Brait ? A diamond in the rough?

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Tuesday, 18 June 2013 - 20:00

Brait is an investment holding company with its primary listing on the Luxembourg Stock Exchange and a secondary listing on the JSE. It differs from most other well known holding companies in SA in that the majority of its investments are in unlisted businesses geared to emerging markets.

Brait started off as a private equity fund manager in 1992 by raising capital for its first fund, Brait I. Three further private equity funds followed, with Brait III and Brait IV each being South Africa’s largest independently managed private equity funds at the time of launch. The company’s first three funds are now fully realised, and achieved an exceptional gross rate of return in excess of 30% pa.

In July 2011, Brait successfully changed its business model from a private equity fund manager to an investment holding company through a R 6.4bn equity capital raising, which together with the debt component of R 2.2bn was considered the largest capital raising in Africa at the time.

Underlying Investments

As part of its investment criteria, Brait seeks underlying investments that are up to R4bn in size, offer a targeted internal rate of return in excess of 25%, demonstrate growth in earnings and/or strong cash flow generation, and are leaders in their respective market segments.

The majority of Brait’s underlying investments are concentrated in Pepkor (61%), Premier Foods (10%) and Iceland Foods (10%). Further investments include the Brait IV private equity fund (4%), with holdings in Consol and Primedia, and DGB (2%), a producer and exporter of local wine with the brands Douglas Green and Boschendal in its stable.

Pepkor, headquartered in Cape Town, was founded in 1965 and now operates in 14 countries across 3 continents. It is SA’s leading retailer operating in the low income market, and sells everything from clothing and footwear (Pep, Ackermans, JayJays, Shoe City) to house wares (Pep Home) and cellular products (Pep Cell). Pepkor trades in 11 African countries, and also expanded to Australia with the acquisition of Best & Less in 1998 and to Poland and Slovakia via the brand Pepco.

Premier Foods is a key staple foods producer in SA, operating 11 bakeries, 5 wheat mills and 16 distribution depots nationwide. Some of its flagship brands include Blue Ribbon Bread, Snowflake Flour and Iwisa Super Maize Meal. Premier Foods has a significant exposure to the informal market, which accounts for over 60% of bread sales in SA, through its well-priced flour products. Brait expects the company to drive growth through optimising its existing milling and baking operations in SA and also expanding into the rest of Africa.

Iceland Foods is a UK based national food retailer that focuses on frozen foods but also offers regular groceries and fresh fruit and veg. The company was founded in 1970 by current CEO Malcolm Walker, who was forced to leave Iceland in 2001. The company floundered in his absence, and Walker made his return in 2005 as a member of the consortium that took the company into private ownership. Since Walker’s return sales have grown by more than 50%, profitability has been fully restored and Iceland now has a 13% share of the UK frozen foods market. The company has an extensive footprint across the UK, has over 24 000 employees and is known as an innovative and rewarding company to work for.

Financial Results

Brait has recently released its annual results for the financial year ended 31 March 2013, and investors will be more than pleased with the strong growth figures. Net Asset Value (NAV) per share increased by 29% from R 20.59 to R 26.64, well in excess of Brait’s targeted growth of 15% per annum. Underlying holdings are valued by applying specific multiples to the earnings received from each investment. Pepkor was valued on a 8.0x multiple, and Premier Foods and Iceland Foods on a 6.5x multiple. These multiples have not increased from the previous financial year, indicating that the growth in NAV is a direct result of the growth in earnings from the underlying companies. It can also be noted that these multiples are vey low in comparison with listed competitors in these sectors, resulting in quite conservative valuations for these investments.

The breakdown and quarterly growth of the NAV per share is as below:

Further highlights include an increase in Normalised Headline Earnings per Share (HEPS) of 34% to R 5.79 per share and the proposal of a bonus share issue of 26.64 cents per share, an increase of 29% on the previous year.

Brait has also experienced R 274m in cash inflows from its investment portfolio in the financial year, including a R 128m Pepkor dividend and R 118m from realisations within the private equity fund and smaller investments.

A further R 1.5bn of capital was raised in August 2012 from the issue of perpetual preference shares, and Brait now has cash and facilities of R 2.7bn available for new investments should opportunities arise.

A unique opportunity

Brait offers investors access to a unique portfolio of unlisted investments characterised by its exposure to emerging markets and lower income groups. The underlying investment portfolio is defensive in nature, cash-generative, and is ever diversifying in terms of geographic and sectoral exposure.

We believe that Brait’s investments can deliver sustainable growth in challenging market conditions, and it is included at a 3.4% holding in the Seed Equity Fund as part of both the momentum and value portfolios.

Kind regards,

Cor van Deventer

info@seedinvestments.co.za
www.seedinvestments.co.za
021 914 4966

Tue, 18 Jun 2013

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