Interim results issued this week by Brimstone hardly shook up the market.
The income statement reflected decent hikes in sales and dividends, while the share of income flows from associates and joint ventures came in markedly higher at R77m.
But hefty fair-value losses of R404m — stemming mainly from weaker share prices in private education group Stadio, Life Healthcare and property group Equites — knobbled bottom line and the all-important intrinsic net asset value (NAV).
NAV at the end of June sat at R16.54/share, meaning Brimstone’s more tradeable N shares are offering a gaping discount of 40%. At this point, the combined value of Brimstone’s stakes in fishing groups Sea Harvest and Oceana is more than the group’s market capitalisation.
Possibly the market is not that enamoured with Brimstone’s debt of more than R3bn. Though this is well covered by assets, interest paid on the borrowings did shave almost R160m off the profit line.
Brimstone does not appear perturbed about the level of borrowings. But would there be any appetite to sell off the remaining 3.4% stake in private hospitals group Life Healthcare when market conditions improve? That would raise about R1bn on a net basis, lopping off a significant slice of borrowings.
Questions have also been asked about the possibility of Brimstone selling its short-term insurer, Lion of Africa.
It’s worth noting Lion clawed back its losses to just R7.7m from a R38m loss previously after ongoing remedial action.
Brimstone also reported an improved claims ratio of 64% (71% in 2017), with gross written premiums increasing 55%. Without including tax issues, Brimstone carries Lion at a modest valuation of R80m.
If Lion could roar back to profitability in the second half, then interested parties might begin stalking.
As costs continue to rise, Eskom’s new management must deliver a new strategy for the state-owned enterprise quickly.
Eskom is increasingly being crippled by debt. Already at R388bn, the utility plans for it to balloon to R600bn in the next four years, largely because of the Medupi and Kusile projects.
A plan to ask the Public Investment Corporation to convert some of its debt into equity was abandoned by Eskom over concerns that the market might see it as a default, chair Jabu Mabuza said this week.
On Thursday, the utility signed a wage agreement it can’t afford. The deal, which will cost R3.9bn, includes salary hikes of 7.5% this year, 7% next year and 7% in the 2020-21 financial year, as well as a housing allowance and a once-off cash payment of R10,000 after tax.
The increases will be financed by either borrowing or any cost savings. Job cuts now appear inevitable.
Reports from Moneyweb are that Eskom is seeking another 15% annual tariff hike from the energy regulator for the next three years, though the regulator will probably grant hikes sparingly. However, history has shown that higher prices have only served to suppress electricity demand.
From a financial point of view, there is no real justification for Eskom’s existence.
A new, inspired plan is urgently needed.
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