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The trouble with Brait

Is still New Look.

It seems there is no end to the decline in Brait’s share price, with the share losing another 6.7% in the last week, pushing the share price decline over the last year to almost 54%.

Long-suffering shareholders will be wondering when things are going to turn around for the company, which was once an investor’s darling. Opportunistic investors will be wondering whether now is the time to buy into the company.

Brait share history

The trouble of course, has to do with its investment in British retailer New Look, which has scored a number of own goals in the last year and is in danger of losing its position as the UK’s number one retailer for women under 35.

In early September, Brait reported that its net asset value (NAV) per share for the first quarter ending on June 30 was R74.14. This reflects a 5.1% decrease compared to March 31 2017’s reported NAV per share of R78.15. At these levels, Brait is trading at a 25% discount to NAV – well above the level considered acceptable for investment holding firms.

In the detailed breakdown of NAV released with the results to March, New Look’s NAV was put at R7 billion, 15% of the group’s total assets. While details were not disclosed in the latest NAV update, one can presume that New Look led the 5.1% decrease in NAV. This figure has fallen steadily since March 2016, when the company was valued at R34.8 billion (£3.0 billion) or 45% of NAV.

Picture: Simon Dawson/Bloomberg

It is worth noting that this R7 billion is simply the carrying value of Brait’s investment in New Look (in other words it’s debt). In March Brait was forced to write the equity value of its investment in New Look down to zero. Bear in mind that in March 2016 Brait valued its 79.95% share of the equity value at £802.3 million; this was further reduced to £167 million in September of 2016.

It didn’t take long for the market to apply its own valuation, says Jan Meintjes, a portfolio manager at Denker Capital. “At R55 you are paying zero for New Look and the other assets you are buying at a 10% additional discount. Iceland Foods, Virgin Active and Premier are good assets.

“That is why at these levels I think Brait offers fair value, with an option of a turnaround of New Look.”

Brait’s investment team, together with New Look chairman John Gnodde are not sitting back. At the beginning of the month the board of New Look announced that CEO Anders Kristiansen, who had been in the job for five years, was standing down.

That it was a sudden decision was evidenced by the fact that Danny Barrasso, New Look MD for the UK was appointed as interim CEO, while the board hunts for a permanent successor.

“As New Look embarks on its next phase of development, we have mutually agreed that it is the appropriate time for a change to the leadership of the company,” said Gnodde at the time.

Brait will fully brief the market on the turnaround initiative with the release of the half-year results in November, he told Moneyweb.

Meanwhile Brait is applying the lessons learned during its turnaround of Iceland. For instance they are headhunting the best people in the business. “They appointed Paula López, who has previously worked for Zara and Esprit as chief creative director, so they are not sitting on their hands,” says Meintjes.

He admits that it is a tough ask. Structurally high street ladies fashion businesses are under big pressure from nimble rivals like Zara and Primark. In addition online retailers are taking market share.

“New Look is well placed from an online perspective with e-commerce sales that are just below 20% of total sales. But that doesn’t change the fact that they have a footprint of almost 600 stores,” he says. “That footprint is great when sales are growing – but a few seasons of big fashion misses have seen them lose market share and that is hard to get back.”

The saving grace for New Look and Brait, unlike an Edcon for instance, is that they have the liquidity to continue. “The third party bonds mature in 2022 and 2023,” says Meintjes. “In the meantime all they need to do is service the interest.”

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Who ever performed the due diligence on this deal and approved this acquisition should be fired! I am no retail expert but having lived in the UK for over 10 years it should have been blatantly obvious to the Brait management team that retail stores with large UK store footprints have been struggling for years with many going out of business. There has been an enormous shift in the UK to online clothing purchases over the last 10 years and low price stores like Primark have been taking market share for a long time. How pleased the sellers must have been to find some unsuspecting South Africans more interested in foreign earning to pay the wrong price and take over long term UK leases on 600 stores. This online tread will ultimately come to SA and decimate store retailing and only the best stores and shopping centres will survive.

Agreed

I have noticed this as a common trend with SA companies fawning over any overseas businesses as if they are some magical entity

Then get burnt.

So many carcasses left in the wake

And we never learn.

the trouble with brait is the quality of the people left there

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