On the face of it, Brait, the JSE-listed investment holding company, presents a relatively uncomplicated investment case. With a clear objective to unlock value from its portfolio of assets within the next two years, the company trades at a significant 37% discount to NAV, raising the inevitable question: is this an opportunity, or simply a reflection of market scepticism?
The group’s portfolio is concentrated in three main assets: Virgin Active (61%), Premier (28%) and New Look (5%). The remaining 6% of Brait’s asset base comprises net cash and other smaller items. While New Look, the UK-based fashion retailer, is too small to shift the needle in any meaningful way, Premier and Virgin Active form the crux of any investment thesis around Brait.
Food producer Premier is now independently valued by the market since its listing in March 2023. This introduces a welcome level of transparency, since Brait’s reported NAV includes the mark-to-market value of Premier based on prevailing market prices. Having said that, Premier’s p:e of about 14 might seem stretched for a business whose core operations remain largely bread and other basic food staples.
While Premier has enjoyed solid earnings growth driven by capital investment-led efficiencies and tight cost control, the sustainability of this momentum is questionable. Revenue growth remains relatively muted and once the benefit from operational efficiencies tapers off, maintaining the current earnings trajectory will be difficult.
But it is Virgin Active, the international gym chain, that introduces the most complexity — and arguably the greatest potential swing factor — into the valuation. Unlike Premier, Virgin Active is still unlisted, meaning its valuation within Brait’s NAV is based on internal assumptions and peer comparisons. Brait pegs the gym group’s value at nine times “maintainable” earnings before interest, tax, depreciation and amortisation (ebitda), a definition that conveniently equates to pre-Covid earnings levels.
This assumption deserves scrutiny, especially in light of the company’s capital-intensive nature and high leverage profile. Virgin Active’s net debt to ebitda sits at a concerning 4.4 times, and when one considers that about 35% of ebitda is typically required for capital expenditures just to keep the gyms running and up to standard, the company’s financial flexibility looks constrained.
Brait’s justification for the nine times ebitda multiple stems from a peer group comprising mainly US and European-listed gym operators such as Life Time, Basic-Fit and Planet Fitness, among others. These peers generally have lower debt levels and operate in higher-income, more stable markets, which justifies their higher valuation multiples. Brait has applied only a minimal 3% discount to this peer average, which many analysts would argue is optimistic. Considering that 56% of Virgin Active’s ebitda are derived from South Africa — a market characterised by a weaker consumer environment, intense competition and higher perceived risk — the case for a more conservative valuation becomes compelling. For instance, applying a six times ebitda multiple instead of nine would push Brait’s NAV down to about 150c a share. That’s notably below its current share price of just over 185c, meaning the perceived discount to NAV disappears entirely — turning a value play into a potential value trap.
Much of this growth has come from increased membership fees rather than meaningful expansion in membership numbers
Virgin Active’s recent performance offers some encouragement. Revenue and profit growth have been solid as the business recovered from the pandemic slump. Yet much of this growth has come from increased membership fees rather than meaningful expansion in membership numbers. The most recent data shows only a 6% increase in active memberships. Meanwhile, rising prices may face resistance in the future as economic conditions tighten. Additionally, South Africa’s gym market has become saturated in recent years. With retail and office space demand declining post-Covid, landlords have repurposed many properties into gyms, intensifying competition and putting downward pressure on pricing power.
One of the most underappreciated risks in the Virgin Active story is its heavy reliance on Discovery’s Vitality programme. This partnership, which subsidises a significant portion of membership fees for qualifying members, is integral to Virgin Active’s South African revenue base. While there is no indication that the partnership will be discontinued, the dependency introduces an element of fragility into the business model. Should Discovery alter its Vitality terms, or should regulatory pressure mount on the grounds of anticompetitive behaviour — something some smaller gyms have complained about — the financial impact on Virgin Active could be material.
Brait intends to list Virgin Active by the end of 2026, with a dual listing in the UK and South Africa. This planned IPO will provide a real-world test of the company’s current valuation assumptions. Until then, investors must rely on internal appraisals that are arguably generous. On the other hand, Premier, now publicly traded, may be unbundled to Brait shareholders, providing a more straightforward route to unlocking value.
Despite Brait’s well-articulated strategy to unlock value, the group continues to trade at a steep discount to NAV. In part, this reflects the broader scepticism towards investment holding companies on the JSE, many of which — including Remgro and Hosken Consolidated Investments — also trade at substantial discounts to their underlying asset values.
Interestingly, majority shareholder Christo Wiese has been steadily increasing his stake. Perhaps it is simply a case of doubling down on an existing investment — in for a penny, in for a pound. But Wiese is a seasoned investor and, together with Brait’s investment adviser, The Rohatyn Group, there is certainly the expertise and incentive to extract every possible cent of value from the group’s assets. This might include buying back debt — mostly convertible bonds, which are publicly traded — at a discount.
For investors willing to trust management and take the long view, there could yet be value to unlock. For others, with a Virgin Active IPO still nearly two years away, there may be more compelling opportunities elsewhere.
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