billion. This means that New Look’s contribution to Brait’s group NAV fell to 15% in 2017 from about 45% a year earlier.

Brait NAV breakdown


March 2017

March 2016

Virgin Active









New Look






% of total assets




The weak performance of its biggest asset, compounded by the stronger rand (+20.5%) relative to a year ago, saw Brait report a hefty 43% fall in full-year NAV. NAV was valued at R39.5 billion, or R78.15/share in the year to end March, down from R136.27/share a year previously.

The question investors need to ask themselves is what now? Is now a good time to buy back in – assuming you are not already a shell-shocked shareholder holding on for dear life.

Brait’s share price, once priced at a premium to NAV has fallen along with earnings and valuations. The share is now trading at a 15% discount to NAV, which is considered acceptable for an investment holding company.

Brait share graph

On the plus side, the portfolio is now a lot more balanced than it was before New Look was revalued, and the NAV is no longer dominated by one underperforming asset, says an analyst who cannot be quoted in the media.

“From a sentiment point of view this changes things,” adds Meintjes. “The fact that it was such a big component of NAV dominated the way people thought of the stock.”

And the balance of the portfolio is solid.

Virgin Active with 1.1 million adult members across 241 clubs in ten countries on four continents is growing Ebitda at 13% and should continue to do so (they have increased their footprint by 7%).

An outside concern is the fact that the Virgin contract with Discovery comes up for renewal in the next few years, the analyst warns.  “As we have seen Discovery has found other ways of monitoring fitness more accurately. The question is what will happen when the deal comes up for renewal and how many clients can afford the prices without Discovery.”

However Virgin management has proved to be innovative and able to cater to the rapidly changing market in healthy living (class exercises and the competition faced from Crossfit). 

Iceland Foods, the frozen foods retailer has returned to positive like for like growth in this financial year. “Brait must be given credit for turning Iceland around,” says Meintjes. Meanwhile its stable-mate Premier Foods has recovered well following the drought in SA. The company has invested in its efficiencies and capacity in the last year and should reap the benefits of this.

While three out of four of Brait’s investments are holding their own, the concern is that consumer confidence in the UK and South Africa remains subdued.

This is likely to impact the likes of New Look, which still has £1.2 billion worth of debt on its balance sheet. “New Look may be more and more reliant on their expansion in China to start delivering. Those business roll outs will take time and be costly, as will their European expansion, says fund manager Vestact in a newsletter to clients.

UK and European headwinds will remain prominent in the short to medium term and some investors will need to be confident that they have abated before considering Brait for a long-term investment – even at current prices, says the analyst.

Others hold a more favourable view. “Over the medium term we expect Brait to improve,” says Meintjes. “I think that 80% of what I’m buying is going to add value, and at current levels I’m buying quality assets at a discount.”

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why I ask myself would anyone bother to invest in a diversified mess whose share price has fallen 60% – when one can buy AMAZON whose shares are UP by a third in 6 months and have just announced the biggest food take over ever. doesn’t make sense

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