Safren wants to separate the ships from the chips in its restructure
'We live in a world of greater focus where the market is calling for more options within its right to select'
IF there is one word which sums up the corporate reshuffling taking place everywhere in business, it is focus. This is a word that Buddy Hawton uses to explain the rationale behind Safren's recent cautionary announcement to shareholders that it is considering a restructure which will include a distribution of its 73% interest in Kersaf and the rationalisation of certain operational activities.
Hawton is chairman of Kersaf and chairman/CE of Safmarine and Rennies Holdings (Safren).
Safren holds 100% of Safmarine, 75% of Rennies, and 73% of Kersaf, which in turn holds stakes in Sun International SA, City Lodge, and various offshore interests, including Sol Kerzner's Sun International Hotels.
Last month Safren released results for the six months to December, which show earnings before exceptional items up 34% to R334-million on a 5% rise in turnover to R4.4-billion, or 10% if one excludes businesses disposed of.
All three operating divisions showed good organic growth, but the significant overall increase in earnings was influenced by the disposal by Safmarine of interests in some ships.
Safmarine contributed R176.5-million to bottom-line earnings, Kersaf R114.5-million and Rennies R45.3-million. Safmarine's contribution is growing steadily and accounted for 55% at the December interim, while Kersaf's is moving lower, to 34% at the interim. Rennies' contribution was 13.5%.
Analysts have always said the combination of shipping, freight, entertainment and casinos is a bad fit, and this is the main reason for unbundling.
Hawton says it is not quite so simple. "We live in a world of greater focus where the market is calling for more options within its right to select.
"While we recognise the criticism relating to the portfolio of different businesses within Safren, the issues extended beyond this to the 'double share price discount' relating to both Safren and Kersaf.
"In the case of Safren, its 73% holding in Kersaf extended the gaming uncertainty to the holding company's share, while the stake in Kersaf also inhibited tradability in that share.
"Another important issue we have recognised is that shipping is a difficult and complex business and with Safren on its own, the market should be better able to understand and value the business."
The big question is whether Safren's restructuring will unlock value, which is clearly a major aim. As Hawton says: "One will only know whether or not value is being trapped when one makes the move."
There was a time in the late 1980s when any investor worth his weight would have felt compelled to hold shares in the high-flying Sun International, Kersaf or Safren.
Times sure have changed.
Uncertainty over the future of Sun International following the re-regulation of the gambling industry has been a major factor inhibiting the share price of Sun International SA (Sisa) and Kersaf since their heyday. Safren too, although its main income is from shipping, has tended to track the performance of Kersaf.
Kersaf's current level of around R35 is a far cry from the R50-plus level of 1994 and if not for a run at the beginning of this year, the share would have been languishing near the R24 to which it had dropped by the end of last year.
No one in Sisa or Kersaf would ever admit it, but the association with the controversial Kerzner, who has now turned his attention offshore, could have also played a part.
His part in contributing to Kersaf's earnings, however, continues to be important.
In the six months to December, Kersaf's earnings were 17% higher at 186c a share, on the back of poor local trading conditions influenced by a slowdown in consumer spending and continued strong growth offshore. Results were achieved on a 4% rise in turnover to R1.4-billion, or a 14% rise, excluding disposed businesses.
The results included a 42% rise in earnings from associates, reflecting the higher contribution from offshore Sun International Hotels. Offshore earnings, including SIH and the European entertainment interests, were 32% up. (Kersaf retained the majority of the offshore interests of Interleisure when it sold the group to Primedia.).
The sale of its Interleisure stake boosted its cash pile to R1-billion, split almost equally between local and offshore.
Explaining his intentions for Kersaf, Hawton says: "In Kersaf we are moving ahead with creating value offshore. You can tell from the SIH share price, currently at around $47, that it is going well.
"In addition, the initiatives we are taking in building up cinema interests in Europe augur well for the future."
Offshore, the group is looking at other opportunities and it has the capacity to do so. Locally, it will use the money to finance any new gambling licences it might get.
"Onshore, we have done a lot of work to structure financially in order to withstand the onslaught of competition and to take up new opportunities, for example new casino licences."
Sisa, as part of the Afrisun consortium, was recently awarded one of the Gauteng licences for a development in Brakpan.
Analysts have for some time been cautious of recommending Kersaf and Sisa because of the cloud of uncertainty. Things remain uncertain, but elements of clarity are emerging. Analysts now say the roll-out of new casinos will take time, so the full impact on Sisa will only be felt in two years or more. Sisa, which built its casino resorts in the former homelands, is at some disadvantage relative to its competitors in terms of locations. But this is countered by advantages such as its vast experience and its excellent systems.
Hawton believes once Sisa has reached a point where uncertainty over its future is factored out, it should achieve a better rating. "Once we can be seen in clear terms by the market, and it may even take a year or two, we should get a better rating. Sisa's rating is on a four times multiple at the moment, which is extremely low."
Hawton says: "Kersaf's priorities offshore are to expand, build value and look for opportunities, At home, they are to come to grips with gaming."
There is speculation that on restructure, Safmarine MD Tony Farr will become MD of Safren, while Hawton will look after Kersaf and stay on as chairman of Safren.
Hawton dismisses the speculation, saying: "This is not an issue I have discussed with shareholders and in the event of concluding the restructure, it is something we would have to look at carefully.
"If we do seek a primary listing of shipping and freight offshore, the issue of the chairman and his role will have to be carefully considered. The issue is open and there has been no detailed discussion in this regard."
ý Rennies and Barlows division Circle International SA this week joined forces with US-based Circle International Group to merge their domestic and international logistics and freight management interests into a new company.
The new company, Renfreight Circle, is expected to have a turnover of R4-billion.
It will service 350 locations in 96 countries.
Rennies will emerge as the major shareholder of the new company with an 80% stake. The balance will be split between Circle and Barlows.
Rennies CE Piet Steyn said the merger would facilitate growth and give the companies global reach and enhance their service levels.