Before we launched the Biznews SA Champions portfolio in January, I researched Brait and really liked what came up. This JSE-listed gem is actually a British company in drag. With the unusual advantage of being 35% owned and directed by one of South Africa’s most successful entrepreneurs.
Five years ago Brait was transformed from a private equity fund into an investment company. This was after Christo Wiese selected it to house much of his shareholding in Pep, which then accounted for over half Brait’s asset value. This became a massive windfall for all Brait shareholders when Pep was sold to Steinhoff in 2015 delivering a seven fold return on the investment, equating to an annualised return of 69%.
Steinhoff’s money didn’t stay in Brait’s bank for long.
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Within six months, the company had acquired control of three major UK retailers. In June 2015 it bought 81% of British fashion retailer New Look for ÂŁ783m. In July it was a ÂŁ692m deal for 71% of London-headquartered Virgin Active. And four months later the stake in UK food retailer Iceland was lifted from 18% to 57% after a ÂŁ175m injection.
Brait has effectively traded three quarters of an SA asset base for pound-based retailing businesses selected for it by a retailing genius. Plus, by the time I looked at the stock in January, the share price had halved as the post-Brexit pound tanked. So at R80 a share, I was delighted to allocate a chunky 15% of our portfolio to the stock.
The price bumped along around those levels for a few months before taking an almighty smack after Brait’s trading update on May 26. The annual report released last week provided the gory details behind the reverse. Primarily due to the unexpected slump at its biggest investment, the 872-store New Look chain.
New Look was expected to start generating profit in the year to end March 2017. Instead it delivered a pretax loss of ÂŁ16.6m. That disappointment translated into an immediate balance sheet event for the parent with Brait slicing the valuation of its New Look holding to R7bn, just one fifth of the R35bn of a year ago.
The New Look reverse offset solid progress at Virgin Active, Iceland and Brait’s other leg, the SA-asset food group Premier. It cut Brait’s net asset value from R136 to R78 a share. And hit the share price. Overlay June’s strong rally in the Rand and suddenly January’s “cheap” price of R80 a share was suddenly down by another quarter.
Price blow offs of this type are really interesting for long-term investors. And so it has been here.
In the past couple weeks the Rand’s rally has petered out, but Brait’s price hasn’t yet reacted. More to the point, Brait’s directors used the share’s weakness to aggressively buy back stock at any price below R65, accumulating R150m worth between the 13th and 22nd of June.
We should take this as a powerful vote of confidence that the festering sore, New Look, is being cleaned up. Which is what tends to happen when a company applies its best resources to problems – and with Wiese, his son Jacob and four Brait executives now on the New Look board, the challenge it is certainly not lacking attention.
Another bull point is New Look has also accelerated its drive into China with 110 stores having been opened there by new CEO Anders Kristiansen, a respected retailer who spent most of his career working in the Middle Kingdom.
In the annual report it cautions that New Look is still in a challenging period. But the worst appears to be over. And the other three legs are pumping. It’s not often that you get a second bite at an offshore cherry like this. Hindsight is likely to tell us that Brait shares, in the R60s, are a serious bargain. Especially as it’s back to business as usual for the Rand.
