In 2019 and 2020, Brimstone Investment Corp elected to suspend dividends as it focused on reducing debt and conserving cash. This year, it has reinstated the dividend and will pay out R75-million, much to the delight of its retail investors who make up 80% of investors in the company, holding 40% of the shares. Until that point, the company had not missed a dividend payment in two decades. 

“Most of our investors will not sell their shares, provided we pay dividends. Dividend payments are important … more important than the share price relative to net asset value,” says Brimstone CEO Mustaq Brey.

However, he acknowledged that, like other investment holding companies, the share is trading at a substantial discount to the net asset value of the underlying investment portfolios, a problem with which management is grappling.

“The discount is a big issue. At one point it was more than 50%, but it has come back a little as our share price has rebounded,” says Brey. “It’s an issue affecting all holding companies … We are not being singled out.”

The share closed at R8 on Tuesday, up R1.10 on the day and 22% over the past year. Brey hopes that as the dust settles on the fishing rights allocation process, the shares of subsidiaries Oceana and Sea Harvest will rebound, supporting Brimstone’s share price and net asset value. Intrinsic net asset value at year-end, 31 December 2021, equated to R13.14 per share. 

The number of investment holding companies in the local market has declined over the past few years as management teams have created value for shareholders by collapsing these structures. Most recently, RMI Holdings announced its intention to dissolve its Holdco structure. The listed entity will remain, but will assume the name of the biggest subsidiary, OUTsurance, which has outgrown the structure. 

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Like its peers, Brimstone has previously unlocked value for shareholders through the listing of Life Healthcare, Grindrod Shipping and Sea Harvest. It has also embraced share buybacks, popular with the management teams operating these companies – though Brey admitted that this “has not solved the discount problem”. 

Talking to Daily Maverick after releasing strong results for the year to the end of December 2021, Brey commented that the persistent discount is an issue that is on the radar, but first management had other fish to fry, so to speak. 

Two years ago, Brimstone found itself on the back foot as Covid announced itself, devastating economies and roiling markets. It was indebted with poorly performing assets, including Lion of Africa and House of Monatic, which were dragging it backwards. 

“Our journey has seen us focus on paying the debt down and dealing with our problem children, the fruits of which can be seen in these results.” 

Debt has been reduced from R4.2-billion to R2-billion, bringing finance costs down by R181.6-million. Short-term insurer Lion of Africa has been wound down, with just a small liability remaining on the balance sheet. 

Meanwhile, the operating assets of House of Monatic were sold to The Foschini Group, which it was well placed to absorb. The last of the House of Monatic retail stores will be closed this year. But Brimstone has retained the brands and there are a few “interesting” plans for the likes of Carducci, Brey says. 

About 65% of Brimstone’s value is held in two listed investments – Oceana Group (25% stake) and Sea Harvest (53.4%). Both performed well in the past year, contributing R125-million in dividends, with a final dividend of R80.9-million expected from Oceana in April. 

The outcome of the long-awaited Fishing Rights Allocation Process, which was announced earlier this year, has also brought a measure of stability to the businesses. 

“This process was important for the stability and sustainability of our key fishing assets,” Brey says. “We think the minister took a pragmatic and practical approach, with both companies largely maintaining their rights.

“We think that the state recognises our role in preserving jobs on the West Coast.” 

He adds that Oceana has contributed (or saved) two million hours of labour by extending its cold room facilities, which ensure that its canning operations are kept busy, even when the catch is poor.

The surprise in the results comes from the unlisted Obsidian Health, in which Brimstone has a 70% stake. While it specialises in prosthetics and other healthcare products, and was affected by the reduction in elective surgery, it diversified into providing rapid antigen Covid-19 testing and HIV screening. Thus it was able to contribute R20.7-million to Brimstone’s profit during the year under review, up from R6.9-million in the previous year.

Overall Brimstone reported a profit before tax of R920.9-million, a significant improvement from a loss of R43.8-million in the previous year. The year ahead will see more focus on unlocking value for shareholders. 

“We must look after our shareholders,” Brey says.

While he does not confirm this, it could include unbundling either Sea Harvest, which is in the process of becoming a nicely diversified foods business, or Oceana. 

It also means a greater focus on the unlisted space, he adds.

Unbundling and dissolving the holding company, or unbundling listed assets fully, is not an option. Brimstone, as a Level 1 BEE company, is invested in a number of BEE shares which they are restricted or prevented from selling. This includes Phuthuma Nathi, the scheme that was created in 2006 to offer black South Africans the chance to own an indirect stake in MultiChoice, MTN’s Zakhele Futhi scheme and Stadio. 

“If we sell, we have to sell to another BEE player, who will no doubt want a discount,” Brey says.

While investors have become vocal about the investment holding company discount conundrum, Chantal Marx, head of research and investment content at FNB, has a measure of sympathy for the management teams. 

“Very often the only option is breaking up the holding company and unbundling the underlying entities to shareholders. An unfortunate externality is that investors will lose out on management’s expertise and ability to fund and incubate new businesses. 

“PSG Alpha and AlphaCode in RMI are cases in point. These businesses will probably end up in private hands and the broader investment community will miss out on ‘the next’ Capitec, Curro, OUTsurance,” she says. 

“BEE holding companies add further value in terms of aggregating good businesses together and acting either as a BEE shareholder to bigger businesses, or actually owning the BEE shares.” 

In Brimstone’s case, as long as management can keep delivering value and making the smart investment decisions of the past, its shareholders are likely to support it – discount or not. BM/DM

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