Brimstone, GPI and AEEI have endured, and all three offer an intriguing proposition for investors.
The three most enduring empowerment companies listed on the JSE — Brimstone Investment Corp,* Grand Parade Investments (GPI) and African Equity Empowerment Investments (AEEI) — have much in common.
All three were launched in Cape Town in the 1990s, and have outlasted more illustrious Gauteng-based empowerment conglomerates like New Africa Investments, Real Africa Holdings and Mvelaphanda.
All three have sprawling community-based shareholders, which explains the determination to maintain a sustainable dividend policy, with cash flows generated from a diversified investment portfolio.
The founding directors remain key and large shareholders in the respective companies — and to an extent still inform investment perceptions around the companies.
But the key commonality between these empowerment companies is that all three attract a huge discount on the intrinsic value of their respective portfolios.
Of course, it is not unusual for investment companies — including larger counters like Remgro, PSG, Brait or Hosken Consolidated Investments — to trade at marked discounts to intrinsic value.
The discounts applied to Brimstone, GPI and AEEI are, however, well beyond the 15%-25% range usually applied to investment counters.
Brimstone, which has the most diversified portfolio, probably looks the most staid of the three empowerment investment companies. Headed by founders Mustaq Brey and Fred Robertson (a cautious/adventurous combination if ever there was one), it is investing for the long haul and any dramatic efforts to unlock value are unlikely.
New deal flows are likely to be cautious and calculated, with Brey recently reiterating caution around unrealistic vendor pricing for assets that have been put up for sale.
But there is simmering value to be had at Brimstone for conservative, risk-averse longer-term investors. At the time of writing the more liquid N-shares had slunk under R11, offering a near 35% discount of the fully diluted intrinsic NAV of R16.60 as reflected at the end of March.
The latest market value of Brimstone’s key listed investments — a 17% stake in fishing group Oceana (worth about R1.4bn), 54.9% of Sea Harvest (about R1.7bn), a 3.5% stake in private hospitals group Life Healthcare (about R1bn) and an 8.5% stake in specialist property group Equites (R240m) — collectively totals close to R4.4bn.
If Brimstone’s debt of R1.8bn is subtracted, these four investments alone are worth about R2.6bn — or about R11/share. That means buyers of Brimstone are getting the rest of the investment portfolio for free.
This "free" portion includes R267m in property investments; significant minority stakes in listed counters like Brian Joffe’s new investment venture, Long4Life, private tertiary education business Stadio and reshaped logistics group Grindrod; as well as holdings in dividend-pumping empowerment vehicles Phuthuma Nathi and MTN Zakhele.
If stoic Brimstone is a conservative investment play, then AEEI — which was almost sunk by its investment in LeisureNet more than 15 years ago — is probably the intriguing option for investors willing to take a leap of faith.
AEEI (the old Sekunjalo Investments) has been studiously avoided by mainstream investors — most probably because controversial empowerment magnate Iqbal Survé remains by far the dominant shareholder in the company.
The change of corporate identity and the resignation of Survé from the board of directors have been interpreted as an attempt to unshackle AEEI from its past difficulties.
The real change, however, came with the appointment of Khalid Abdulla as CEO in 2009. A former number-cruncher, Abdulla pragmatically dealt with the old Sekunjalo’s many legacy issues, established much-needed cash flows and de-geared the balance sheet. The scoreboard shows AEEI’s share price has increased more than tenfold since mid-2013.
That might suggest the easy money has already been made at AEEI. But there are interesting valuation models that can be applied to AEEI after the separate listing of subsidiary Premier Fishing & Brands in March last year and the more recent (and controversial) listing of technology arm Ayo Technology Solutions.
At the time of writing, AEEI’s 50% stake in Premier held a market value of about R550m and the company’s stake in a very illiquid Ayo was about R5bn.
The market value of these two listed investments is already significantly higher than AEEI’s market capitalisation of about R3bn — which speaks to market scepticism around the "market" valuation attributed to the scarcely traded Ayo shares.
If the see-through market value of AEEI’s Ayo shares is halved, then the company’s NAV is still well ahead of the market price — remembering a R600m portfolio of strategic investments that include significant minority stakes in listed counters Pioneer Foods and fund manager Sygnia as well as unlisted defence contractor Saab SA.
At AEEI’s recent investment presentation, an eye-popping slide showing a directors’ portfolio valuation of R21.50/share was offered. This number was based on a R1.5bn valuation of the 55% stake in Premier and an R8.4bn value for Ayo. Both these figures appear to be stretched valuations based on potential deal flow by both Premier and Ayo.
It is easy to laugh off such heady directors’ valuations. Then again, eyes also rolled when Abdulla suggested a future value of 500c for the old Sekunjalo five years ago when the share price was less than 50c. Abdulla has also consistently delivered on promises to shareholders — whether in terms of turnaround efforts or executing corporate action.
Certainly some serious deal flows need to materialise fairly quickly at Ayo to justify current market valuations, while Premier will need to snag more acquisitions to diversify its profit catch further.
The FM has long held that a merger between Premier and Sea Harvest would create an imposing local fishing enterprise to challenge Oceana. But it would require some careful corporate angling to preclude lines getting tangled in what will be increasingly choppy waters in the run-up to the 2020 long-term fishing rights awards.
A key short-term consideration for those weighing up AEEI as an investment proposition will be the generosity of a mooted special dividend that could follow the recent R990m sale of its 30% stake in British Telecoms SA to Ayo.
In terms of a more immediate prospect for value unlock, GPI looks a fairly good bet. A concerted effort to unlock value would also placate nervous shareholders who have watched four top executives quickly exiting the boardroom.
At this point, GPI founder, chair and significant shareholder Hassen Adams is large and in charge after CEOs and financial directors seemed only able to endure brief stints.
GPI has in recent years effectively become a hybrid empowerment company because of its operational role taken when it snagged the master franchise agreement for fast-food business Burger King.
Burger King has not yet chipped in to the bottom line, but GPI has secured ongoing exclusivity by achieving the stipulated target of opening 80 stores by the end of this month.
Gut feel is that the rapid rollout of Burger King undertaken during the financial year to end-June will continue into the 2019 financial year to secure profitable critical mass as quickly as possible.
In terms of funding this rollout, GPI has already signalled the sale of a chunk of its 18% stake in restaurant franchiser Spur Corp, which will hopefully bring in between R200m and R300m in the next few months.
The issue at GPI is that it is difficult to establish a fair value for Burger King, which is slated in the latest accounts at R827m.
An easier valuation to quantify is the R866m value placed on GPI’s 15% stake in gaming group SunWest — which owns the cash spinning GrandWest casino — and the R676m tag on the 30% stake in limited payout machine operator Sun Slots. Combined, these valuations — stripping out GPI’s borrowings — are worth more than 300c/share compared with a share price of about 210c.
No only does the share price offer a free option on Burger King, but GPI’s Cape Town central headquarters carries a value of between R180m and R230m.
There are also two potential X-factors at GPI. First, the innocuous R30m investment in the Golden Valley Casino in Worcester could be worth more, should plans eventually materialise to allow Western Cape casino operators to transfer an existing licence to Cape Town.
Then there is the possibility that GPI considers relinquishing its operational role at Burger King once critical mass is achieved, and then sells down its holding in the master franchise to a significant minority level.
This would re-establish GPI as a pukka empowerment investment company with a stronger dividend-paying profile and the opportunity to further diversify the portfolio.