Written by Dirk van Vlaanderen – Portfolio Manager
A rough diamond is known as a brait and significant value is added through polishing and shaping it before it is sold. JSE-listed Brait is an investment holding company that plays an active role in improving and growing its portfolio of investment companies. We evaluate the opportunity for Brait to polish and shape its two key portfolio companies, Premier Foods and Virgin Active, to unlock value for shareholders.
Premier Foods (Premier) started as a small bakery in 1824 and has since grown to be a leading branded and private label food manufacturer operating in South Africa, Eswatini, Mozambique, Lesotho and the UK.
The largest contributor to group revenue is the bakeries division, which bakes and delivers 1.7 million loaves of bread to 42 000 retail outlets each day. Its main bread label is Blue Ribbon and more than 60% of its bread sales occur through the informal retail channel. Premier has improved the quality of its bread through consistent investment into its bakeries over several years, thereby closing the price gap with, and gaining market share from, its largest competitor – Albany (manufactured by Tiger Brands).
Recent investment into the company’s Pretoria-based bakery will see three bakeries consolidated into one, potentially resulting in significant cost savings. Premier’s inland bakery should double profitability in line with the outcome of similar investments at its coastal bakeries.
Flour that is not used for internal baking purposes is sold under the Snowflake brand, which currently contributes around 18% to group revenue. Maize meal is a staple food in South Africa and Premier’s Iwisa and other maize brands command a 17% market share locally, with Premier being the third largest producer.
In March 2015, Premier acquired Companhia Industrial da Matola SA (CIM), a leading manufacturer of biscuits, pastas, rice and animal feed products in Mozambique. CIM services the Mozambique market and exports into other SADC countries, currently generating 8% of Premier’s revenue.
Major brands in the confectionery portfolio are Manhattan and Super C. The recent acquisition of Mister Sweet has resulted in Premier becoming the second largest sugar confectionary producer in South Africa, with a 16% market share.
Finally, feminine hygiene brand Lilettes contributes around 5% of Premier’s revenue and has South African and UK operations.
Investment underpins growth
Under Brait’s stewardship, Premier has cumulatively invested R5 billion into its operations on a consistent basis since 2011. This has resulted in a large and eﬃcient manufacturing and distribution footprint and subsequent strong financial performance (below left), with cash operating profit growing at an average 24% per annum over the last decade (below right). The recent Pretoria bakery investment and the acquisition of Mister Sweet look set to deliver another leg of growth for Premier Foods.
Brait acquired a controlling stake in Virgin Active in July 2015. The group includes a portfolio of health and fitness clubs that operate in South Africa and internationally, across four continents. Southern Africa remains the largest contributor to group revenue (46%), with over 700 000 pre-COVID active members across 134 clubs. The international clubs are adapted to suit local needs and tastes in each region and are somewhat diﬀerent to the well-known South African formula.
The UK Virgin Active portfolio (contributing around 23% of revenue) consists of premium city-centre clubs that cater to the needs of professional commuters, with larger clubs positioned in out-of-town residential areas. In Italy, where Virgin Active is the largest health and fitness club player, its 37 clubs cater for members who tend to exercise later in the day and who enjoy a lengthy post-workout relaxation session. Therefore, more attention is paid to providing large and well-equipped changing rooms complete with massage pools, sauna and spa facilities.
Virgin Active has been investing in growing its Asian footprint in recent years and now has 24 clubs in the region (Australia, Thailand and Singapore). The South-East Asian opportunity remains compelling, with high population densities and an underdeveloped fitness market that should see good membership growth in the medium term. In these markets, group exercise classes are a huge feature of gym life and a visit to the gym is also a social outing.
Globally, the increasing focus on health and wellness (accelerated by the COVID pandemic) should provide a long-term structural tailwind to the health and fitness industry, with Virgin Active well positioned to benefit. The business model delivers cash-based annuity revenues from low capital investment and therefore consistent high returns to shareholders.
The government-imposed mobility restrictions during the pandemic had a significantly negative impact on the fitness club industry. Clubs were forced to close in several territories and then reopen with strict capacity constraints. This saw active memberships plummet, causing huge decreases in revenues and cash flows. Virgin Active management proactively engaged with lenders, landlords and Virgin itself to restructure debt servicing costs, rental arrangements and branding royalties to help limit the cash burn across the business. Since lockdown restrictions have been lifted, members have begun to return to clubs. As charted below, Southern African membership is almost back to 80% of pre-COVID levels (May 2022). Europe and Asia are lagging the South African recovery but are following a similar trajectory, which bodes well for Virgin Active returning to much healthier levels of profitability in the near term.
New leadership, enhanced strategy
In March 2022, Dean Kowarski took the reins as the new global Virgin Active CEO following the retirement of founder and CEO, Mathew Bucknall. Dean is the founder of the Real Food Group (bought by Virgin Active), a collection of health-focussed casual restaurant chains incorporating the Kauai and Nu brands. He has grown this business successfully to 204 stores since acquiring Kauai in 2015. His strategy looks set to shift the focus of Virgin Active from a pure fitness oﬀering to a broader, more holistic wellness and nutrition experience. The new strategy incorporates refreshing the club estate and enhancing its technology oﬀering to clients.
Polishing and realising value
In January 2020, following a change of ownership and a capital injection, Brait set out on a value unlock strategy where new management was elected with the mandate to realise value from the existing portfolio in a reasonable timeframe. Since then, several assets have been sold for good value. This leaves the portfolio essentially comprising of Virgin Active and Premier Foods, with a small contribution from New Look, a fashion retailer in the UK. After Brait’s central debt its self-assessed net asset value is around R9 billion.
Premier Foods is due to list on the JSE in the next 12 months and Brait shareholders should ultimately receive a direct holding in Premier shares. Virgin Active is on the path to a solid recovery, with a refreshed strategy, and could in time either be sold or unbundled to shareholders. With this in mind, we believe that the current share price is valuing Brait at a significant discount to its net asset value, which will likely be realised in the coming years.