On paper, the dour economic climate provides a perfect backdrop for attractively priced deals. Especially if you’re cash-flush Long4Life (L4L), the investment company headed by deal-making doyen Brian Joffe.
But ongoing political and economic jitters might well cause the group to reel in more of its own shares rather than chase acquisitions in the short to medium term.
There was much that could be garnered from the group’s AGM last week. It was a far more sombre affair than the previous gathering of shareholders.
At last year’s AGM, Joffe urged institutional investors to put more money into SA. He also stipulated a preference for making a bold acquisition rather than a series of small deals.
This year’s AGM showed L4L directors in a more wary mood. It’s clear that SA’s deepening economic gloom is taking its toll on some of the country’s staunchest erstwhile champions.
Joffe said that while there had been multiple opportunities to deploy capital, it was a "difficult call" to buy businesses on historic earnings multiples. This month’s market savaging is a case in point. "Imagine," said Joffe, "if we had done deals at earlier levels."
Joffe also bemoaned the jaundiced market sentiment. "No-one appreciates small caps these days. We thought we would have a better [market] rating and people would be interested in the space we are in."
L4L’s main investments are in sports and outdoor goods retailing (Sportsmans Warehouse and Outdoor Warehouse), beauty and health services (mainly Sorbet) and niche beverages (Chill and Inhle).
Shareholder activist Chris Logan noted that L4L’s latest annual report had flagged the SA political and economic climate as a top risk to company prospects. This was not the case in the previous annual report.
Joffe said he was reluctant to make predictions about SA, but believed the situation was probably now more predictable. "There’s probably more chance of the economy going up than down. But we won’t get real economic growth until we have economic stability.
"I am confident about the president. But there is a question mark about whether he will be able to implement some of his ideas."
L4L shareholders can at least take comfort in the group’s stout balance sheet, which should still reflect cash of over R1bn.
Not surprisingly, Joffe is adamant that L4L will not use its equity at current prices to fund deals. But there should be ample opportunity for meaningful share buybacks. As at August 19, the group had bought back another 11.8-million shares at an average price of 427c a share (since the financial year-end, February 28).
The share price at the time of writing had dribbled down to 381c — versus a NAV of 548c a share and tangible NAV of 202c a share. Shareholders may be disappointed if cheap scrip is not mopped up with vigour.
While acquisitions might be on the back burner, one interesting option cited by Joffe was that of a merger, presumably with another similar-sized and similarly rated investment counter. "There is the potential to scale up, if we can find the right opportunity to merge."
Operationally, L4L’s investments seem to be chugging along. The sport and recreation division has shown like-for-like sales growth, but Joffe admitted that margins were slightly lower, primarily due to increased sales of markdowns.
The personal care and wellness division is also performing to expectations.
However, Chill Beverages, maker of Fitch & Leedes mixers and the Score energy drink, is causing a hiccup. Joffe said L4L had invested heavily in Chill’s production capacity and had spent more on sales, marketing and product development.
But the higher sales haven’t yet materialised.
"Therefore, while revenue has increased against the prior comparative period, underutilised capacity, together with the increased expenditure, has resulted in a decline in the trading profit of the business."
L4L is now pinning its hopes on a thirsty summer. "We foresee that there will be buoyant sales in the season ahead and that the increased capacity should satisfy expected demand."
Noting the growing competition in SA from international beverages firms (like Monster, Fever-Tree and Premier Mixes), Logan asked whether it could be a smart move to merge Chill’s Fitch & Leedes brand into a larger "drinks" play.
Joffe responded with: "If you bring the cheque we will talk."
It could be argued that a promising niche brand like Fitch & Leedes would, in the longer term, be worth more in the hands of a large beverages player. Brands could be developed (think a Fitch & Leedes ready-to-drink gin and tonic), and rapidly rolled out globally.
During his long and successful tenure at conglomerate Bidvest, Joffe was not renowned for selling assets, or, in fact, for having to deal with too many poor-performing operations.
How L4L deals with Chill’s short-term challenges could well be telling about the group’s flexibility in building value for shareholders.
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