Brainworks Capital shareholders recently approved the change of the group’s name to Arden Capital Limited. Normally, a name change signals a fresh start and this was to be expected given the history of the company and the changes that occurred within its management and shareholding structure. According to its website profile, Brainworks (now Arden Capital), is a diversified investment holding company, listed on the Johannesburg Stock Exchange, with an exclusive focus on Zimbabwe.
Brainworks invests in assets that are consumer-facing and cash-generative, and aims to build a portfolio that will deliver capital growth. The substantial existing investment portfolio currently offers exposure to prominent Zimbabwe-based assets in hospitality, real estate and logistics.
From its early beginnings, the group appeared to be primarily geared towards private equity investments, with a board of directors chaired by a seasoned fund manager and a management team led by seasoned investment bankers.
Essentially functioning as a private equity fund, the business model seemed to be drawing funding from foreign investors, acquiring controlling stakes in local companies operating in high growth industries, incubating the said companies and exiting with the gains.
The group’s earliest disclosed portfolio in 2011 featured a 36,9 percent stake in Ecobank Zimbabwe and 100 percent stake in GetBucks Financial Services prior to its listing as well as 100 percent stakes in BCM Gold – a private mining company, Senwes – a private Agribusiness and FML.
Over time the group gradually disposed of its investments while the advisory business seemed to fade out as it concentrated on its portfolio.
The group’s stake in GetBucks was profitably disposed in after the microfinance unit was listed on the ZSE in 2016. Ecobank was exited in 2015 for US$12,5 million, albeit at a loss of $3,9 million.
Meanwhile, the group began taking up positions in its present core assets, Dawn Properties and African Sun Limited in 2013.
However, for Arden, the change in its identity should be able to redefine its entire corporate structure and how it wants to conduct its business going forward. It should be able to go beyond simply owning two share certificates; African Sun and Dawn Properties.
The essential characteristics of a company such as Arden, is that since it owns a substantial participation in the shares of other companies, usually operating subsidiaries, it must be a powerful asset protection and risk management tool.
However, in this instance there are certain caveats and considerations which need attention. The board composition, chaired by Simon Village and Chipo Mtasa as lead independent non-executive director is packed with diverse experience and technical expertise but is this board built to scale?
At the moment, Arden has two major assets African Sun Limited and Dawn Properties begging the question of whether the group is looking to acquire more assets to fully utilise the board’s skill and value.
It is implied by the nature of most boards on listed companies or private equity that you would like to extract much value from your own board as possible. An analyst would wonder if the board’s size is worth the capacity of future investments?
The group’s situation is worsened by the lack of diversity behind its balance sheet structure which is dominated by property assets. As an investment company, it should have spread a wider net in its strategic investments, perhaps with an export oriented operation as a hedge against the local economic cycle.
The group could have also strategically diversified geo-graphically and created synergies between those investments. Now the shareholders have had to prop it up through the ZAR86 million rights issue (which was 71 percent subscribed), with unclear prospects for any value creation or even dividends in the short to medium term.
On that note, it would make more sense for the group to target a higher amount for the capital raise, beyond the need to repay the debts and invest it elsewhere, where value can be gained.
Otherwise, further down the line it is difficult to see the group raising any meaningful capital by other means.
In its most recent results (June 30, 2019), the group’s revenue recorded a 31 percent decline to $21,5 million from $31 million recorded during the 2019 comparative period.
Revenue decrease was recorded by the group’s two main operating segments, hospitality and real Estate segments. The hospitality segment remains the major driver of total revenue, with contribution of 91 percent (US$19,7 million) of the total current interim period revenue.
Expenses at the holding company far exceed the company’s cash generation, as cash is generated at subsidiaries and this is not a sustainable position. Curiously is the question on how the company has been surviving on director loans. How sustainable is this going forward?
The 2018 annual report (page 94) lists that both the chairman and (the former) chief executive officer have advanced amounts to the company.
The holding company’s balance sheet provides no support to the subsidiaries to grow unlike companies such as Innscor Africa, which works as central treasury to its subsidiary and associates.
The ideal situation would be for the holding company to provide the full range of treasury, internal audit, public relations, market research and marketing etc.
As it stands the Arden subsidiaries look after themselves and have two fully functioning boards chaired by Alex Makamure (African Sun) and Phibeon Gwatidzo (Dawn Properties). The subsidiaries then have to declare a dividend to sustain operations of a costly holding structure.
For a JSE investor, Arden offers little in terms value creation or dividend payouts. This combined with the weak foreign investor sentiment on Zimbabwe means the group will likely face challenges sourcing capital to invest in other ventures.
If Arden can’t raise new capital and grow, the corporate structure is expensive for shareholders and it would be best to declare a div-in-specie to shareholders to allow them to hold shares in African Sun and Dawn directly and eliminate the holding costs structure.