The moment of truth is almost upon African Equity Empowerment Investments (AEEI) in terms of establishing the robustness of its value proposition.
Financial statements for the year ending August show the company — formerly known as Sekunjalo Investments — holds an estimated net asset value (NAV) of 344c/share. That compares with a share price at the time of going to press of 331c, which might be perceived as a reasonable discount on a portfolio of mostly cash-generative unlisted investments.
But for the longest time AEEI executives have maintained that the “official” NAV hardly reflects the real underlying value of investments in Premier Fishing and a profitable technology hub, as well as strategic investments in British Telecom, defence contractor Saab SA, consumer brands giant Pioneer Foods and asset manager Sygnia.
At an investment presentation last week AEEI offered a “directors’ value” of between 650c/share and 660c/share — almost double the ruling share price. This valuation might easily be dismissed were it not for the fact that AEEI will, in effect, test its own portfolio estimate when it lists its fishing and technology interests separately on the JSE.
It is the Financial Mail’s understanding that Premier Fishing — which is mainly an export play with key holdings in the sectors of South Coast lobster, West Coast lobster and farmed abalone — could list by late 2017. The technology hub, which is in acquisitive mode, might list only in early 2018.
The directors’ valuation of Premier Fishing is R1.6bn – around half of the R3.2bn inferred value of AEEI or 325c-330c/share. The suggestion then is that investors buying AEEI at current levels are paying for Premier Fishing and getting the rest of the portfolio for free.
In the past financial year Premier Fishing generated revenue of R401m (up 15%) with adjusted Ebitda (earnings before interest, tax, depreciation and amortisation) of R88m. Fundamentally AEEI’s valuation of Premier Fishing is based on an Ebitda multiple of more than 20. That may appear fairly demanding, especially since the much larger (and more diversified) fishing group Oceana trades on a headline earnings multiple of just under 20.
There is, of course, an X-factor that might justify some latitude in the directors’ valuation of Premier Fishing. This is the awarding of new fishing rights in 2020, where Premier Fishing, as a black-controlled entity, could well add to its catch considerably. There is also the chance that other fishing companies, especially those not under meaningful black ownership, could trawl towards Premier Fishing, particularly since plans for a listing have been made public. Then there is also the potential for Premier Fishing to bolster export earnings with the aggressive expansion of its abalone farming initiative.
The true test for Premier Fishing will come when scrip is offered to institutions ahead of the listing.
At present AEEI, which spent the best part of 10 years recovering fitfully from the collapse of its core investment in LeisureNet in 2001, does not enjoy the patronage of many institutional shareholders. Gut feeling is that if Premier Fishing can bring on board more staple catches (like pelagic fish, hake and horse mackerel) to complement its higher-margin export niche in lobster and abalone, there may be some interest from professional shareholders.
At this point the Financial Mail might err on the side of caution by valuing Premier Fishing at closer to R1bn.
The technology division, which is centred mostly on record keeping in the health-care sector, is valued by directors at R500m. The valuation is not outlandish, with this generating turnover of R215m and adjusted Ebitda of R37m. As is the case with Premier Fishing, there are nonoperational factors that might also inform the valuation, most notably two new acquisitions and the hint of another couple of deals on the table.
But one has to ask how much enthusiasm the market will have for a small technology company. The modest valuation placed on a perennially profitable company like security specialist ISA Holdings might well be instructive.
AEEI’s strategic investments carry a collective value of R858m, or roughly 174c/share. While the value of listed entities like Pioneer and Sygnia are easily quantifiable, confidentiality clauses around Saab and British Telecom deals preclude the publication of financial information that would allow investors to formulate the respective valuations. What we do know is that both Saab and British Telecom pay regular and rather generous dividends. The valuations on the smaller investments — biotech (R150m), health care (R40m) and events & tourism (R50m) are not, at this juncture, worth quibbling about, as they represent less than 10% of the directors’ valuation. If it is difficult to nail down a definitive value for AEEI by unpacking the main components of investment portfolio, there is at least the cash flow statement that can provide some tangible fundamental underpin.
Cash flow from operating activities was over R75m — equivalent to 15c/share. This does suggest much of the 44c/share earnings reported in the year to end-August consists of revaluations of the underlying investments. But the cash flow is underpinning dividends, which this year were increased by a third to 3.3c/share. The bottom line is that the market is going to struggle to buy into a valuation of 650c-660c/share — at least until Premier Fishing is cast off into what will hopefully be a fast-moving growth current.
But at current levels AEEI still looks interesting, and worthy of a closer look by investors willing to speculate about ambitious longer-term outcomes.
If Premier Fishing can bring on board more staple catches to complement its higher-margin export niche in lobster and abalone, there may be some interest from professional shareholders