Brimstone Investment (JSE:BRT): A Cautionary Tale of Earnings Quality and Sustainability

Brimstone Investment Corporation (JSE:BRT), a diversified investment holding company with stakes in sectors ranging from fishing to property, has long been a subject of debate among investors. While its strategic focus on above-average returns through strategic alliances and management expertise is laudable, recent financial disclosures raise critical questions about the sustainability of its earnings. A closer examination of its 2024 performance reveals a troubling reliance on non-operating income and one-time items, which may obscure the true health of its core operations.

Earnings Volatility and the Shadow of One-Time Items

Brimstone’s transition from a R1.18 per share profit in 2023 to a R0.82 loss in 2024 underscores a dramatic earnings contraction [1]. This shift is not merely a reflection of operational challenges but is heavily influenced by non-recurring gains. For instance, the company reported a ZAR96.9 million one-off gain in the last 12 months, contributing to a R97 million profit boost from unusual items [1]. Such gains, while temporarily inflating earnings, are inherently non-sustainable and often distort year-over-year comparisons. Analysts caution that these items—likely tied to asset disposals or tax adjustments—create a false sense of stability, masking underlying operational weaknesses [3].

The Surge in Non-Operating Income: A Double-Edged Sword

A more alarming trend is the sharp rise in non-operating revenue as a proportion of total revenue, which jumped from 1.1% in 2023 to 8.0% in 2024 [1]. This shift suggests a growing dependence on non-core income streams, such as investment gains or government grants, which are less predictable than revenue from ongoing business activities. While the interim results for the six months ending June 2025 highlighted strong contributions from associates like Sea Harvest (R174.2 million) and Oceana (R115.2 million), these figures do not fully offset the risks posed by volatile non-operating income [2]. Investors must ask: How much of Brimstone’s reported profitability is derived from its core competencies, and how much is a product of financial engineering or market timing?

The INAV-HEPS Disconnect: A Red Flag for Value Investors

The most striking contradiction lies in the disparity between Brimstone’s headline earnings per share (HEPS) and its intrinsic net asset value (INAV). Despite a 51% year-on-year increase in HEPS for 2024, the INAV per share fell by 8.5% to R12.13, while the share price closed at a significant discount to this value [3]. This divergence highlights the limitations of accounting practices that prioritize short-term earnings over long-term asset preservation. For example, consolidated investments are treated differently from minority stakes, creating volatility in HEPS that does not reflect the company’s true economic value [3]. Such inconsistencies make it difficult for investors to assess Brimstone’s financial health using traditional metrics.

Investment Implications: Proceed with Caution

The reliance on non-operating income and one-time items raises serious concerns about Brimstone’s earnings quality. While the company has maintained a high dividend payout (ZAR0.40 per share for 2024), this appears to be funded by a shrinking asset base and a declining INAV [1]. Furthermore, the recent 24.1% drop in INAV per share from December 2024 to March 2025—driven by declines in listed stakes like Oceana and Sea Harvest—underscores the fragility of its portfolio [1].

For investors, the lesson is clear: Brimstone’s reported profits may not align with its underlying profitability. The market’s focus on HEPS, rather than INAV, risks overvaluing a company whose earnings are increasingly driven by non-sustainable factors. A cautious approach is warranted, with due diligence centered on the nature of non-operating gains, the sustainability of associate company contributions, and the alignment of management incentives with long-term value creation.

Conclusion

Brimstone Investment’s 2024 results paint a picture of a company navigating a precarious balance between short-term gains and long-term stability. While its strategic investments in Sea Harvest and Oceana offer some optimism, the disproportionate role of non-operating income and one-time items suggests a lack of earnings resilience. Investors should prioritize intrinsic value metrics over headline figures and remain vigilant about the risks of earnings volatility. In a market where true profitability is often obscured by accounting quirks, Brimstone’s case serves as a timely reminder to look beyond the numbers and scrutinize the narrative behind them.

Source:
[1] There Are Some Reasons To Suggest That Brimstone ... [https://sg.finance.yahoo.com/news/reasons-suggest-brimstone-investments-jse-043130995.html]
[2] Brimstone Investment : Interim Results June 2025 [https://www.marketscreener.com/news/brimstone-investment-interim-results-june-2025-ce7c50d2d18df225]
[3] Ghost Bites (ADvTECH | Brimstone | Murray & Roberts | Mustek [https://www.ghostmail.co.za/ghost-bites-advtech-brimstone-murray-roberts-mustek-quilter-sea-harvest/]