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In late 2009 Finweek reported how Hosken Consolidated Investments’ CEO Johnny Copelyn vented considerable frustration in his annual review about the market’s cynical response to its investment in then debt-laden clothing and textile conglomerate Seardel Investment Corporation [JSE:SER]. Writing in HCI’s annual report, Copelyn took a swipe at an unnamed analyst’s downbeat pronouncement on the black empowerment company’s R250m investment in Seardel – which at that point looked operationally brittle.
Copelyn wrote: “To add insult to injury, one of the very few analysts writing reports on HCI came to the view that it was time to double the discount that should be placed on our shares because we had bought an asset in the clothing industry and this showed a complete lack of focus by management.”
What really got Copelyn’s goat was HCI had actually acquired assets worth 200c/share net asset value for 50c/share. What’s more, HCI’s 71% stake in Seardel – secured by underwriting a R300m rights issue that fended off some very concerned banks – was hedged to a R50m downside and 80% of the upside on 500m shares in the company.
Finweek itself got a taste of the scepticism reserved for Seardel when we picked it as one of our turnaround stocks in a cover story in late 2009. During a discussion on the turnaround candidates on CNBC Africa, one analyst dismissed Seardel as “road kill”.
That “road kill” tag might now be a little difficult to hang on Seardel following some rather encouraging (and perhaps unexpected) numbers for the year to end-March 2011. What’s transpiring at Seardel might well rank as one of the great turn-around stories of the past two decades: an empowerment company is driving a development all the more encouraging as the process has two former union stalwarts at the helm.
Profit from continuing operations – driven by its textiles division – came in at R96m. Even if the R87m of losses generated by discontinued operations are included, Seardel managed to put R8,5m on its bottom line.
Shareholder activist Chris Logan, of Opportune Investments, says if ever a turnaround deserves to be successful it’s this one. “The Seardel/HCI team have devoted considerable energy and resources in saving Seardel and trying to deal with the truly horrible industry fundamentals.”
Logan says without trying to diminish the ongoing problems faced by its clothing division, Seardel – increasingly weighted towards property – is beginning to look commercially viable. The operational performance in Seardel’s core textile and clothing divisions must be seen against the backdrop of weak trading conditions across the textile and clothing fronts, as well as a prolonged period of rand strength (which cuts export revenue and drives imports of cheaper clothing lines).
Seardel also had to contend with a marked increase in cotton prices, which thankfully have wound down to around US$1,50/lb from a peak of $2,20/lb.
The operational performance makes Copelyn’s earlier contention that Seardel (over time) “ought to be a significant source of new profit contribution” for HCI sound far less far fetched.
One analyst admitted the results represented an “eat my hat” moment. “I didn’t think there was a remote chance of an operational turnaround… Seardel always looked like an asset strip opportunity for HCI.”
The most common market version of HCI’s efforts at Seardel centred on a suspicion the empowerment investment giant was co-opted into investing by the SA Clothing & Textile Workers’ Union – which are shareholders in both HCI and Seardel. If it was a philanthropic (read: “grudge”) gesture, then at least HCI invested R250m in a rescue rights issue knowing there was sufficient security in the company’s property portfolio to more than compensate for any losses that might be suffered should Seardel’s operations not respond to turn-around treatment.
Indeed, its property portfolio (which is dealt with in some detail separately in this report) still provides a comforting underpin to Seardel’s 177c/share NAV.
But there seems enough evidence from its latest set of results that Seardel’s traditional operations – in particular, its textile division – still has some legs.
As things stand, the scaled-down Seardel (remember: a large chunk of Frame was shut and the clothing segment’s brassiere manufacturing capacity closed last year) generates turnover of around R2,4bn. If we strip out the R450m contribution from toys (Prima) and electronics (Sharp), then the “manufacturing” revenue lines are split almost equally between textiles and clothing.
The big difference is that the textile cluster – which is far less labour-intensive, with 2 000 employees against 8 000 for clothing – has a fairly decent margin. In the year to end-March textiles turned in a little more than R1bn of revenue into pre-tax profits of R56m – a net trading margin of 5,5%.
Seardel CEO Stuart Queen reckons the net margin can be shifted to more than 7%, which – if we presume modest turnover growth in the years ahead – means textiles has the potential to produce at least R80m in pre-tax profits.
Unfortunately for Seardel, its clothing manufacturing segment is another proposition entirely. Year to end-March results showed the division’s turnover from continuing operations of R1bn being worn away into a loss of R21m at pre-tax levels. While that’s a slight improvement on the previous year’s R26m loss, the market might have been expecting clothing to shift closer to break-even.
However, the clothing division faces serious challenges to attain viability – most notably, competition from offshore suppliers, non-compliant South African manufacturers that don’t pay the minimum wage and punitive import duties on fabrics and trims.
While the turnaround in its textile division surely precludes making dire pronouncements about its clothing division, it really seems Seardel will need a radical revamp to achieve a sustainable turnaround.
The biggest hitch for Seardel is the bulk of its clothing cluster falls within what’s described as “higher wage areas” such as Cape Town. Changing work arrangements won’t be easy – with Seardel on previous occasions bemoaning the lack of co-operation from workers. It wouldn’t be surprising to see Seardel shutting down more clothing clusters – even though Queen is at pains to stress the company is determined to avoid more job losses.
However, Queen appears to concede its clothing cluster isn’t going to spin vast profits anytime soon, noting that the short-term strategy revolves around sustaining jobs and ensuring the division doesn’t cost Seardel money. Where clothing may score over the longer term is by building up its brands. Seardel recently launched a brand-focused business unit – Brand Identity – in a bid to manage the range of apparel names (swimwear brand Speedo and the recently acquired 46664 brand being the best known).
Finweek – which has written extensively about Rex Trueform’s successful transformation from a clothing manufacturer to a fashion retailer – wonders whether Seardel also has serious retail ambitions. Queen cautions Seardel is currently only contemplating stand-alone boutiques as an exercise to market its brands. “We aren’t looking at stand-alone stores as genuine revenue spinners but more as a marketing exercise. We don’t want to be in competition with the retailers we’re supplying to…”
Perhaps the brands initiative does suggest the clothing manufacturing cluster will be cut down to the better known brands, a development that would seriously curtail turnover but hasten efforts to put the bottom line back into the black.
R1bn ‘road kill’
AT THIS STAGE it’s probably a little premature to claim the cynics were wrong to question HCI’s involvement at Seardel. Some pundits – such as Brimstone deputy chairman Fred Robertson – would argue empowerment companies have a duty (or a social responsibility) to accommodate one or two difficult investments if it means sustaining jobs.
Even if HCI has enhanced its status as a responsible black empowerment investor, CEO Johnny Copelyn’s argument about the economic merits of HCI investing in Seardel can no longer be dismissed.
Looking past the reassuring property underpin there’s ample cause for enthusiasm in studying Seardel’s operational cash flow. The cash flow from continuing operations was R114m – equivalent to 16c/share. While net cash flow was negative, you have to consider the (temporary) effects of higher cotton prices on working capital and that a chunky R85m was spent on upgrading property, plant and equipment.
The investment in property is key, because (see separate report on property) Seardel is looking for sizeable rental flow in years to come.
The balance sheet remains in reasonable shape – especially considering scarcely three years ago the banks were ready to pull the plug on Seardel. The “acid test” doesn’t prompt too many worries, with current assets of R1,1bn comfortably covering current liabilities of R775m.
Although finance costs are still a distracting R35m (with short-term debt sitting at around R350m), CEO Stuart Queen dismisses any notions Seardel (which has seen its share price more than double over the past 12 months) would consider a rights issue to cull remaining debt. That might say a lot about how HCI feels about Seardel’s cash flow prospects going forward.
A scorecard for HCI makes impressive reading. Its initial investment of R250m has grown roughly 70% to R425m – a figure that excludes the R4m/year HCI scores in management fees from the clothing and textile conglomerate. On a tangible net asset basis, HCI’s investment in Seardel is worth close to R1bn – which isn’t too shabby for an investment in “road kill”.
Finweek reckons there’s a whole lot more to come for HCI… especially with substantial legal claims against the estate of Seardel founder and former CEO, the late Aaron Searll, still ongoing (see accompanying box).
PROPERTY INVESTMENTS
Property pinned
value
SEARDEL, which sits with R900m in property plant and equipment, now has a separate entry in the balance sheet for “investment properties”. While the bulk of its property portfolio still houses clothing and textile plants, investment properties are listed as being worth R224m and should give some indication of how serious Seardel is about building a meaningful property offering.
There might be some excitement in that Seardel’s property division generated revenue of R65m in the year to end-March 2007. But the bulk of that comprises inter-segment transactions, with the real rental revenue from investment properties being closer to R7m. However, that R7m should be seen in context. Its new-look investment property division hasn’t been formally running for more than a year and developments are still at an early stage, with only 30 000sq m let. Last year the division only managed R341 000 in rental revenue, which shows just how far the segment has come over a year.
CEO Stuart Queen says Seardel has 150 000sq m available for rental. Using R35/sq m as an average let, Queen reckons over the medium term Seardel’s investment property division could generate rental streams of around R60m. That would certainly add a reassuring diversity to Seardel’s clothing and textile core – which currently is only lightly flavoured with contributions from Sharp Electronics and Prima Toys & Leisure.
SEARLL LEGACY
Searll legacy called up
ALTHOUGH MOST PUNTERS believed the matter would fade away, Seardel and controlling shareholder Hosken Consolidated Investments (HCI) are still actively pursuing a more than R300m claim against the estate of Seardel founder and former CEO, the late Aaron Searll. Finweek understands the matter is currently in arbitration, which should be concluded by early June.
The claims stem from mainly property transactions undertaken during Searll’s tenure that have prejudiced Seardel. Those allegedly include Seardel buying properties and selling the same properties back to Searll at questionable prices. There’s also a contention properties owned by the Searll family and rented to Seardel should perhaps not have been bought by the family but rather the company.
Finweek understands the Searll family has offered to settle for a sum of more than R50m, but that settlement was rejected by Seardel and HCI. Because the matter is sub judice it wasn’t possible to clarify rumoured developments. But one source noted: “Johnny (Copelyn, CEO of HCI) isn’t letting this one go and is going for broke…”
Former trade unionist Copelyn is well known as an uncompromising and street-smart businessman (how else do you build up SA’s largest casino empire from scratch in just a few years?) and wouldn’t be doggedly pursuing legal action if there wasn’t a better-than-average chance of winning the case.
A settlement of R300m is significant in Seardel’s life. It’s equivalent to around 40c/share and would eradicate the company’s overdraft.
Part of the settlement process could see the Searll family writing off R100m to Seardel. When Seardel concluded its rights issue and subsequent restructuring, its assets secured borrowings from commercial banks. But the Searll loan was conspicuously left unsecured.
Opportune Investments’ Chris Logan says any chance of Seardel being successful in its R300m claim against former company directors may excite the market.
KWV HOLDINGS
A thread for a KWV turnaround
AS POINTED OUT in a recent issue of Finweek, Hosken Consolidated Investments (HCI) has indicated its intention to buy out liquor group KWV Holdings. HCI currently owns 34,9% of KWV, having recently bought out the anchor shareholding held by PSG’s Zeder Investments.
KWV has been a notorious underperformer and its shareholders might take heart at developments at Seardel, in that HCI is capable of executing profitable change… even in a specialist industry where it may lack experience.
There’s a common thread between Seardel and KWV: both companies are/were burdened with legacy issues at management level, operational costs are too high for the weak markets in which they ply their respective businesses and both are asset rich (especially in properties). As Seardel was under the control of the Searll family, so KWV may still carry the burden of an inefficient and stubborn legacy that current management won’t (or can’t) tamper with too much. Of course, a major shareholder – that demands decent returns from a sizeable investment – may not handle such issues with kid gloves. HCI wasted no time in shutting down Seardel’s corporate HQ in Constantia, shifting it to a clothing factory in unfashionable Epping.
Management structures were also quickly shaken up and dead wood removed.
Most importantly, HCI had the guts to cut out less viable business units, something the previous management was loath to do (either for fear of a union backlash or not wanting to shrink the empire).
The Seardel experience suggests if HCI gains outright control of KWV there could be major changes afoot at La Concorde.
Copelyn wrote: “To add insult to injury, one of the very few analysts writing reports on HCI came to the view that it was time to double the discount that should be placed on our shares because we had bought an asset in the clothing industry and this showed a complete lack of focus by management.”
What really got Copelyn’s goat was HCI had actually acquired assets worth 200c/share net asset value for 50c/share. What’s more, HCI’s 71% stake in Seardel – secured by underwriting a R300m rights issue that fended off some very concerned banks – was hedged to a R50m downside and 80% of the upside on 500m shares in the company.
Finweek itself got a taste of the scepticism reserved for Seardel when we picked it as one of our turnaround stocks in a cover story in late 2009. During a discussion on the turnaround candidates on CNBC Africa, one analyst dismissed Seardel as “road kill”.
That “road kill” tag might now be a little difficult to hang on Seardel following some rather encouraging (and perhaps unexpected) numbers for the year to end-March 2011. What’s transpiring at Seardel might well rank as one of the great turn-around stories of the past two decades: an empowerment company is driving a development all the more encouraging as the process has two former union stalwarts at the helm.
Profit from continuing operations – driven by its textiles division – came in at R96m. Even if the R87m of losses generated by discontinued operations are included, Seardel managed to put R8,5m on its bottom line.
Shareholder activist Chris Logan, of Opportune Investments, says if ever a turnaround deserves to be successful it’s this one. “The Seardel/HCI team have devoted considerable energy and resources in saving Seardel and trying to deal with the truly horrible industry fundamentals.”
Logan says without trying to diminish the ongoing problems faced by its clothing division, Seardel – increasingly weighted towards property – is beginning to look commercially viable. The operational performance in Seardel’s core textile and clothing divisions must be seen against the backdrop of weak trading conditions across the textile and clothing fronts, as well as a prolonged period of rand strength (which cuts export revenue and drives imports of cheaper clothing lines).
Seardel also had to contend with a marked increase in cotton prices, which thankfully have wound down to around US$1,50/lb from a peak of $2,20/lb.
The operational performance makes Copelyn’s earlier contention that Seardel (over time) “ought to be a significant source of new profit contribution” for HCI sound far less far fetched.
One analyst admitted the results represented an “eat my hat” moment. “I didn’t think there was a remote chance of an operational turnaround… Seardel always looked like an asset strip opportunity for HCI.”
The most common market version of HCI’s efforts at Seardel centred on a suspicion the empowerment investment giant was co-opted into investing by the SA Clothing & Textile Workers’ Union – which are shareholders in both HCI and Seardel. If it was a philanthropic (read: “grudge”) gesture, then at least HCI invested R250m in a rescue rights issue knowing there was sufficient security in the company’s property portfolio to more than compensate for any losses that might be suffered should Seardel’s operations not respond to turn-around treatment.
Indeed, its property portfolio (which is dealt with in some detail separately in this report) still provides a comforting underpin to Seardel’s 177c/share NAV.
But there seems enough evidence from its latest set of results that Seardel’s traditional operations – in particular, its textile division – still has some legs.
As things stand, the scaled-down Seardel (remember: a large chunk of Frame was shut and the clothing segment’s brassiere manufacturing capacity closed last year) generates turnover of around R2,4bn. If we strip out the R450m contribution from toys (Prima) and electronics (Sharp), then the “manufacturing” revenue lines are split almost equally between textiles and clothing.
The big difference is that the textile cluster – which is far less labour-intensive, with 2 000 employees against 8 000 for clothing – has a fairly decent margin. In the year to end-March textiles turned in a little more than R1bn of revenue into pre-tax profits of R56m – a net trading margin of 5,5%.
Seardel CEO Stuart Queen reckons the net margin can be shifted to more than 7%, which – if we presume modest turnover growth in the years ahead – means textiles has the potential to produce at least R80m in pre-tax profits.
Unfortunately for Seardel, its clothing manufacturing segment is another proposition entirely. Year to end-March results showed the division’s turnover from continuing operations of R1bn being worn away into a loss of R21m at pre-tax levels. While that’s a slight improvement on the previous year’s R26m loss, the market might have been expecting clothing to shift closer to break-even.
However, the clothing division faces serious challenges to attain viability – most notably, competition from offshore suppliers, non-compliant South African manufacturers that don’t pay the minimum wage and punitive import duties on fabrics and trims.
While the turnaround in its textile division surely precludes making dire pronouncements about its clothing division, it really seems Seardel will need a radical revamp to achieve a sustainable turnaround.
The biggest hitch for Seardel is the bulk of its clothing cluster falls within what’s described as “higher wage areas” such as Cape Town. Changing work arrangements won’t be easy – with Seardel on previous occasions bemoaning the lack of co-operation from workers. It wouldn’t be surprising to see Seardel shutting down more clothing clusters – even though Queen is at pains to stress the company is determined to avoid more job losses.
However, Queen appears to concede its clothing cluster isn’t going to spin vast profits anytime soon, noting that the short-term strategy revolves around sustaining jobs and ensuring the division doesn’t cost Seardel money. Where clothing may score over the longer term is by building up its brands. Seardel recently launched a brand-focused business unit – Brand Identity – in a bid to manage the range of apparel names (swimwear brand Speedo and the recently acquired 46664 brand being the best known).
Finweek – which has written extensively about Rex Trueform’s successful transformation from a clothing manufacturer to a fashion retailer – wonders whether Seardel also has serious retail ambitions. Queen cautions Seardel is currently only contemplating stand-alone boutiques as an exercise to market its brands. “We aren’t looking at stand-alone stores as genuine revenue spinners but more as a marketing exercise. We don’t want to be in competition with the retailers we’re supplying to…”
Perhaps the brands initiative does suggest the clothing manufacturing cluster will be cut down to the better known brands, a development that would seriously curtail turnover but hasten efforts to put the bottom line back into the black.
R1bn ‘road kill’
AT THIS STAGE it’s probably a little premature to claim the cynics were wrong to question HCI’s involvement at Seardel. Some pundits – such as Brimstone deputy chairman Fred Robertson – would argue empowerment companies have a duty (or a social responsibility) to accommodate one or two difficult investments if it means sustaining jobs.
Even if HCI has enhanced its status as a responsible black empowerment investor, CEO Johnny Copelyn’s argument about the economic merits of HCI investing in Seardel can no longer be dismissed.
Looking past the reassuring property underpin there’s ample cause for enthusiasm in studying Seardel’s operational cash flow. The cash flow from continuing operations was R114m – equivalent to 16c/share. While net cash flow was negative, you have to consider the (temporary) effects of higher cotton prices on working capital and that a chunky R85m was spent on upgrading property, plant and equipment.
The investment in property is key, because (see separate report on property) Seardel is looking for sizeable rental flow in years to come.
The balance sheet remains in reasonable shape – especially considering scarcely three years ago the banks were ready to pull the plug on Seardel. The “acid test” doesn’t prompt too many worries, with current assets of R1,1bn comfortably covering current liabilities of R775m.
Although finance costs are still a distracting R35m (with short-term debt sitting at around R350m), CEO Stuart Queen dismisses any notions Seardel (which has seen its share price more than double over the past 12 months) would consider a rights issue to cull remaining debt. That might say a lot about how HCI feels about Seardel’s cash flow prospects going forward.
A scorecard for HCI makes impressive reading. Its initial investment of R250m has grown roughly 70% to R425m – a figure that excludes the R4m/year HCI scores in management fees from the clothing and textile conglomerate. On a tangible net asset basis, HCI’s investment in Seardel is worth close to R1bn – which isn’t too shabby for an investment in “road kill”.
Finweek reckons there’s a whole lot more to come for HCI… especially with substantial legal claims against the estate of Seardel founder and former CEO, the late Aaron Searll, still ongoing (see accompanying box).
PROPERTY INVESTMENTS
Property pinned
value
SEARDEL, which sits with R900m in property plant and equipment, now has a separate entry in the balance sheet for “investment properties”. While the bulk of its property portfolio still houses clothing and textile plants, investment properties are listed as being worth R224m and should give some indication of how serious Seardel is about building a meaningful property offering.
There might be some excitement in that Seardel’s property division generated revenue of R65m in the year to end-March 2007. But the bulk of that comprises inter-segment transactions, with the real rental revenue from investment properties being closer to R7m. However, that R7m should be seen in context. Its new-look investment property division hasn’t been formally running for more than a year and developments are still at an early stage, with only 30 000sq m let. Last year the division only managed R341 000 in rental revenue, which shows just how far the segment has come over a year.
CEO Stuart Queen says Seardel has 150 000sq m available for rental. Using R35/sq m as an average let, Queen reckons over the medium term Seardel’s investment property division could generate rental streams of around R60m. That would certainly add a reassuring diversity to Seardel’s clothing and textile core – which currently is only lightly flavoured with contributions from Sharp Electronics and Prima Toys & Leisure.
SEARLL LEGACY
Searll legacy called up
ALTHOUGH MOST PUNTERS believed the matter would fade away, Seardel and controlling shareholder Hosken Consolidated Investments (HCI) are still actively pursuing a more than R300m claim against the estate of Seardel founder and former CEO, the late Aaron Searll. Finweek understands the matter is currently in arbitration, which should be concluded by early June.
The claims stem from mainly property transactions undertaken during Searll’s tenure that have prejudiced Seardel. Those allegedly include Seardel buying properties and selling the same properties back to Searll at questionable prices. There’s also a contention properties owned by the Searll family and rented to Seardel should perhaps not have been bought by the family but rather the company.
Finweek understands the Searll family has offered to settle for a sum of more than R50m, but that settlement was rejected by Seardel and HCI. Because the matter is sub judice it wasn’t possible to clarify rumoured developments. But one source noted: “Johnny (Copelyn, CEO of HCI) isn’t letting this one go and is going for broke…”
Former trade unionist Copelyn is well known as an uncompromising and street-smart businessman (how else do you build up SA’s largest casino empire from scratch in just a few years?) and wouldn’t be doggedly pursuing legal action if there wasn’t a better-than-average chance of winning the case.
A settlement of R300m is significant in Seardel’s life. It’s equivalent to around 40c/share and would eradicate the company’s overdraft.
Part of the settlement process could see the Searll family writing off R100m to Seardel. When Seardel concluded its rights issue and subsequent restructuring, its assets secured borrowings from commercial banks. But the Searll loan was conspicuously left unsecured.
Opportune Investments’ Chris Logan says any chance of Seardel being successful in its R300m claim against former company directors may excite the market.
KWV HOLDINGS
A thread for a KWV turnaround
AS POINTED OUT in a recent issue of Finweek, Hosken Consolidated Investments (HCI) has indicated its intention to buy out liquor group KWV Holdings. HCI currently owns 34,9% of KWV, having recently bought out the anchor shareholding held by PSG’s Zeder Investments.
KWV has been a notorious underperformer and its shareholders might take heart at developments at Seardel, in that HCI is capable of executing profitable change… even in a specialist industry where it may lack experience.
There’s a common thread between Seardel and KWV: both companies are/were burdened with legacy issues at management level, operational costs are too high for the weak markets in which they ply their respective businesses and both are asset rich (especially in properties). As Seardel was under the control of the Searll family, so KWV may still carry the burden of an inefficient and stubborn legacy that current management won’t (or can’t) tamper with too much. Of course, a major shareholder – that demands decent returns from a sizeable investment – may not handle such issues with kid gloves. HCI wasted no time in shutting down Seardel’s corporate HQ in Constantia, shifting it to a clothing factory in unfashionable Epping.
Management structures were also quickly shaken up and dead wood removed.
Most importantly, HCI had the guts to cut out less viable business units, something the previous management was loath to do (either for fear of a union backlash or not wanting to shrink the empire).
The Seardel experience suggests if HCI gains outright control of KWV there could be major changes afoot at La Concorde.
