years). Bear in mind that EBITDA
growth is also driven by inflation
and relative inflation levels in SA
have been significantly higher than
in the UK.
New Look has a number of
additional features in its favour,
says Maqubela. Among these is
the fact that retail growth in the UK
is firming after a few years of low
growth (See: Figure 1.)
New Look is also well positioned in
the higher growth, value segment
of the UK’s apparel and accessories
market. Brait believes the retailer
has strong growth prospects,
in particular in China where it
has opened 31 stores in the
past 14 months.
"
Figure 2: Source: Datastream
What created the potential was investing in businesses
with good growth and high cash conversion potential.
We bought our assets well in chapter 1 and believe we
have bought even better assets now,
John Gnodde, Brait managing executive
“New Look generates attractive
gross margins relative to the South
African peer group. The implication
here is that a small change in
sales will have a levered effect on
earnings, Maqubela says.
In April Brait announced it would
pay £682m to acquire an 80%
stake of Virgin Active, which also
translates into an enterprise
multiple of 9.3x. The gym group’s
EBITDA growth has averaged 11% p/
year over the past three years, with
growth in Q1 2015 of 16%. “This is a
high fixed cost business, with good
retention rates, predictable EBITDA
and cash flow generation given its
subscription based model,” he says.
“It’s true that New Look and Virgin
have a slower growth profile than
Pepkor, but these are businesses
that have brand strength. Also
investors can accept a lower return
from these assets as they are based
in regions that have a lower cost of
capital,” he says.
Both businesses carry some debt. In
the case of Virgin it’s about £360m.
In the case of New Look it is £1.2
billion. “Brait is adept at refinancing
debt at cheaper levels and this
will be one of the first steps they
will take," says Neelash Hansjee,
banking sector analyst at Old
Mutual Equities. "Strong cash flow
characteristics of the companies
means they can pay down the debt
to create value.”
Gnodde confirms that New Look's
debt was refinanced 2 weeks ago
and the interest rate reduced from
9.42% to 6.25% which results in
an interest saving to New Look
of £32m/year.
Much of Brait’s portfolio is focused
on the mass market or value sector,
which is growing faster than other
sectors. “Don’t forget existing assets
like Premier Foods which is an
exciting story,” says Hanjee.
Along with peers like Rainbow
Foods and Pioneer, Premier – in
which Brait now has an 86% stake
- is shifting from basics to higher
value foods and has diversified
its portfolio. In the last year the
company has invested R2.2 billion
on eight acquisitions (at an average
multiple of 7x) including Star
Bakeries , Lil-lets Group and most
recently, 68% of CIM, the leading
food producer in Mozambique.
Premier’s revenue for the nine
months ending 31 March 2015
increased 31% on the comparative
period. Group EBITDA margin
improved to 9.1%, generating )