Brimstone: Balancing yield and capital growth

PREMIUM


Brimstone Investment Corp was one of the first black empowerment investment companies launched at the dawn of democracy in the mid-1990s.
It has endured, and now holds a well-diversified portfolio of investments with a gross value of more than R11bn.
In some ways, Brimstone follows the old Rembrandt (now Remgro) model with its main investments being well managed, brand rich, cash-spinning and profitable.
The group also prides itself on generous dividend payouts, aligned to its determination to support its large community shareholder base.
Co-founders Fred Robertson and Mustaq Brey are still the prime movers, though a new generation is coming through.
Robertson and Brey must be acutely aware of the large discount the market is placing on Brimstone’s shares. At the end of December Brimstone showed an intrinsic NAV of 1,615c a share — which, at the time of writing, represented a discount of close to 45%. This is a hectic discount for a counter that has consistently delivered dividends, created enormous value and managed its investments prudently.
What Brimstone does lack is an obvious (or immediate) value-unlocking opportunity. So there may be a perception that the share price will continue to trade at a deep discount and share price movements will be dictated by movements among its biggest investments — the stakes in JSE-listed fishing groups Sea Harvest and Oceana Group. At the end of December, Sea Harvest (26.6% of the intrinsic gross value, or IGV) and Oceana (23.8% of IGV) represented a serious chunk of Brimstone’s intrinsic value. This will become even more meaningful when Brimstone acquires another 8-million Oceana shares ahead of that company’s planned unbundling from Tiger Brands.The other significant holding is the 3.4% stake in private hospitals group Life Healthcare, worth R1.3bn at the end of December, or 18.3% of IGV.Brimstone has made no bones about its determination to build a food platform around Sea Harvest (which owns Ladismith Cheese) and Oceana (which has substantial cold-storage interests).That might suggest that a "large minority" stake like Life may no longer be considered strategic, despite the reliable dividend flows. In the past financial year Brimstone sold 15.3-million Life shares to raise R409m. Any firming in the Life share price may well trigger further share sales, or even a decision to place the remaining 3.4% stake. That could raise substantial proceeds, which could be mobilised to cull debt and pay a special dividend.In the meantime there are good dividends to look forward to. What is reassuring is that the dividend flows are diverse. About R26m was collected from Oceana, R93m from Phuthuma Nathi (MultiChoice) and R43m from property group Equites.Brimstone is for the longer-term investor that wants to balance yield and capital-growth requirements. From a value perspective, prospective investors are really paying for the stakes in Oceana and Sea Harvest, and gaining exposure to counters like Equites, Grindrod, Long4Life and Stadio for next to nothing.

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