I continue to recommend avoiding Brait. The latest results from troubled New Look don’t hold out much hope that we’ll see recovery in that company any time soon, at least not to realise much value. Premier, Virgin Active, and Iceland are sufficiently priced in as to not warrant a counterweight to New Look. Moreover, there are other hidden dragons that could come to bite Brait, including the shareholder funding of New Look, the Fleet special purpose vehicle, and a geared investment structure that is “confidential”.

Share price: R41,05 

Net shares in issue: 508,1 million

Market cap: R20,8 billion

DCF: R30

Trading Sell and Portfolio Sell (maintained)  

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I continue to recommend avoiding Brait. The latest results from troubled New Look don’t hold out much hope that we’ll see recovery in that company any time soon, at least not to realise much value. Premier, Virgin Active, and Iceland are sufficiently priced in as to not warrant a counterweight to New Look. Moreover, there are other hidden dragons that could come to bite Brait, including the shareholder funding of New Look, the Fleet special purpose vehicle, and a geared investment structure that is “confidential”.

My analysis in the past has demonstrated that Brait was extremely overvalued and that caution was advised. The fact that the stock has fallen 75% from its high at around R165 to R41 does not make Brait good value.

The company’s own computation of what they think NAV should be, R55 per share as at 31 March 2018, should also not be taken as an indication that there is a value gap. The EBITDA multiples Brait uses to value Virgin Active, Premier, and Iceland are all higher than I think they should be whilst the so-called “maintainable EBITDA” assumed has also proved to be not quite as maintainable in practice.  

It is not out of the question that Brait could have to recapitalise New Look. Financial liabilities exceed £1,3 billion and the business is loss making. Operational interest on the New Look financial liabilities is £80 million pa. The notes trade at a discount to face value.

Moreover, what you don’t see on the face of the balance sheet is Brait “shareholder funding” of around £1,3 billion for New Look that continues to incur interest at a rate of 10% per annum, which accrues. There is no equity value only shareholder funding. The shareholder funding interest is roughly £130 million per annum. The shareholder funding has no fixed repayment and matures 25 June 2025. 

New Look results for the 13 weeks ended 23 June 2018 remained weak. In the UK, over 80% of the business, sales dipped 3% overall with bricks & mortar flat and online, believe it or not, falling 20% year-on-year. International sales were up 2%. Operating profit of £9,2 million improved because of lower expenses but the net loss is up slightly to £15,5 million after interest of almost £23 million.

The highest EBITDA New Look has made under Brait ownership is £220 million and it was negative £11 million for the year to March 2018 with the operating loss £74 million after adjustments. Due to reduced working capital and thus cash retained from working capital, cash flow from operating activities was a negative £18 million.  

Another negative is the Brait loan to Fleet, which is an inhouse special purpose vehicle (“SPV’) that have Brait shares as collateral. The auditors insisted this be placed on balance sheet.

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As at 31 March 2018, there is a R1,9 billion loan owed by Fleet to Standard Bank and RMB. There are 35 million pledges shares. The difference between the value at the year end and the loan is R650 million. The loans are due in December 2020. The loan incurs interest at JIBAR + 3%. By 2020, that loan is R2,5 billion. With 35 million pledged shares the Brait share price would need to be over R70 to be square.

I value Brait at R30 per share. Given that the Fleet loan will be R2,5 billion in December 2020, the difference between R70 per share and R30 per share is R1,5 billion. With Brait on the hook it’ll have to cover a gap.

There is another geared structure against which assets are unknown.

Brait and Titan Premier Investments in F2018 agreed a process for certain transactions in which Brait and Titan would co-invest directly or through a special purpose vehicle in public securities (the “listed position”). These investments are included in the “Other Investments Portfolio” which had a stated value of R2,4 billion as at 31 March 2018. Note 10 of the accounts states that “the listed position remains confidential”. Titan is ultimately controlled by a Wiese family trust.   

In the first six months of F2018, Brait started to build a stake in the listed position in an SPV formed by Brait. This SPV was refinanced in full by bank debt of R1,4 billion or €90 million guaranteed by Titan. Titan acquired the SPV at a cost of £1, which approximated the fair market value of the listed position net of bank debt. The preferred investment structure was then changed. Titan would no longer invest directly in the listed position although Brait wanted to hold the listed position and agreed to acquire the equity in the SPV for £1 and it also assumed the debt. The ownership shifted to Brait. At transfer, there was a loss of €10 million. Brait drew on its borrowing facility for €86 million to repay the debt in the SPV guaranteed by Titan.

Taking all the above in to account, and in view of the example set by the opaque Steinhoff precedent, long term investors would be advised to continue steering clear. Even at R30 I question whether that could give sufficient cushion for some future nasties. From a trading point of view a short position remains the recommendation.  

Wishing you profitable investing, until next time

Mark N Ingham