EPE Capital Partners Ltd (EPE.JO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Ethos Capital Full Year 2024 Results Webcast. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Anthonie de Beer. Please go ahead, sir.

Thank you. Good afternoon, everybody and thank you for joining us. We're pleased to present the Ethos Capital latest performance to June 2024 and update you on the strategy as of September 2024. This presentation highlights the NAV performance, the update on the progress that we've made with realizations and an overview of capital allocation choices, which the Ethos Capital Board is exploring in line with the strategy of the business. Let me start by thanking Peter Hayward-Butt, the previous CEO, for his vision, resilience and tremendous commitment to the Ethos Capital journey since the IPO in 2016. Peter led with the Board and shaped the Ethos capital to now representing a mature, resilient diversified portfolio. He led and navigated the extremely challenging COVID period and in particular, its impact on one of Ethos Capital's largest exposures at the time, the Brait investment. The work done on Brait did not only save that business and your investment in it, but also provided you with an opportunity to now post unbundling of Brait in August to participate directly in the value creation of that investment. Thanks, Pete. As far as the global or the macros are concerned, the global economy faced significant challenges. I think all of us are aware of it, some persistent inflation, high interest rates and geopolitical tensions. Domestically, South African economy was marked by slow GDP this year, ongoing power outages and political uncertainty leading up to the national elections. The suspension of load shedding in March establish -- establishment of the Government of National Unity in May, all of these things have sparked optimism around economic reform. Through Ethos Capital, we have directly or indirectly accessed to more than 20 private businesses. We received trading and performance updates from these companies monthly, sometimes weekly and see signs of deterioration or improvement in the economy early. Our portfolio is a bit like the canary in the coal mine, providing early indications of what is to come. For now, green shoots in trading performance remains limited, but a significant change observed around boardroom tables, is the improving business, consumer and investor confidence. The conversation is simply more constructive with more optimism. This should support trading performance of our businesses over the medium term, and in particular, as far as Ethos Capital is concerned, should support the realization program of our fund investments. Throughout the past 12 months, we've engaged with the major shareholders to discuss Ethos Capital strategy, focusing on value creation and liquidity options. Many investments are held indirectly through limited partnership stakes in TRG funds, meaning that the exit time lines around these exposures are largely fund driven. Conclusions from these engagements include that we will continue to support the NAV growth of portfolio companies and support the value creation plans of the underlying funds and investments. We will pursue realizations in an orderly manner, thereby maximizing outcome for investors. The Board has agreed to make no further investments in funds for the moment, and we will be reducing leverage and return capital to shareholders in the most optimal way. So let's move over to the first slide of the presentation. The performance of the unlisted portfolio remained robust with LTM revenue and EBITDA increasing by 12% and 18%, respectively. Strong operational turnarounds at Twinsaver and increases in the valuation of Synerlytic and CrossFin due to -- included sale processes resulted in an increase in the unlisted portfolio NAV. TymeBank concluded another capital raising round post year-end at a significant premium to the June carrying value. Optasia, the largest exposure in Ethos Capital, making up 32% of total assets at year-end. Its strong operational performance continued. The U.S. dollar EBITDA growth of 10%; however, the valuation was negatively impacted as reported on previously by the material naira devaluation, which we reported on throughout the year. This has been taken into account in our maintainable EBITDA for that business for valuation purposes. The NAV per share declined by 17.9% from ZAR 8.56 to ZAR 7.03, and this was largely driven by the decline in the share price of the listed portfolio. And just to remind you, in that listed portfolio, we have rate that was a significant driver of that. And then we have got some MTN Zakhele Futhi shares. So the Brait ordinary share is reduced by 73% from June 2023 to June 2024, and the MTN Zakhele Futhi price was down by 27% in the same period. The listed portfolio contributed ZAR 1.38 per share to the decline of NAV per share. The unlisted portfolio grew 4% year-on-year and in line with our strategy, as discussed earlier, the Board made the decision to unbound Brait's ordinary shares to Ethos Capital shareholders. The result of this was a significant distribution to shareholders and this -- which is expected to reduce the impact of share price volatility on Ethos Capital and remove the double discount. Adjusting for the shares on bundle, the NAV per share will reduce post year-end to ZAR 6.58, but we provide some analysis on this on a couple of slides to come. The Ethos Capital share price responded positively to the developments with a discount to NAV falling from under 50% pre-unbundling to now around 30%. I will briefly unpack this also later in the presentation. Exits from BevCo, Synerlytic and Neopak, together with the repayments are a portion of the great exchangeable bonds delivered total proceeds received around ZAR 457 million, of which ZAR 323 million was received shortly after year-end. It's worth noting that all of these proceeds were delivered at a 31% premium to prevailing share price. This brought total realized proceeds since listing of the underlisted portfolio to around ZAR 1 billion. And I think that's very positive. We've taken capital from investors at the time of listing. We've deployed that into a diversified portfolio of investments. And following the private equity life cycle, we've now disposed of around ZAR 1 billion of those proceeds at a pretty good IRR. Proceeds was also used to repay the debt. And as you'll see later in the report, the debt at the moment is sitting at around ZAR 200 million. We've reduced it from the ZAR 525 million to around ZAR 200 million post the receipt of some realization proceeds. We're also expecting another ZAR 54 million to come in from the disposal of Adumo to Lusaka and that will be prior to December 2024. So as mentioned, in terms of our perspective on the outlook, the market conditions for the first time in a while seems more favorable for NAV growth, but also supportive of realizations over the next 18 to 24 months, and we remain focused on maximizing outcomes for our investors and returning capital to the investors. Turning to the Ethos Capital journey. The investment life cycle is set out in this slide. To recap, it starts with raising capital, then investments and growth phase followed by realizations and then the allocation of capital. As mentioned, following engagement with shareholders, the strategy was confirmed that there will be no new fund commitments made and hence Ethos Capital's Board will focus on the left-hand side of the slide to the allocation of capital between leverage and returning capital to investors. On the right, we split the NAV performance over 1, 3 and 5 years between fund and company-investments and Brait, highlighting the material impact that the Brait investment had on Ethos Capital's NAV. It's worth noting that Brait's journey is not over. We simply unbundle it you, led by Pete , the Brait CEO, we're still driving the value creation phase of that vehicle with an aim to unlock value -- unlock the discount as well. The Brait share price performed well recently supported by continued strong performance from Premier Foods and a recovery in the performance of Virgin Active. But in particular, some increased comfort from the market around the material debt restructure and the capital injection into Brait. Ethos Capital shareholders through the unbundling were all afforded the opportunity to follow their rights and participate in this improvement in Brait. The share price of Brait increased from ZAR 0.79 a share to ZAR 1.41, slightly higher today, a more than 80% increase in that share price. You'll also note on the slide, the material realization activity. So in the 1-year bucket, ZAR 457 million was realized over the past 12 months from the Ethos Capital portfolio. And that is a very big positive. And this is all before the Adumo ZAR 55 million, which is expected later this year. In the next couple of slides, I'll unpack the NAV in a bit more detail. The NAV per share on the slide, as you can see, was sitting at around ZAR 8.57, 30 June 2023, and it's now down to ZAR 7.03 per share -- or ZAR 1.53 per share reduction. ZAR 1.19 per share of that ZAR 1.53 reduction was due to the reduction in the Brait share price at year-end, ZAR 302 million reduction. The Brait exchangeable bonds also traded down over the past 12 months, and the dividend coupon of ZAR 15 million was received in this period. Fund VII debt was flat. The Optasia was revalued down mainly due to the devaluation of the currencies in which it operates against the dollar. I think specifically around the Nigerian naira, the depreciation was severe. So to give you a sense of that the naira was sitting at NGN 760 to $1 at 30 June 2023, and this devaluated to NGN 1,535 to $1 at 30 June 2024. So a very material depreciation of the naira. We've reported on it at the half year and also provided updates in March and June on that. But I will unpack the Optasia performance a bit more in detail later. Excellent performance from Synerlytic, underpinned by the disposal and cash flow of the WearCheck realization to Bidvest and TymeBank continues to exceed milestones for the business. The customer base increased to 9.5 million customers with successes in the Philippines and the piloting in Vietnam and it seems to be performing pretty well there as well. The progress in TymeBank is supported by the valuation increase -- supported the valuation increase. And this is underpinned -- was underpinned by capital raising rounds the most recent capital raising round took place post year end at a premium to the 30 June carrying value. We followed a buy-and-build strategy in Echotel investment before COVID. The South African operations of Echotel performed well with revenue growth driven by the South African operations. The African operations, however, required a cost restructure in the year and the value reduction that you're seeing in the Echo valuation was due to us taking more curtailed view of the African business. The decent performance from the rest of the portfolio with around ZAR 30 million in distributions and realizations received. The liabilities of the group ended the year at ZAR 544 million and as mentioned earlier, post year-end and post receipt of the Synerlytic realization proceeds, that debt reduced to around ZAR 200 million. Other liabilities and provisions increased by ZAR 12 million, reflecting provisions for management fees and contingencies in underlying funds. Putting another lens on the NAV analysis, the investment value of the portfolio on a like-for-like basis declined by 9% and ZAR 164 million of this decline was attributed to the naira devaluation to the dollar or largely the naira devaluation to the dollar. And as I mentioned, naira went from NGN 760 to $1 to NGN 1,535. Excluding the impact of the foreign exchange devaluation, the unlisted portfolio achieved a gross return of 12%. There was a small reduction in the EBITDA multiple -- valuation multiple, but the discount of peers that we use is still sitting at 40% compared to 42% in the prior year. So no change to the valuation methodology, just a small change and the reduction in that multiple. There was a ZAR 40 million benefit from deleveraging. And you can see there the impact of the reduction in Brait MTN and Brait EB share prices. Net distribution from the portfolio was ZAR 125 million after ZAR 9 million was invested mostly into Vertice. On this slide, we just provide you with a sense of the drivers of valuation growth. You can see there, revenue growth of the overall portfolio was sitting around 12% EBITDA growth at 18%. This is actual EBITDA growth of all the companies that we are using an earnings-based valuation for. So you may ask, well, why your valuation is only up by 4%, if you have 18% growth in EBITDA, that's the actual EBITDA growth. We've made the adjustment for Optasia, as we mentioned earlier, where we took quite a big adjustment for the currency impact in the Optasia valuation and that valuation, therefore, remained -- or slightly down. The EV maintainable EBITDA range was 7.4x, excluding Optasia, sitting at 5.8x, which is a pretty comfortable level for a largely SA-based investment portfolio. And the debt EBITDA multiple range was sitting at 1.6x, debt to EBITDA to give you a sense of the financial risk that's sitting in the remainder of the private equity portfolio, which we certainly feel pretty comfortable with at this stage. The analysis at 30 June, the share price of Ethos Capital was sitting at ZAR 4.21 per share, a 40% discount to the ZAR 7.03 per share. Five assets make up 65% of the NAV with Optasia by far, the largest exposure followed by Synerlytic, which is valued at the -- which was valued at the expected proceeds from the disposal to Bidvest and then the Brait exposure is making up around 11%. Approximately ZAR 1 billion of the unlisted and ZAR 883 million of the listed portfolio was realized over the last number of years. I think this is quite a telling slide. And I want to just pause here for a second. There have been 15 material realization events over the last couple of years. On this slide, we show those material events, but we also show what the returns are that we generated out of these material events. Most of these investments generated an IRR somewhere between 15% and 17% and at times money back of 1.7x or 70% more than the original cost of those original investments. The Brait disposals, clearly, also very successful disposals, Consol, Iceland Foods, Premiers, round of capital that we raised for that business, all were done at quite large premiums to the original costs of them. And the capital of Brait from these realizations were used to reduce the Brait leverage and/or invest into the underlying portfolio. I think in particular, the core of what we do and what you are left exposed to -- in Ethos Capital sits in the unlisted portfolio, and you can see there a decent track record with only Autozone returning less than the regional cost. On the next couple of slides, we start unpacking a little bit to capital allocation so what -- where the NAV sits of the portfolio, where it sits relative to the share price. And then the steps that are taken to unlock either the discount or to distribute capital to investors. So the NAV on this slide sitting at ZAR 7.03 per share or ZAR 1.78 billion. Net debt at year-end, as I mentioned, was sitting at ZAR 525 million to give you a total gross NAV of ZAR 2.3 billion. We unbundled Brait shares, ZAR 114 million or ZAR 0.45 pretty Ethos Capital share. We received some cash back from Brait exchangeable bonds of ZAR 43 million as well as the Synerlytic proceeds of ZAR 271 million. So adding all of those up gets you to gross assets of ZAR 1.88 billion. If you deduct from that the outstanding debt of ZAR 202 million, you get to the NAV per share of ZAR 6.61 and that compares to a share price that at the moment is trading around ZAR 5 a share. On this slide, what I tried to do is I really sort of just compare the -- what the Board considers when they receive some capital and to take you through some of the thinking in terms of the alternatives and the considerations that we have. So at year-end, we had ZAR 525 million of debt. If you compare that to the cover ratio that we have, we had total assets of ZAR 2.3 billion, which gives you a 4.4x cover. So we received Synerlytic proceeds, and we received Brait extendable bond proceeds. And if we add that together, it gets you to a total asset cover ratio of 9.3x. So what the Board will do is they evaluate the portfolio. They say, should we be considering some unbundling of listed assets? Should we do share buybacks? What about some pro rata share repurchases and then cash and scrip dividends. There are more options also to consider, but these are the main ones that the Board would consider. In looking at these alternatives, they would consider the NAV per share impact, what the implications would be on the share price. I can't influence the share price, but you can certainly try and drive NAV and give the market a sense of your choices that you're making to give effect to share price impact. You look at the overall liquidity, the efficiency with which we can get the cash back to shareholders and to the banks, how long will it take to implement these choices, are shareholders being treated fairly, are we giving shareholders the right optionality, so can those that want cash take cash or should they be considering cash and/or scrip? And then you have to look very carefully at what your distribution constraints are. So if we then compare the choices we made on Brait to those considerations. First of all, the Brait share price at 20 June the day that we announced the Brait unbundling, it was sitting at ZAR 3.70, a 47% discount to the NAV at the time. The share price as of last week, Thursday was sitting -- the Ethos Capital share price was sitting at ZAR 4.69. If you add to that, the Brait ordinary shares and [indiscernible], which you would have received as a Ethos Capital shareholder, that combined value is ZAR 5.63, a 52% uplift from the 20 June share price level. That's the ZAR 4.69 also now at a 29% discount to the NAV. So I think it's pleasing to see that there was a positive response to that unbundling. I think there was -- certainly, the NAV goes down, but that's understandable given that you're unbundling assets to investors, but the share price increased the discount narrowed. Shareholders have the option to exercise their Brait rights or not. And there was also a significant deleveraging as a result of the Brait exchangeable bonds proceeds, which came into Ethos Capital. So with that, I'm going to move to a couple of slides on the portfolio. I'm going to focus on the top 5 exposures and starting with what is probably now without a doubt your largest exposure in Ethos Capital, which is Optasia, 32% of total assets. It's a business, a global fintech company. You -- most of our investors should know this business pretty well. It gives access to end customers through an AI-led credit assessment engine. Our valuation at year-end was at ZAR 753 million. And we are part of a consortium of investors and representing around 16.6% of the ownership of that vehicle. We invested alongside other like-minded financial investors with an aligned view on where to with the asset. Ethos Capital is direct and indirect economic interest is at 7.3%. So what does Optasia do? It's got a micro-lending business, airtime credit services business, that was the original business that we invested in. And the micro-lending business certainly has increased dramatically and the data monetization. So the drivers of growth here is a growing addressable market for the products they serve. It's a very scalable company list with a low-cost -- extremely low cost base and very scalable and expandable over geographies as well as in product. So a very attractive profile of company and investment characteristics. The half year performance, H1, this year was driven by the full absorption of FX losses. As I mentioned earlier, you can see to the right there June 2023, the naira was sitting at 760; June 2024, it was sitting at 1,530. And therefore, the dollar-based EBITDA growth was adjusted quite a bit by the naira and implications of the naira. There is a step change in the profitability of the company 1st June 2024. We decided to report on that. We did mention this to investors. We've always said that there are new deployments coming on stream and that these new deployments will bear fruit. And specifically on the micro finance side, these new deployments have now come on stream. There's also been enhanced technology and data solutions for products that have been rolled out. They are also coming on stream, and that creates more revenues and lower defaults. And the currency has been reasonably constant over the last couple of months. So we are feeling fairly positive about where Optasia is sitting at the moment. At June, we had higher EBITDA that was offset by the currency. We had a marginally lower valuation multiple and for the past 6 months, the valuation was largely flat. So first 6 months, we took quite a big step down, but the last 6 months, this valuation was pretty flat. We're unpacking 1 or 2 additional slides, which investors continue to request all of us on Optasia. So the company is doing pretty well in diversifying away from a country risk, but also for customer risk. So on the right-hand side, you can see there the 2019 revenue, split of which 98% of that was ACS and was sitting in 5 countries, largely 83% of it in the top 5 countries. At June 2024, that revenue split has reduced where the ACS business is now 68.5% of the total revenue. Micro finance at around 31.5%. And the top 5 countries is now at 67.4%. We have provided this data point before. You can see there, country 1 and country 2 on this slide is Nigeria and therefore, our reliance on the naira now has reduced dramatically with Nigeria only making up 19% of the revenue of Optasia. The next asset worth just reflecting on is Synerlytic. It's a business that's been sold. We received the cash in the last month or so and investment made by the mid-market fund in 2019. They completed that acquisition. It had attractive characteristics, as I almost always referred to as opposed to Ethos Private Equity business. It's a strong moat, high margins and great cash conversion, a good market share position and was scalable with great management. So it's -- the business you really are looking forward to invest behind. It was complex in terms of unlocking the value of the delisting and the enterprise multiple at the time was sitting around 6x maintainable. What was important is to drive the separation of that business into 2 stand-alone businesses WearCheck and The Particle Group. And that was done so that we can ultimately dispose of WearCheck and The Particle Group to likely by interests. It was a multifaceted sale process really driven well by the management and by the mid-market fund team. And those 2 exits delivered ultimately the 25% return 3x money back in the 3-year holding period. So excellent job done by the team there. On Vertice medical technology company, which was really a buy-and-build strategy that was done over a couple of years. Ethos Capital's exposure to, it was ZAR 173 million at year-end, the 7% of our total assets. And we invested as Ethos Capital through Ethos Fund VI through the AI fund and directly in the Ethos Healthcare platform. The economic interest direct and indirect to 17.6%. So Optasia, buy-and-build, we did large -- or the team did a large number of acquisitions there, really to focus the business on capitalizing on organic growth on integrating those bolt-on acquisitions and the synergies out of it and then trying to drive a digital transformation of the Vertice business. It did take some time for that to settle down. They made more than 9 investments. And I think this year, the growth sort of coming through. So we're quite pleased with the performance of Vertice. The LTM revenue and EBITDA increased by 22% and 29% with strong performance from the orthopedics, surgical and the mobile clinics. We've also lost an agency this year, but the team has done a great job backfilling that lost agency and the performance is up there and growing strong. We're also looking into some other software solutions and expanding that into the European market and the contract to that effect was secured this year. So several growth and optimization opportunities for Vertice and a business that's doing very nicely for us at the moment. Crossfin is -- invests in high growth, established, cash generative fintech solutions. So it's a couple of different exposures through different companies, providing different fintech services. This year, the value that Ethos Capital has got exposed to -- Crossfin is ZAR 170 million. We've got 33.4% ownership alongside through the mid-market fund and the AI Fund. And they've started the realization program. So bottom left there, you can see ZAR 170 million worth of value, 38% of that was exited or were weighting exit proceeds. But exit proceeds will come through in Adumo as well as the last portion of the retail capital disposal, the final tranche that's due on it. In looking at iKhoka business, that's the point-of-sale devices. It delivered a strong year. The business continued to deliver revenue growth around 22%. And the growth is driven by investment in business marketing, some product and staff resources and although these have contributed at the top line, we have not seen it come through in EBITDA yet. And we're hopeful that, that will come through in the coming months. Then there's the Akelo business, a leading card and mobile processing business. Akelo had a mixed performance, to be honest. The cards business delivered according to plan. But the venture assets didn't perform according to plan, and there were some noncore assets that are expected to be sold from the venture assets. And then the last one, just to mention, on Sybrin, a soft performance in the past 12 to 24 months. We've appointed a new group CEO and CFO, and they are focused on revising and reenergizing the strategy of that group. And over the next year, Sybrin's key focus will be on creating efficiencies for it. So what do you expect out of Crossfin, first of all, the cash back out of Adumo and the cash out of retail capital and then some performance uptick hopefully out of the rest. Moving over to Gammatek, a distributor of mobile accessories and low-technology products. So the company benefits from continued growth in the smart mobile devices. They're expanding their channels, they diversify to mid-tier mobile devices, and they expand to selected markets outside of Africa. They've also done a couple of smaller bolt-on acquisitions to expand on the channels and on the products, and those are being integrated and synergies driven through them. So I think -- for the last 12 months, I think, our commentary there on the right-hand side around performance is accurate. But I think the truth is that the revenue and the EBITDA is starting to pick up very nicely with revenue -- LTM revenue increasing by 10% and EBITDA by 13%. The focus will be on margin improvement in Gammatek, and it's a very cash-generative business. So we would also hope that there would be some decent deleveraging coming out of the Gammatek business. So our valuation remained pretty constant. The increases in EBITDA resulted in a 27% valuation increase. So the multiple remained constant but our valuation ticked up in line with the EBITDA performance of the company. So in conclusion, just to repeat briefly of what we discussed before. The strategy of Ethos Capital, the top row, we're going to support the businesses to drive NAV growth, drive realizations in an orderly manner so that -- and drive debt reduction in portfolio companies so there can be some capital flow into Ethos Capital and then the capital allocation choices that the Board will apply their minds to is either to reduce debt further in Ethos Capital or to return the capital to investors through an unbundling share buybacks, pro rata share repurchase or cash and scrip dividends. On the left, the non-Brait investments or the nonlisted investments without a doubt, are now making up the biggest part of the NAV going forward, which should reduce the volatility in our NAV, and we've started the realization program with ZAR 687 million of proceeds to June and a further ZAR 323 million expected post June to deleverage Ethos Capital down to ZAR 200 million. So with that, thank you for your support. Thank you for the Board for their support over the last 12 months and the constructive engagement with investors over time. We are always here to take any questions, happy to engage in conversation to the extent people need further discussions with us. So with that, we are open for questions.

[Operator Instructions] Sir, at this stage, there are no questions on the conference call. Are there any questions on the webcast?

No questions on the webcast at the moment.

[Operator Instructions]

As I said, thank you so much for listening in and for your support, and you are welcome to give us a call directly to the extent that there are questions outside of this call. Appreciate your time. Thank you.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.