Brait has changed its spots over the last three to four years. Historically it was a traditional private equity asset manager and has now morphed into an FMCG play. Sean Ashton from Anchor Capital tells Alec Hogg why currently the share price is fully reflecting the value of the company, but because this is a high-quality business it needs to remain on your watchlist. – CP
ALEC HOGG: Joining us now is Sean Ashton from Anchor Capital. Sean, you’ve just put a piece together on Brait, which is really interesting because it’s a fascinating business that doesn’t get a lot of airtime amongst investors. What attracted you to it?
SEAN ASHTON: Thanks, Alec. The story with Brait is that they really transformed this business from what was, essentially, a private equity investment vehicle three or four years ago to a holding company for a variety of FMCG assets. Ultimately, what you’re buying into now is pretty much what I would regard as a fairly expensive entry point into a Mr Price alternative, and that’s really, their Pepkor business, which is about 70 per cent of the value of the company. Certainly, very good quality underlying assets.
ALEC HOGG: It was interesting, looking at your research report, that Pepkor (or their investment there) makes up R28bn. I suppose it’s because we haven’t had visibility of Pepkor for years.
SEAN ASHTON: Absolutely. I think that visibility within their numbers is still, much better than what you would have had in the past (because you had nothing) but you don’t have a full set of listed accounts, given that they disclose what they ultimately want you to see. Ultimately, I think that’s our valuation of it and the point we would make is that when you look at the published NAV that Brait puts out – just shy of R35.00 per share – I suppose many investors would scratch their heads and say ‘well, the share price is at R76.00. It’s way too expensive’. At the end of the day, they’re using fairly conservative valuation numbers from a director’s valuation point of view. What we’ve said to ourselves is ‘well, what could you possibly justify to make this thing look like fair value’ and ultimately, you have to look to Mr Price’s valuation, which is a very good comparable for what Pepkor does in the South African space.
If you’re prepared to apply 18 to 20 times EBITDA then you kind of get back to just shy of the share price. Ultimately, what the market’s doing with this thing is saying ‘we rate the assets as highly as we do with Mr Price, but even once we’ve done that, there’s not huge value to be had in this’. The long and the short of it is that we think this is a great quality business with great assets, but one can afford to be a little bit patient on the valuation side.
ALEC HOGG: Maybe it’s a bit expensive at the moment. Why do you put it in the same category as Mr Price?
SEAN ASHTON: Simply, when you look at the sum of the parts the way we look at it, 70 percent of the value of the business is Pepkor and really, that’s a cash retailer servicing the value end of the market – principally, in South Africa. They do have some businesses in Europe and the rest of Africa but that’s a segment of the market, which is quite comparable to what Mr Price does. There’s a lot of apparel retail in there. They obviously have some cellphone sales and I suppose that where there’s a bit of a difference is on the sports side and the furniture side, which Mr Price looks after but it’s very much, a value positioning in the market. I would suggest that Pepkor’s probably slightly lower end than Mr Price is, in the sense that Mr Price has a higher LSM mix of customers. Ultimately, it’s largely on cash sales, though, with very attractive return metrics and margins.
When you look at the rate of sales growth that they’ve been achieving – when you look at Pepkor versus Mr Price – actually, if anything, Pepkor’s probably outperformed Mr Price but they’re both very strong growers over the last couple of years.
ALEC HOGG: The whole story of Brait though, is moving from a private equity firm with Thierry Dalais and a few of his colleagues who’ve gone onto other shores, and then being taken over by Christo Wiese who then injected his Pepkor assets. That was in the last three years. The markets loved the story. Has it run out of steam?
SEAN ASHTON: I think the markets loved the story because this is a unique set of assets that you have now and there was no other way to get your hands on what ultimately, is a very good quality underlying business. When Pepkor was injected into Brait, it was at a much lower valuation. When you look back three years ago where you’ve had explosive share price performance out of Brait over the last three years – even outperforming Mr Price – there clearly was an implied discount on the underlying assets relative to comparable peer groups in the South African market. I think that gap is now closed, so for us it’s really about what they do with the portfolio henceforth, as opposed to a rerating of the existing assets inside the portfolio. Certainly, I think that when you look at Pepkor, Premier Foods, and Iceland Foods, they’re all…
To get to this share price, you’re having to apply at least the same valuation as you would to comparable assets. In the instance of Pepkor, it would be Mr Price in our view and from a Premier perspective, that’s probably Pioneer Foods. With Iceland Foods (a food retailer in the U.K.), you would look at businesses like Tesco and some of the discounters there as well. They’re great quality assets, but I think the rerating is largely done and right now, they do have some uncommitted debt facilities, which they can utilise. I know that they are under cautionary so clearly, the market’s expecting the potential for some corporate action, but I think it has to be fairly sizeable to move the needle.
ALEC HOGG: You haven’t mentioned Poland yet but in your research report, it looks like this company is growing aggressively in that part of the world.
SEAN ASHTON: Absolutely. That’s probably the most attractive part of Pepkor. It’s about 20 percent of that business’ sales. Really, the story there is that you have a business… I think they’re sitting with about 550 retail outlets across Poland, Slovakia, and the Czech Republic. That’s under the Pepkor brand so it’s really, a value apparel store positioned in those markets. That business only had 115-odd outlets in 2008 so we’ve grown the base by more than 25 percent per annum and they’re still rolling out 100 stores annually. We think that if they can sustain that type of profile, this business could sustain 20+ percent store growth and then on top of that, you have to take a view on same store sales and on that score, they’re performing very well. When you look at the recent numbers, you’re looking at more than ten percent same store sales growth in that specific market.
Provided that this trend continues, that business can grow by 30 percent per annum for a while. Granted, it’s only 20 percent of the sales profile of Pepkor as a whole, but that’s a nice sweetener to overall growth for the Pepkor Group.
ALEC HOGG: Well, the Stellenbosch guys certainly like Eastern Europe. Talking about the Stellenbosch guys and the Christo Wiese factor, does it play much given that the share price is so close to your implied value?
SEAN ASHTON: Yes. Look, I think what that brings to it is that you have to believe that there’s a potential for deal flow that comes via the Christo Wiese factor, I guess, in the sense that these guys are strong dealmakers. I think they have a very good corporate finance background and at the end of the day, having him as an anchor shareholder, you have to believe that there’s the potential to be shown more good quality deals than you otherwise would have. Maybe there’s some premium that one places on that so I would say that there’s an element of that in the price already, but that can be no bad thing, certainly.
ALEC HOGG: So if I just bring it all together Sean, the share price is fully reflecting the value of the company for the moment, but it’s one of those high quality businesses that you put onto your watch list. If there’s a pullback in the market, it’s one you might look at.
SEAN ASHTON: I think that’s a great summation.
ALEC HOGG: Sean Ashton is with Anchor Capital.
