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THERE were some really encouraging signs in the year to end-March results of clothing and textile conglomerate Seardel.
Thicker margins, an encouraging showing for textiles, markedly lower gearing and, most importantly, continued enthusiasm from executive management (speaking, I suppose, for controlling shareholder HCI).
I had a few enthusiastic shareholders on the line on Thursday afternoon, one of whom suggested that Seardel could have paid a token dividend in the form of free 2010 Fifa World Cup t-shirts.
Indeed, there’s loads to soak up in the latest Seardel report in terms of monitoring the chances of a sustained operational turnaround. But for me the most significant bit in the very comprehensive commentary by CEO Stuart Queen was almost a throw-away line around Seardel’s properties.
The line I’m referring to read: "We have also made progress in adding a property leg to the business which, when completed, will lend some stability to future earnings."
Now why should a line about a "property leg" be such a big deal?
Seardel’s property portfolio – mainly of the industrial ilk – provides the main underpin to the company’s latest stated Net Asset Value (NAV) of 183c/share. Property, plant and equipment are valued at just over R900m in Seardel’s balance sheet.
Seardel’s shares (ords and N-shares) – that range between 38c to 45c on the JSE – offer a truly massive discount on what appears to be a very tangible net asset value.
The discount is quite understandable, though. While Seardel is still operating as a clothing and textile company (not to mention a toy and consumer electronics business as well), there is no chance the properties can be sold off to realise the underlying value suggested in the balance sheet.
Significant implications in value perception
Of course, Seardel has made some good profits in recent years by flogging off the odd surplus property. There’s been nothing of late in this regard.
But the recent closure of the Frame vertical pipeline will – once the plant and equipment has been shipped off the respective premises – free up properties.
Now the formation of a property leg is obviously aimed at squeezing a return from these properties. Naturally first prize would be to sell off the properties, but I doubt very much Seardel – or its controlling shareholder HCI – will be entertaining cheeky offers that are so typical in economic lulls.
There is also the issue of some continuing textile operations still occupying parts of the properties in question, as is the case (I’m told) in New Germany.
That means Seardel will be looking to rent out vacant buildings to outside tenants, creating a new and, dare I say, much needed revenue stream.
There are some complications in that some buildings were custom built, which means there will have to be an element of redevelopment.
Queen stresses the company is not (like some other industrial giants on the JSE) going to have a property development business on the side.
Still, Queen has estimated that the area available to be rented out will be in excess of 150 000 m² – which is not exactly small change (even for a company that churns over R2.4bn a year in revenue).
While it’s early days (negotiations with prospective tenants are continuing), it will be interesting to gauge the potential of the property leg in the new financial year.
A compelling rental stream will, in my opinion, have some big implications in terms of perceptions of value at Seardel.
For one thing tenanted properties are so much easier to sell, and may well fetch good prices should some buoyancy return to the real estate sector.
Rental streams also underline the indicated value for Seardel’s property portfolio. This should reinforce the notion that even if the clothing and textile operations are facing a frayed future there are heaps of bankable value on the ground (so to speak).
- Fin24.com
