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DARN DIFFICULT

IT WILL BE DARN DIFFICULT, BUT HCI AND BRIMSTONE THINK SA’S RAG TRADE CAN BE PROFITABLY STICHED UP

A last gasp attempt at stitching up a vestige of viability in South Africa’s beleaguered clothing and textiles industry rests, it seems, very much on the shoulders of two Cape-based empowerment investment companies. Brimstone Investment Corporation and Hosken Consolidated Industries (HCI) are both making brave investments and taking fresh initiatives in the local rag trade — an industrial segment largely regarded by investors as a “no-go area”.

HCI is now the controlling shareholder at clothing and textiles conglomerate Seardel after — somewhat surprisingly — underwriting a R300m rescue rights issue needed to placate some worried bankers.

On the other hand, Brimstone is still actively investing in and around its clothing manufacturing arm housed in House of Monatic — which it wants to change into a separately listed fashion brands house over the longer term

More than a few observers feel both HCI and Brimstone may be nsking future returns by “faffing around” in industries that realistically can’t offer much more than frayed rewards to investors. The reality is that for the past dozen years investors in the clothing and textiles sector have really been grasping at threads of hope. Markedly cheaper imported garments and textiles (mainly from the Far East) have all but rendered SA’s clothing and textiles businesses redundant.

Of course, much hinges on the retail trade buying into an arrangement to source more merchandise locally. Currently, it would seem retailers are not too enamoured at suggestions they should risk their margins with a “quota” of local buying (see separate report below).

Perhaps the billion rand question is whether there’s any way clothing and textile manufacturers can sway SA retailers to source more from local manufacturers. Recently appointed Seardel executive Stuart Queen says one of the issues for suppliers in the industry is that the cost of switching to alternative suppliers is minimal. “Therefore, retailers are relentless in trying to source product at the lowest cost — which is understandable from their perspective. We’re not relying on any favours from the retailers and we recognise we need to offer value.”

However, Queen says the value proposition to the retailers goes beyond price alone. “In addition to needing to constantly drive down the cost of production we also need to focus on the other areas of value creation for retailers.” That would mean delivering consistent quality and sizing of garments, shorter lead times and flexible production scheduling to allow retailers to carry optimum stock levels in order to increase stock turn and reduce discounted sales.

“But having said that, if we could ask for one thing from retailers it would be that they act responsibly to ensure all their suppliers are complying with the various laws and that they don’t stock product that has arrived through illegal channels.”

Statistics from Texfed (the official organisation of the SA textile industry) show imports of clothing and textiles have continued unabated since 1995. In the mid-Nineties textiles worth R3,4bn and clothing worth R400m were imported. For 2008, Texfed estimates those values grew to R4,5bn and almost R700m respectively.

But things were not always this threadbare for SA’s manufacturers. Up until the mid-Nineties the JSE still had its very own clothing & textiles board with around 30 listings. In fact, investments in the sector were still very much in vogue in the Sixties, Seventies and Eighties…

But the ensuing years have seen listed contenders disappear — including Unispin, Adonis, Burlington Industries, Coastal Group, Gubb & Inggs, Progress Industries, Sterling Clothing, Pointer Fashionwear, Meritex, Ninian & Lester, Textile Mills, Leegall Clothing, Romatex, Allwear, Asean, Tolaram 2000 and, most recently, Pals Holdings.

Most of the remaining clothing and textile listings, such as Glodina (now housed in industri- 12 al conglomerate KAP), SA Bias Industries (now hosued in Sabvest) and Rex Trueform (now revamped as a clothing retailer rather than manufacturer) only have indirect links with the JSE. The last new listing was AM Moolla in the late Nineties – a tenure that was short and bittersweet.

It wouldn’t be an exaggeration to say that a new clothing and textile listing — no matter how compelling the profit forecasts — would probably not elicit much attention from either professional investors or wide-eyed retail punters. The playing field is now so skewed in favour of cheaper imports from the Far East that only a precisely niched clothing or textiles business could even think of accommodating investors.

So if prospects for the sector are indeed so tattered and torn, why are savvy and street-smart empowerment investors such as Brimstone and HCI so determined to pull on the hair shirt that is SA’s clothing and textiles sector?

Both HCI and Brimstone are empowerment shareholders with impressive track records as regards creating value for shareholders and working deal flows. Both those attributes will come in handy in shaking up their respective investments in the sector.

Frater Asset Management’s Matthew Kreeve says the Seardel rescue deal is typical of the kind of deal an empowerment company like HCI can do. “It’s a deal that levers off their access to capital, managerial skill, substantial Government relationships and their patient approach. Find a cheap entry into a business that needs to be restructured and better run… a business that will benefit from improved interaction with Government agencies and unions.”

Kreeve says keeping stalwarts of the SA manufacturing industry intact is a coup — a development that makes the likelihood of an improved interface with Government going forward even more likely.

Achelon Investment Capital director Shawn Stockigt wonders if it would not be better over the longer term for Brimstone and HCI to unbundle the clothing manufacturing operations. “That way those who want exposure can invest directly in a business that may take a while to turn around and become competitive. That way the clothing manufacturing exposure won’t have an effect on other investments.”

Stockigt reckons the only way to make money in clothing manufacturing is to offer specialised clothing or materials (eg, fire resistant or parachute material). “The key would be to offer quality and service as well as have the capability of doing smaller personalised runs — something that’s helped KAP International’s Glodina business.”

Perhaps the most fascinating aspect of the empowerment initiative in the sector is that Brimstone and HCI are taking two very differentstrategic tacks in their respective bids to squeeze returns out of much maligned sunset industry assets. Subsequently, we have two different reports on HCI and Brimstone’s efforts that — while vastly different — must succeed if SA’s clothing and textiles industry is to survive in tangible form over the longer term.

However, observers feel both HCI and Brimstone are being more philanthropic than business minded about their respective clothing and textiles investments.

HCI CEO Johnny Copelyn summed it up succinctly when chairing a recent Seardel AGM. “Last year a great many clothing and textiles companies got into trouble. Getting those companies out of trouble is a very important project for the country… we can’t just give up on thousands of jobs. There’s a moral imperative to pull together and save the local clothing and textile sector. Seardel will play a leading role in that — and so will HCI.”

As empowerment entities both a responsibility for making social investments. In fact, those efforts should be heartily applauded. But both companies’ investments in the industry are relatively large and can’t be deemed as a “social sideline”.

Shareholders, naturally, could become irked if those investments into moribund and uncompetitive industries start impacting on the bottom line — especially at a time when the markets are not conducive to generating great returns from most investment opportunities.

Source: Finweek – Marc Hasenfuss