Empowerment investment companies should, in a perfect world, be a popular choice for local investors. On paper, there should be a good number of well-established companies looking for black partners able to add value.
What’s more, empowerment investment firms with balance sheets that supported deal-making initiatives should not be short of opportunities to partner with businesses with reputable cash flows and defendable operating niches.
Clearly this was the notion in the mid-1990s when various black-owned investment ventures raised capital and wended their way to the JSE. Sadly, very few of the original pioneers are left on the bourse, even though in some instances good money was made for the original investors.
The two biggest BEE pioneers, New Africa Investments and Real Africa Holdings, enjoyed a short period of active deal-making before most of the value was realised and the counters delisted from the JSE. Others, such as Mvelaphanda, Cape Empowerment Trust and Arch Equity also departed after relatively short sojourns on the JSE.
Today the JSE’s most enduring empowerment companies, which were started in the late 1990s from funds sourced from local communities, hark from Cape Town: Brimstone Investment Corp, African Empowerment Equity Investments (AEEI, or the old Sekunjalo Group), Hosken Consolidated Investments and Grand Parade Investments.
These companies had — and probably still have — much in common, but the most discerning thread is that all three trade at discounts of more than 50% to the intrinsic net asset value (NAV) of the respective underlying investment portfolios.
While all four companies face an intriguing year ahead, IM wants to look specifically at the Brimstone value quandary as an example of how sentiment for empowerment companies has become clouded over the past few years.
Brimstone was founded in the mid-1990s by auditor Mustaq Brey and schoolteacher Fred Robertson, with a strong focus on Western Cape-based companies — particularly in the fishing sector. Some would say that Robertson brought a certain derring-do to deal-making with Brey acting as a more conservative foil.
Later Brey and Robertson were joined by respected academic the late Jakes Gerwel and corporate whizz Lawrie Brozin. This quartet worked well together on deals, added considerable value to companies that Brimstone invested in and helped build the group’s reputation as a "go-to" empowerment investor.
From the outset, Brimstone understood the value of investing in cash-generative businesses and brands. The group’s initial forays into the fishing sector — via Sea Harvest and Oceana (the owner of the Lucky Star canned pilchard brand) — remain anchor investments in the portfolio.
Brimstone also realised early on that protecting shareholder capital was critical. During the exuberance of the late 1990s new listings boom it accumulated a diverse portfolio of passive investments.
Realising that a strategic focus was likely to yield better results, the company liquidated most of its smaller investments and then opted to return the proceeds to shareholders via a huge special dividend of 150c a share. The ensuing focus on fishing, fast food (the group had a share in Nando’s before it delisted from the JSE), health care (Life Healthcare) and packaging (Lenco) helped rebuild value and cash flows. Dividends started flowing again in 2004, and continued unabated until 2020, when prudence was required to navigate the Covid-19 trading environment.
Brimstone also bent over backwards to preclude shareholders from cashing out their shares by unbundling part of its shareholding in Life Healthcare, allowing shareholders to either retain those shares or sell them on the open market.
There has been criticism that Brimstone has expended too much capital and management energy in its 100%-owned subsidiaries Lion of Africa (short-term insurance) and House of Monatic (clothing manufacturing). Brimstone is now in the throes of running down the Lion of Africa’s insurance book, and House of Monatic has — after a series of operating losses — been sold to TFG (The Foschini Group). Both investments, while disappointing, did not leave gaping wounds on Brimstone’s portfolio or balance sheet (for that matter). But the group’s ability as an "operator" (as opposed to a strategic investor) might be questioned — though its success at transforming Sea Harvest before its JSE listed largely nullifies this argument.
What Brimstone should get much credit for was its timely decision to exit from Luxe Holdings (the old Taste Holdings) on the first signs that the venture into global brand franchising via Starbucks and Domino’s might cause serious indigestion for investors.
Brimstone decided to sell out rather than pitch in more capital. This decision was questioned, but a small loss on the original investment capital was far easier to swallow than the stomach-churning value destruction that subsequently transpired at Taste/Luxe.
At this juncture, Brimstone is far easier to contemplate as an investment prospect. About 65% of the value is held in two listed investments — Oceana Group and Sea Harvest. A number of small holdings such as Phuthuma Nathi (MultiChoice’s empowerment vehicle) and real estate group Equites as well as financial services group Aon, property group FPG and private education venture Milpark (all unlisted) are also kicking through some meaningful dividends. These, alone, should more than cover Brimstone’s operating costs.
Brimstone has also worked hard in the past year to remove the debt burden that might have been the biggest reason for its sagging share price.
The group is busy with a staggered disposal of its investment in Life Healthcare and it has sold down investments in Equites and Phuthuma Nathi.
The debt issue is worth delving into more deeply. In the year to end December Brimstone made debt repayment to funders of more than R1bn, resulting in a reduction of R129.8m (almost 25%) in finance costs. The part disposals of Equites and Phuthuma Nathi raised almost R500m, and the part disposal of Life Healthcare another R440m.
The bottom line is that Brimstone’s debt ratio improved to 49.1% (previously 55%), and the important current ratio or acid test improved to 1.43 times from 1.15 times. Roughly another R800m should flow from the sale of the remaining portion of Life Healthcare. It will push debt closer to 40% of net assets.
At this juncture, Brimstone carries a NAV of close to R13 a share — which means the ordinary and lower-voting N-shares are offering discounts of 40% and 50% respectively.
While this is still a sizeable discount, it is better than the 60%+ discounts seen in the early parts of 2020.
A persistent discount seems likely while the bulk of Brimstone’s NAV resides in Sea Harvest and Oceana. Investors may prefer to hold Sea Harvest and Oceana directly — rather than seeing Brimstone as a discounted entry point to them.
There is persistent talk that Brimstone should consider unbundling its stake in Oceana to shareholders. That has merit, in terms of value unlocking and the much politicised "ownership" issues in the local fishing sector. But IM thinks such a move will not be seriously considered until the already delayed fishing rights allocation process has been completed. This seems likely only at the end of this year.
In the meantime, the big question is whether Brimstone uses its improved gearing position to build other hubs of value outside the broader fishing/food segments. Last year it acquired a further 55% equity interest in associate Obsidian Health — making this company an 80% held subsidiary.
Obsidian is a supplier of capital equipment and medical devices to the public and private health sector with a key focus on cardiology, cardiovascular, theatre, ICU, point-of -care diagnostic testing, Covid-19 rapid antigen testing kits, rapid HIV screening tests and personal protective equipment. But the company is small, and it will take time to make an impact on profit and value.
Obsidian does not even warrant its own line in Brimstone’s portfolio spreadsheet.
The discount might narrow if Brimstone decides to cull debt further by selling off its smaller investments. If the 25% stake in SA Enterprise Development and the 49.5% share in Vuna Fishing (both strategic longer-term holdings) are excluded, IM thinks Brimstone could easily raise between R800m and R1bn (if asset prices continue to improve as Covid-19 dissipates).
It would push debt to levels where Brimstone, relying on dividends from Oceana and Sea Harvest, could resume payouts to shareholders.
The bottom line is that it will take time for Brimstone to convince the market that it warrants serious investor consideration again.
Should the large discounts persist it is difficult to see Brimstone not unbundling its major investments in the fishing sector.
Brimstone’s future sans its core holdings in Sea Harvest and Oceana would not be easy to contemplate without the group forming more meaningful growth pillars in other business sectors such as health care or food production.
Still, investors with long memories will know not to write off Brimstone. In the past it has been able to leverage its redoubtable empowerment credentials to good effect.
*The writer holds shares in Brimstone
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