Mark Ingham's Fun-damental analysis

“Down to earth with a bump”

Share price: BAT:SJ 6700 cents

Recommendation: Trading Sell and Portfolio Buy, fair value at R68 (but subject to review post results).

In various notes, I’ve critiqued the manner in which Brait values its assets and reiterated my bearishness on both the Brait valuation and on the stock. The NAV published by Brait cannot be taken at face value and should be stress tested. Previous market hype about the stock has evaporated and the share price has spectacularly deflated, at R67 roughly 40% of the high in March 2016.

I’ve indicated before to watch out for New Look Retail. Indeed, for the 52 weeks to 25 March 2017, revenue declined by 2,4% with UK like-for-like sales down 6,8%. Adjusted EBITDA was down 31,8% to £155,0 million whilst underlying operating profit was down 44,1% to £97,6 million. EBITDA of £155,0 million is a fair distance from the so-called “maintainable EBITDA” of £227 million that Brait was assuming a year ago, at a lofty multiple of over 13x no less (subsequently reduced). Given the gearing in the capital structure the underlying equity value is disproportionately affected for the worse.

Brait will report results for the year ended 31 March 2017 on 13 June. I’ll be catching up with management and the directors that day. The company has already flagged that NAV, on the basis that that management calculate it, has fallen by over 40% since this time last year to around R79. In fact, in a note dated 11 July 2016 I had a NAV scenario, using acquisition multiples actually paid for assets, of R79 per share, which was 42% less than Brait was reporting.

This means Brait’s stated NAV is getting closer to the parameters I’ve guided. However, I’d be interested to see the detail in the results first and shall review my valuation after the results and feedback from management. Investors meantime should remain cautious, particularly with respect to deploying new money.

The most recent valuation is included below. It compares Brait’s more recent December 2016 assumptions with my own with the only difference being that the exchange rate is updated to R16,40/£ rather than the R16,95/£ applied at that date. My own value is just above R68 per share, again subject to review post results after which I’ll update investors on my thinking.

I’m retaining a Trading Sell and for long term portfolios, i.e. those already invested, the Portfolio Buy is maintained as the share price bubble has popped.

(See table for abbreviated valuation on Brait)

brait table.png