First published in the Daily Maverick 168 weekly newspaper.

While Twitter was ablaze this week with suggestions that Cele should choose better friends, President Cyril Ramaphosa relaxed the ban. That’s good news for those who would like the freedom to choose whether to consume alcohol – and not furtively drink it out of a teapot at a mate’s restaurant. More importantly, it could stem the massive loss of jobs in the industry and bring in some much-needed tax revenue.

While the country’s biggest drinks group, Distell, will no doubt welcome the news, it’s done pretty well in the face of the ban. That’s partly due to stockpiling but also to its growing diversification across the globe, including countries with less autocratic leaders.

Investors may have been expecting the worst so a trading update from Distell had them raising their (now full) glasses on Wednesday, sending its shares close to 9% higher at their best. It has essentially defied the odds by growing volumes, revenue and earnings for the six months to December. That’s despite losing 41 trading days in SA, its biggest market. To put it into perspective, it missed out on more than a fifth of the trading period due to the prohibition.

Outside SA, the company also faced obstacles, such as international travel restrictions. Amarula, that creamy tipple loved by grandmothers everywhere, is a favourite in duty-free shops. But with fewer travellers passing through airports, the global travel retail market has taken a big hit. Still, Amarula sales were also up.  

Distell credits its agility and previous investments in route-to-market and optimisation of its production network, particularly in markets outside SA, for the double-digit growth in foreign revenues for the six months to end-December as it capitalised on premium whisky brands, discontinued sales of less-profitable wines and improved online sales channels.

Even in SA, revenue held steady with just a small decline in volumes. Spirits, mainstream wine and premium ready-to-drink brands were the tipples of choice.

Distell warns that more alcohol bans may still lie ahead and the current surplus of wine in the country is a big concern that may bring long-term structural challenges to the industry.

Best to continue stockpiling.

 Rebosis brushes off the blame

Rebosis Property Fund would have us believe that it’s not to blame for releasing financial results that were not, at a minimum, reviewed. Shareholders traded on the information provided for a full month before it released reviewed and audited numbers, which reflected a R900-million downward adjustment to the value of its property portfolio and a 15% decrease in its net asset value per share. Even then, its accounts still carried a qualified audit opinion due to disagreements with its auditors over its real value.

The fund, founded by property mogul Sisa Ngebulana, hit back at the JSE this week after it was publicly censured over the handling of its 2019 accounts, saying it strongly disagreed with the exchange’s conclusion that it made a conscious decision to publish the unchecked numbers due to differences over the property values. They were clearly titled “unreviewed and unaudited”, it said.

So why release them then?

Delayed financial statements have become the order of the day over the past couple of years. Steinhoff is still coming to terms with its accounting shenanigans of a few years back. PPC delayed the release of its 2020 results a number of times after it picked up errors in previous years’ accounts. The same with Tongaat Hulett and EOH, with both companies delaying results last year after they also had to restate financials from preceding years. Both companies were fined by the JSE for publishing results that may have compromised investors.

Rebosis isn’t accepting accountability. It says it depends on several parties to keep it informed of listing requirements, such as having results reviewed. It was up to its sponsor, Nedbank Corporate and Investment Bank (which didn’t escape the JSE’s censure), to “proactively” inform the exchange of the oversight. It launched its own investigation, which led to the replacement of the company’s Audit and Risk Committee chairman, its chief financial officer as well as a change in audit partner.

As it turns out, its auditors were right. After disagreeing with their assessment at the end of 2019 and hiring its own experts to value its portfolio, it later adjusted the carrying value down to R13.3-billion from the R15.6-billion it previously believed it was worth. It declined further to R12.8-billion after it sold its Mdantsane City shopping centre to help reduce debt, which still remains significantly higher than its peers in the sector.

While its 2020 results received an unqualified audit opinion, Rebosis remains in a tricky situation. It didn’t declare a full-year dividend after a solvency and liquidity test, required under the Companies Act, found it was solvent but not liquid. And its auditors said its ability to continue as a going concern was dependent on the roll-forward of its debt facilities by its bankers.

Rebosis is actively looking for ways to raise capital, including disposing of more assets. Its loan-to-value, which measures debt against the value of its assets, was 72.4% last August, well above the sector average.

Perhaps that’s why it escaped a fine.

Gym bans hurt Brait

Private equity firm Ethos may be regretting the R1.35-billion it invested in Brait as part of last year’s R5.6-billion capital raise. The rights issue was priced at R6.60 per share – a 49% discount to where its shares traded ahead of the event. They are now worth less than half that.

While Covid-19 was already making news at the time, nobody could have foreseen the devastating impact it would have on just about every aspect of our lives – including our fitness regimes. And that’s where it continues to hurt Brait.

In an update this week, the investment holding company said it was restructuring its Virgin Active business outside SA due to liquidity problems that had resulted from lockdowns in the UK and Italy, where its health clubs are currently closed. Its gyms in Bangkok, which fall under the Asia-Pacific region, reopened late last month.

Virgin Active makes up close to half of Brait’s value, followed by food group Premier, which has been ticking along nicely.

Brait says it is working with all stakeholders to find funding solutions for the Virgin business outside SA. And it may require all involved to dig deep into their pockets. In December, the Financial Times reported that the UK gym chain had raised doubts about its ability to continue as a going concern in accounts filed at Companies House, saying its debt covenants would be breached unless it could raise capital.

Make that more capital.

Following the severe impact of the first lockdown, Brait contributed £16-million (R325-million) as its portion of a £20-million shareholder support loan, while Richard Branson’s Virgin Enterprises deferred £5-million of royalty payments. The £25-million was matched by a further £25-million of new bank debt from the UK, Italy and Asia-Pacific banking syndicate.

The trouble is, it doesn’t make any revenue while gyms are closed due to its “free membership freeze” policy.

Gyms have been closed in the UK since 18 December and aren’t expected to open for at least another two months. Italian clubs, which have been closed since late October,  may open next month.

Fortunately, Virgin Active South Africa is financed separately. While use of its clubs has again been affected by level 3 restrictions, which limit the number of members allowed to train at any one time, it remains cash flow neutral at an operating level. Unfortunately for Brait, more members have cancelled their subscriptions and it’s not selling as many new memberships.

But while Zoom gyming may have found a niche, there will still be loyal members who prefer pumping their guns in a club. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.