Company Results Analysis 20 November 2017 Recommendation: Overweight JSE Capped SWIX weighting: 0.32% Recommended exposure up to: 5.32% BRAIT SE Sector: Financials Max Sector Weight: 35% Nature of Business: Brait is an investment company focussed on driving sustainable long-term growth and value creation in its investment portfolio of sizeable unlisted businesses operating in the broad consumer sector. Brait s shares are listed on the EURO MTF market of the Luxembourg Stock Exchange and also on the JSE. JSE Code: BAT Current Share Price: ZAR 4233c Stock Data: Market Cap (R'bn) 23.1 52-Week High 9 382 No. of shares 526 52- Week Low 4 321 Avg. daily value (R'm) 84.4 1 Year TR -53.22% Free-float 55.4% 1 Month TR -20.22% Beta 0.62 Source: Bloomberg Comments on results: Brait reported a NAV of R66.62, a decline of 10.1% compared to the NAV of R74.14 at 30 June 2017. NAV was significantly affected by the valuation of New Look, which has been reduced to nil. Operating expenditure for the year amounted to R135m which represents 0.61% of average AUM which is well within management s target of 0.85% of average AUM. The group s cash and equivalents totalled R3.3bn, representing 9.7% of NAV which is within the target range of below 25% of NAV. A cash translation gain of R212m was recognised due to the positive affect of exchange rate movements. Franco Pretorius Head of Equity Research +27 (11) 996 5200 Franco.Pretorius@psg.co.za Tayla Wesson Equity Analyst +27 (11) 996 5200 Tayla.Wesson@psg.co.za
Operational Review: -Virgin Active: Virgin active owns 236 clubs in 8 countries across 4 continents with 1.2m members across the world. Revenue grew by 5% on a constant currency basis to 421m where membership remained largely stable. Revenue in South Africa grew by 6% (membership down 1%) with 11 new clubs opened, revenue in the UK grew by 2.0% (membership down 2%), revenue in Italy was up 3% (membership 1% higher) while revenue in Asia Pacific was up 19%. Portfolio EBITDA grew 2% to 98.5m in constant currency terms. Asia pacific saw new club opening costs offsetting its revenue growth resulting in EBITDA growing only 3%. UK saw EBITDA improve 14% following the head office restructure after disposals were made while Italy reported a 13% climb in EBITDA following its growth in revenue and membership flowing through whilst good cost control aided EBITDA growth. Portfolio EBITDA margin contracted by 70bp during the period to 23.4% impacted by the 8% EBITDA decline in South Africa where there is continued focus on sales and marketing investment in order to grow volumes. Double digit EBITDA growth is anticipated for 2017 supported by currency tailwinds. Furthermore, the traction made in Italy should provide a boost to EBITDA along with the recent volume growth in the UK should translate into higher revenue. The investment in Asia should provide for a strong pipeline to benefit in the medium term. The difficult consumer market in the South African market is expected to continue where there has been a focus on lower price points as well as trialling of different membership options whilst a moderation in the roll-out pipeline has been cited. Virgin Active is Brait s largest investment and contributes 41.0% to Brait s total assets. -Iceland foods: Total sales increased by 7.3% (like-for-like: 4.3%) to 1.3bn supported by the net 17 new stores opening in the period and aided by the net 21 new stores opening in full year 2017. Total sales were ahead of the market. Like-for-like sales saw a downturn on quarter two to 2.2% from 6.4% in quarter one. EBITDA margin deteriorated marginally from 4.8% to 4.7% where EBITDA had grown by 5.2% to 60.9m. Refits of traditional Iceland stores had commenced in October 2016 whereby 34 store refits were completed at 10 November 2017 all achieving incremental like-for-like sales growth. The goal is to have 55 store refits by year end, mainly in London and the South East. The plan of opening 24 Food Warehouse stores per annum is continuing whereby 11 new stores have been opened in the first half the financial year and 6 additional stores after. A significant improvement was made in working capital achieving a positive year-to-date movement of 23.8m due to favourable timing of supplier payments.
Iceland purchased and redeemed a nominal total of 50m of Floating Rate Notes at a redemption price of 100.00% of the principal amount, plus accrued and unpaid interest. Assuming Iceland repays the remaining 79.5m on the Floating Rate Notes through internally generated cash, there will be no refinancing requirement until at least 2023. Going forward tougher trading comparatives are expected as well cannibalisation from own new stores and greater competition in the market on value. Forecast net debt to remain approximately the same at 675.1m as in full year 2017. Exceptional costs pertaining to getting the Deeside depot operational, litigation expenses and management restructuring is expected. -Premier: Net revenue was down 10% due to the milling business, which accounts for one third of Premier s net revenue, was impacted by extreme maize commodity market pricing volatility. Bread and Maize contributed 46% and 19% respectively to net revenue. Competitor promotional pricing put pressure on Bread sales volumes, however, market share of 23% across all its bread brands was maintained. Maize revenue decreased by 22% as volumes fell 7% to the prior period due to consumers substituting into cheaper staples. This resulted in stocks of maize lasting longer than planned. In addition, maize margins fell 4% lower due to maize stock being sold at below budgeted margins. Revenue in Premier s wheat business fell 7% whereby sales volumes decreased 4%. EBITDA margin eased to 8.3% from 9.9%. Going forward management expects the milling business to outperform the comparable period for the remainder of full year 2018. This is after the maize commodity price volatility has normalised in the second quarter of full year 2018. -New Look: UK sales decreased 6.1% to 463.4m whist e-commerce sales declined 7.6% to 94.9m with 3rd Party E-commerce partners increasing by 17% to 33.7m. International sales declined by 1.5% (LFL: decline of 7.9%) to 86.3m on the back of challenging trading conditions in Europe which offset YoY growth in China in addition to favourable currency movements. Franchise sales improved by 7% to 16.9m. The cost base for New Look increased 7% (1.6% after adjusting for FX and once off, annualised investment costs) to 343.8m. UK Retail went into negative territory with an underlying operating loss of 8.7m from an underlying operating profit of 42.4m in the prior period. International extended its underlying operating loss by 53% to 12.1m whilst E-commerce deteriorated 89% to an underlying operating profit of 1.4m, whilst 3rd Party E-commerce partners weakened to 6.8m from 7.8m and Franchise eased to 2.2m from 3.8m. Adjusted EBITDA was 24.2m, a 72% decrease to first half 2017. What was notable was performance had weakened further in the second quarter. There was a multitude of reasons for underperformance that was highlighted. The broad appeal of New Look shifted and become too young and edgy with the range becoming overly fashionable losing its value proposition. The E-commerce platform chased sales impacting profitability. In addition, the company was slow to update to trends on the back of excessive product options and increased complexity impacted the organisations flexibility. Stock was also not moved quickly enough. Compounding the issues was sustained difficult market conditions. A primary focus for management is an adequate cash and liquidity profile, which is in place. Following interim results, New Look signed an agreement with its core operational bank to provide increased bi-lateral liquidity and operating facilities totalling 100m on a fully committed basis (pari passu with the RCF). RCF (committed) will amount to 100m. Company prospects: Good momentum seen in Italy and a strong pipeline in Asia Pacific is expected to provide medium term growth opportunities for Virgin Active. However, the South African market will be a challenge owing to the tough consumer market which is set to continue. This has prompted management to slow down the rollout pipeline and to look at lower price points and trailing different membership options to grow volume. Iceland s recent refinancing should enable it to pursue its well established, long term strategy for growth with the benefit of lower borrowing costs.
New Look s second half of the year is expected to remain challenging where management intend to focus on short term stabilization of the business in order to maintain its liquidity profile. This is to be achieved through cost control. Factors that were largely self-inflicted that had affected interim results are expected to be addressed going forward with the goal to recover its broad appeal after full year 2018 where managing cash and establishing a profit recovery are the most pressing issues in the short term. In addition to the improved planning cycle to reconnect with its heartland customer. There has been changes in senior management. It has been stressed that the business maintains a sufficient liquidity profile and operating facilities in order to implement their plan and provide time to recover. Recommendation: We feel the share offers value at current levels with the share price at a 37% discount to Brait s management estimation of fair value. We estimate that the current share price implies a further 18% decline in EBITDA assuming stable exchange rates and stable valuation multiples, which seem pessimistic. Given the highly geared nature of the structures in which the investments are held, changes in earnings and valuation multiples of investments has a significant impact on its reported value. The share is currently trading at a 30% discount to our estimation of intrinsic value primarily due the higher discount that we apply to peer spot multiples given the unlisted and highly geared nature of its investments. The sensitivity of the group s investment to earnings changes was confirmed by management reducing the value of New Look to zero until its recovery is established. Exchange rate volatility (especially the GBP - given that majority of the assets are concentrated in the UK) is likely to have a material impact on investment returns given the uncertainty related to the UK economic environment. Virgin Active, which is the group s largest investment, had its valuation increased by 8% in GBP terms since 30 September 2016. The investment offers an annuity type income stream and continues to de-gear due to strong cash generation; however, membership growth poses a challenge. Iceland Foods valuation was written up by 9% in GBP terms since 30 September 2016. This was primarily due to an increase in maintainable EBITDA while the EBITDA multiple remained the same. Its online presence is outgrowing the market whereby its online service distribution radius covers 84% of the UK population. The company has good market share in the UK frozen food market of 15.3% (40% of total sales) and 2.1% of the UK grocery food market. However, sustained positive LFL sales have been impacted by an intensely competitive UK retail climate. Premier valuation was decreased by 3% primarily due to a lower EBITDA multiple. However, EBITDA improved slightly from March 2017. The Premier business has a significant exposure to the informal market which accounts for 70% of bread sales volumes which due to its strong brand positioning and positioning in the staple food segment should provide some consistency in earnings.
Portfolio Guidance: JSE Capped Swix weighting 0.32%. We feel that the share offers value at current levels but would only recommend the share to speculative investors at this stage. Given the investments low weighting in the benchmark and the high expected return we recommend portfolio exposure of up to 5.32%.
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