Anyone with the foolish notion of launching a listed investment holding company would have had their enthusiasm suitably tempered if they’d joined EPE Capital Partners’ (Ethos’s) investment call last week.
But first, it’s probably best to let the numbers for the year to end-June do the talking. Ethos reported NAV up 1% to R2.7bn, or 856c a share.
Yet its share price is only 401c; so it trades at a gaping discount of 53% to the supposed value of its assets. This is far wider than larger counters Remgro and Hosken Consolidated Investments, as well as the similar-sized Sabvest Capital.
Over one year, Ethos shares have fallen 29% — almost as badly as the 33% slump in the Brait share price over the same period.
Brait is one of EPE’s most recognisable investments. And despite a chunky 46% of the Ethos portfolio sitting in cutting-edge businesses (such as Vertice, Crossfin and Tyme Bank), the market seems to treat the share as a proxy on Brait.
Despite a chunky 46% of the Ethos portfolio sitting in cutting-edge businesses (such as Vertice, Crossfin and TymeBank), the market seems to treat the share as a proxy on Brait
But the Brait portion of the Ethos portfolio (which includes a sizeable chunk of exchangeable bonds) accounts for just 22% of its value.
The biggest investment is now fast-growing fintech business Optasia, which represents 31% of Ethos’s portfolio, given its valuation of R831m. Sceptics might question that figure, but it is based on a third-party valuation thanks to a partial sale of the asset.
Ethos CEO Peter Hayward-Butt was at pains to stress that 58% of its portfolio value is based on listed valuations or recent third-party deals. In other words, “only 42% of our portfolio is subject to the vagaries of Ethos’s views”.
Still, investors are getting testy. Greg Blank, representing GLB Trading, wanted to know why, after unlocking R7.8bn of value at Brait, there was so little for Ethos shareholders. “All they have seen is a diminution of the share price.”
Hayward-Butt said the strategy at Brait is to return shares (JSE-listed consumer brands conglomerate Premier Group and unlisted health and fitness chain Virgin Active) to shareholders. “Unbundle the value and get rid of the discount. Today the market capitalisation of Brait is the same value as its stake in Premier, which absolutely illustrates the point that there should be value to be unlocked here.”
The same could happen with Virgin, he argued. “If we can get Virgin Active to be a listed business or someone comes along and says, this is a very attractive portfolio of gyms across the world and I want to buy it ... that will unquestionably unlock value.”
The caveat, he said, was that “there is still some work to be done there”.
Blank argued that Ethos should let the market determine the value of Virgin Active. “If Virgin Active needs a rights issue, then the market will dictate. What you are doing now is waiting for the eventual outcome, which could be 16 months down the line. Are there not ways to expedite what you want to do?”
Hayward-Butt said it was the view of several banks that Virgin Active was not ready to be listed on its own. “We have international experts saying investors will not buy into Virgin Active today as a listed entity on its own. It will take us some time, but in the period before December 2024 we will hopefully get it in position [so] that it can be listed.”
Blank asked if Ethos should not then be buying Brait shares in the open market, “if you believe your own story”. Hayward-Butt responded that such an action would be up to the board, but that Ethos does not have the liquidity to wade into the market to buy up Brait shares.
the Brait conundrum will cloud other efforts to unlock value at Ethos
The Brait conundrum may well cloud other efforts to unlock value at Ethos. For one thing, the partial sell-down of shares in Optasia might suggest action at this large investment sooner rather than later. Ethos has been invested in Optasia — formerly Channel VAS — since 2018, so the investment is nearing the end of its private equity cycle (usually between five and seven years).
Optasia is a global fintech player that partners with mobile network operators, mobile wallet operators and financial institutions to provide financial access to customers through an AI credit scoring platform. The business operates across 30 countries - but mainly with an emerging market focus on emerging markets in sub-Saharan Africa, the Middle East, Asia and Latin America.
In December 2022 a new consortium led by Chronos Capital bought a 17.4% stake in Optasia. It snapped up a further 2.6% stake in March this year. Ethos’s share of the proceeds was R194m (as well as a R22m dividend from Optasia).
Ethos’s overall multiple on invested capital for its investment in Optasia has increased to an impressive 3.1x at the end of June. And there’s the option to list Optasia — most likely not on the JSE which would, of course, further reinforce Ethos’s valuation.
My gut feeling is that Optasia might be embroiled in corporate action before a listing is formally contemplated, which would again be good for Ethos and ensure the Brait blot is kept in perspective.
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