Seardel results, no takers for heavy suit

But anchor shareholder Hosken Consolidated Investments, which pumped some R250m into Seardel in a rescue rights issue in late 2008, remains determined to fashion a new-look clothing manufacturing hub after radically rationalising loss-making operations.

Core trade undermines smaller divisions

Still, Seardel's year to end-March results make for startling reading. The smaller toys, stationery and consumer electronics divisions collectively racked up R56m in operating profits, while the external rentals from Seardel's revamped property division (which in total earned around R45m) came in at an encouraging R24,5m.

The core "rag trade" hubs actually detracted from the performance of these divisions. The textile segment's profits of R38m (previously R56m) were obliterated by a R146m loss in the clothing cluster.

While the property division is a promising work in progress - it has now started renting out redeveloped industrial properties - the efficiencies in the toys, stationery and electronics division raise questions around the determination to press on with the low-margin textile and clothing businesses.

The toys, stationery and electronics division managed a trading margin of over 10% of turnover of R566m, while textiles earned less than 4% of turnover of over R1bn.

The clothing division's massive loss (off turnover of R957m) included a R22m restructuring cost and R36m of inventory impairments. However, the need to fill production capacity meant the clothing segment's margins were sacrificed to retain volumes - an untenable situation.

Presuming that Seardel's operating profits would have come in around R15m excluding the recent one-off litigation gain of R191m (stemming from claims against former directors) and before restructuring and retrenchment costs, a simple calculation would show that without the burden of clothing manufacturing the company might have posted operating profits of close to R150m. Operationally, that would make Seardel - largely seen as a net asset value (NAV) play - a completely different beast. Perhaps even vaguely attractive.

With this in mind it might be disappointing to read that Seardel, which carries a NAV of almost 200c/share, will press on with efforts to turn around the clothing division.

Independent valuation

In fact, Deloitte's recent independent valuation of Seardel (published ahead of a proposed share repurchase of the Searll family's shares) puts a considerably lower value on the business after considering key assumptions for growth rates and operating margins on the operating segments.

Deloitte found an indicative value range of 106c/share to 150c/share, the lower valuation(s) being more or less in line with the recent share price trading range. Core value was estimated at 125c/share, the discount on the official 200c/share presumably stemming from a clinical assessment of the clothing cluster.

So the best option is ensuring it does not drag on operational performance, and here it is at least encouraging to note that CEO Stuart Queen reckons improvement initiatives are beginning to be felt.

But the scaled-down division still faces a long haul to sustainable profitability.

Heavy competition

One of Queen's more despondent comments around clothing manufacturing was that "the competition this business unit faces from both imports out of lower wage paying countries and manufacturers within our own borders that do not pay the prescribed minimum wage meant that rising input costs could not be recovered in higher prices for products supplied".

Under these conditions, is there any justification to carry on? Queen discounts the chances of Seardel disposing of its remaining clothing manufacturing interests. The FM raised the option after noting that fashion brands retailer Foschini recently bought out Prestige Clothing to serve as an in-house apparel manufacturer and another fashion house, Rex Trueform, managed to sell its clothing manufacturing interests to unlisted Pals Holdings.

Queen says: "The truth is that it has not been the most attractive asset for a prospective purchaser and we haven't been inundated with offers."

Responsibility

As regards a complete closure of the clothing unit, Queen argues that Seardel has a responsibility to save as many jobs as possible. "However, we obviously cannot sustain loss-making jobs and have needed to act in areas where we did not believe that the losses could be stemmed."

He says the biggest problem is that input costs have continued to rise and selling prices have stayed flat at best. "Indeed, there are a number of areas where selling prices have declined in nominal terms. In time the margin squeeze became overwhelming and we have been forced to downsize further."

After the latest restructuring, which recently consolidated its five Western Cape facilities into two and two facilities in Ladysmith (KwaZulu Natal) into one, the potential for further rationalisation seems limited.

Interwoven profit and loss

Queen notes it's currently not possible to pick out a profitable thread in the clothing cluster as the various factories and sales streams are quite integrated.

"While it's true that there are profitable product lines, it's not like they could be split off as stand-alone product lines as the lossmaking product lines at least contributed to absorbing overheads."

One of the main reasons for the latest rationalisation, he says, is to reduce factory capacity and overhead structures to allow Seardel to eliminate low-margin product.

"We are not intending any further downsizing. The latest round was completed in April this year and though there is some work left to do to settle the business in its new form we believe that, all things being equal, we are at a size that can be maintained."

He adds: "Clothing needs to be sustainable, but we realise there will be further losses ahead. If these can't be stemmed we will have to contemplate further action in the longer term."

Brand ID

One new initiative that bears watching is Seardel's attempt to build a fashion brand house under Brand ID - a development which, if successful, might give the clothing manufacturing arm new vigour.

Queen remains cautious, though. "Without making any specific predictions, we are confident that Brand ID will become a significant contributor to the group in time ... though it probably has another two years or so to go before break-even is achieved."

Source: Financial Mail