These days nothing snuffs out investor sentiment quite like a balance sheet sagging under a burden of debt.
Brait, once the darling of the JSE’s investment companies, is labouring under a debt load that is blocking efforts to restore market faith after the ill-timed foray into the UK fashion retail sector via New Look. At the end of June, IM calculates Brait’s total net debt at around R11.5bn — roughly R2bn more than the group’s market capitalisation at the time of writing in mid-July.
Results for the year to end-March show convertible bonds of around R6.4bn (which mature in September next year) and Brait’s committed revolving facility of R6.5bn.
Brait has cash on hand of around R8.4bn, which meant net debt at the end of March was just over R12bn. But post-balance sheet events show Brait recently received R610m after clinching a refinancing of Virgin Active SA’s senior debt facilities — which informs our latest net debt figure of R11.5bn.
Not only will this debt take some servicing, there is the overriding worry about the significant chunk of convertible bond that matures next year.
Brait reported R798m cash inflows from its portfolio in the past financial year, including shareholder funding repayments of R365m by Virgin Active and R232m from Premier as well as R157m coupon received on New Look bonds.
After settling operating costs and tax, Brait had R536m for servicing finance charges.
But it has to cull debt.
Brait is focusing on reducing its net operating costs through measures that include cost rationalisation and increasing its annual fee and annuity income from its portfolio.
The more critical thrust will be to materially reduce debt ahead of the September 2020 redemption and repayment of Brait’s convertible bonds.
Brait, with its share price heavily discounting the latest NAV estimation, cannot issue new shares for cash to raise proceeds for a debt cull.
A sale of assets is, realistically, the only way forward. But the sale of one of the larger investments could lead to an imbalance in the portfolio structure. For instance, if Premier was sold, there would be a serious concentration of assets in the UK market.
Officially, Brait says it is "progressing several opportunities to generate cash proceeds from its investment portfolio". It also mentions creating value for shareholders and securing headroom to advance strategy — noting that "executing on these plans should result in reducing the discount of Brait’s share price to the reported NAV per share".
Reading between the lines, IM reckons Brait might surprise in the coming months with a couple of deals to help address the market’s serious concerns around its debt.
IM believes it was significant that Brait opted to peg lower ratings on its main holdings — a development that markedly reduced intrinsic NAV to R41.80 a share.
A key question is whether Brait’s lowering of valuations on key investments might be aimed at attracting investors to acquire strategic minority stakes in certain businesses.
Certainly Brait should not struggle to find investors to acquire a significant minority stake in Premier Foods, which owns brands such as Blue Ribbon bread and Snowflake flour.
It could sell off minority stakes in the Virgin Active operations, which span SA, the UK, Europe and elsewhere.
There is the possibility of selling the bonds in New Look, and exiting some of the smaller investments like glass maker Consol and liquor group DGB.
IM sees the possibility of Brait’s discount narrowing on "value-confirming" corporate action and believes the share might be worth accumulating at current levels on a longer-term view.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.