Publications
Partners
Empowerment group Brimstone Investment Corporation is in an interesting space right now. Left holding a 5,5% stake in private hospitals group Life Healthcare (the rest was unbundled to shareholders and sold off last year), Brimstone is being eagerly watched by the market for signs of its next big deal.
Currently Brimstone’s N-shares are trading around 24% off the last stated intrinsic net asset value of 774c/share. The illiquid ordinary shares are actually trading at a premium.
When discounts to NAV narrow (or fall away) in investment trust companies, which traditionally attract discounts of 25% to 35%, it usually means the market has sniffed some attractive deal flow or the onset of a value unlocking exercise. Brimstone has in the past traded at discounts of much more than 30% to intrinsic NAV.
Last week Brimstone surprised punters by announcing a small portfolio investment in soon-to-be-listed Galaxy Gold – a deal, judging by the paucity of media coverage that seemed to pass largely unnoticed. Brimstone took 8m Galaxy shares upfront (roughly 6% of Galaxy) and has the option to acquire another 8m shares. While the Galaxy deal is titillating, the truth is that this investment won’t really shake up the portfolio for an investment company worth more than R1,9bn.
So what could Brimstone – which has reduced its debt from R1,5bn to R800m – get up to in the next 12 to 18 months to renew market confidence in its ability to secure inspirational deal flows?
A recent investment presentation provides some clues about the possible investment direction – also reiterating management isn’t sitting on its hands. The presentation highlighted that Brimstone recently upped its stake in short-term insurer Lion of Africa to 100% (as well as chucking in another R16m of additional capital) and invested R20m in MTN’s Zakhele scheme.
But much more intriguing is the comment from Brimstone CEO Mustaq Brey that it regards recently listed Life Healthcare as “fundamentally undervalued at current levels”. Brey goes on to say Brimstone is awaiting Life’s black empowerment deal – which gives some credence to a contention made by Finweek last September that Brimstone could be tempted to buy back into the private hospital group.
It might seem strange for a company to partially unbundle and sell off its biggest investment and then buy back into that investment. But we should realise Brimstone’s decision to exit the bulk of its Life investment was driven by the fact that management was accommodating a number of community-based Brimstone shareholders who needed to cash in their shares.
Rather than risking the exit of a sizeable proportion of black shareholders (which could have diminished Brimstone’s empowerment credentials) management opted to put a chunk of the company’s underlying investments into the hands of shareholders.
With Life showing (over the past few years) a capability to generate strong cash flows, a reinvestment by Brimstone using debt to fund the deal wouldn’t worry too many shareholders. Gut feel is that Life would also welcome back the hard-working Brimstone as an anchor empowerment partner.
The other possible piece of action could be a value unlocking exercise at fashion retailer Rex Trueform – where Brimstone has a sizeable economic stake but no voting influence, due to an archaic N-share/pyramid holding structure.
Brimstone deputy chairman Fred Robertson notes the company didn’t achieve the desired value unlocking at RexTru – but “continues to explore avenues”. Brimstone invested R48m in RexTru (and parent holding company African & Overseas Enterprises) in 2007. The carrying value of the RexTru investment has grown to R83m, but the truth is that highly illiquid RexTru is currently trading at well below its “real” value on the JSE.
RexTru, which operates the Queenspark fashion chain, recently posted a set of strong interim results to end-December 2010, with operating profit lifting above 50%. While the market seems to be overlooking RexTru’s stylish operational performances there’s loads of underlying value that can be unlocked as well. For example, the company sits on a cash pile of almost R150m (which is far in excess of operational and expansionary needs) as well as a substantial “mothballed” property portfolio that once housed clothing manufacturing facilities.
While Robertson hints at some frustration at RexTru, he does note Brimstone is still engaging on “value unlocking alternatives for all and better growth prospects for Queenspark”.
Robertson says Brimstone is actively engaging the RexTru and A&O boards and controlling shareholders about governance issues. Last year we reported on RexTru and A&O AGMs, where shareholder activist Theo Botha raised a number of questions about the independence of their directors.
Finweek reckons Brimstone will push for the dismantling of the pyramid holding company A&O as well as the dismantling of the N-share structure. Removing artificial control could see other fashion retailers (Foschini, Truworths, etc) perhaps taking a more active interest in RexTru – which could do wonders for its share price.
Currently Brimstone’s N-shares are trading around 24% off the last stated intrinsic net asset value of 774c/share. The illiquid ordinary shares are actually trading at a premium.
When discounts to NAV narrow (or fall away) in investment trust companies, which traditionally attract discounts of 25% to 35%, it usually means the market has sniffed some attractive deal flow or the onset of a value unlocking exercise. Brimstone has in the past traded at discounts of much more than 30% to intrinsic NAV.
Last week Brimstone surprised punters by announcing a small portfolio investment in soon-to-be-listed Galaxy Gold – a deal, judging by the paucity of media coverage that seemed to pass largely unnoticed. Brimstone took 8m Galaxy shares upfront (roughly 6% of Galaxy) and has the option to acquire another 8m shares. While the Galaxy deal is titillating, the truth is that this investment won’t really shake up the portfolio for an investment company worth more than R1,9bn.
So what could Brimstone – which has reduced its debt from R1,5bn to R800m – get up to in the next 12 to 18 months to renew market confidence in its ability to secure inspirational deal flows?
A recent investment presentation provides some clues about the possible investment direction – also reiterating management isn’t sitting on its hands. The presentation highlighted that Brimstone recently upped its stake in short-term insurer Lion of Africa to 100% (as well as chucking in another R16m of additional capital) and invested R20m in MTN’s Zakhele scheme.
But much more intriguing is the comment from Brimstone CEO Mustaq Brey that it regards recently listed Life Healthcare as “fundamentally undervalued at current levels”. Brey goes on to say Brimstone is awaiting Life’s black empowerment deal – which gives some credence to a contention made by Finweek last September that Brimstone could be tempted to buy back into the private hospital group.
It might seem strange for a company to partially unbundle and sell off its biggest investment and then buy back into that investment. But we should realise Brimstone’s decision to exit the bulk of its Life investment was driven by the fact that management was accommodating a number of community-based Brimstone shareholders who needed to cash in their shares.
Rather than risking the exit of a sizeable proportion of black shareholders (which could have diminished Brimstone’s empowerment credentials) management opted to put a chunk of the company’s underlying investments into the hands of shareholders.
With Life showing (over the past few years) a capability to generate strong cash flows, a reinvestment by Brimstone using debt to fund the deal wouldn’t worry too many shareholders. Gut feel is that Life would also welcome back the hard-working Brimstone as an anchor empowerment partner.
The other possible piece of action could be a value unlocking exercise at fashion retailer Rex Trueform – where Brimstone has a sizeable economic stake but no voting influence, due to an archaic N-share/pyramid holding structure.
Brimstone deputy chairman Fred Robertson notes the company didn’t achieve the desired value unlocking at RexTru – but “continues to explore avenues”. Brimstone invested R48m in RexTru (and parent holding company African & Overseas Enterprises) in 2007. The carrying value of the RexTru investment has grown to R83m, but the truth is that highly illiquid RexTru is currently trading at well below its “real” value on the JSE.
RexTru, which operates the Queenspark fashion chain, recently posted a set of strong interim results to end-December 2010, with operating profit lifting above 50%. While the market seems to be overlooking RexTru’s stylish operational performances there’s loads of underlying value that can be unlocked as well. For example, the company sits on a cash pile of almost R150m (which is far in excess of operational and expansionary needs) as well as a substantial “mothballed” property portfolio that once housed clothing manufacturing facilities.
While Robertson hints at some frustration at RexTru, he does note Brimstone is still engaging on “value unlocking alternatives for all and better growth prospects for Queenspark”.
Robertson says Brimstone is actively engaging the RexTru and A&O boards and controlling shareholders about governance issues. Last year we reported on RexTru and A&O AGMs, where shareholder activist Theo Botha raised a number of questions about the independence of their directors.
Finweek reckons Brimstone will push for the dismantling of the pyramid holding company A&O as well as the dismantling of the N-share structure. Removing artificial control could see other fashion retailers (Foschini, Truworths, etc) perhaps taking a more active interest in RexTru – which could do wonders for its share price.
