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SEARDEL – ON A STEEP ACCESS – RELIEF GRANTED

Is it worth taking an operational view on clothing and textile conglomerate Seardel? Or should investors continue to fixate on the underlying value locked up in the company’s property portfolio?

Seardel managed an R8,5m bottom- line profit (R96m from continuing operations) in the year to end-June — with a much improved showing from the slimmed down textile division being the highlight.

But shareholders scanning Seardel’s annual report carefully may have some questions around the veracity of the operational successes achieved at Seardel since empowerment giant HCI hauled the group out of the clutches of some anxious banks about three years ago.

The annual report shows Seardel earned R78m in government grants in the past financial year.

The grants were included in the “other income” line in Seardel’s income statement — an entry of R155m that includes fair value adjustments to investment properties as well as rental income on consumer electronic s subsidiary Seartec’s long-term debtors book. Take the R78m out of the equation, and Seardel’s operating performance no longer looks that encouraging.

A further concern is that while R78m was accounted for in “other income”, only R39m was actually received from government in cash.

Seardel CEO Stuart Queen explains that while the grant is a cash flow item there is a timing difference in terms of when it is “earned”, and when the grant is “received”.

“One qualifies (or earns it) based on a percentage of value-add through the production process. But to receive the cash you have to demonstrate that you have spent it on things that improve your productivity.”

Queen concedes it would be fair to say that, without the grants, Seardel would be trading in the red at bottom line — though the company would still be in the black in its continuing operations. But he cautions: “It is not a simple calculation in just adding back the R78m. We would have incurred expenses on qualifying projects in anticipation of the incentive and it’s doubtful whether the costs would have been incurred in the absence of the incentive.”

Seardel’s costs are twofold. The first is capitalised expenditure, and in this instance Seardel has modernised its production facilities. The second type of expenditure is non capitalised expenditure, which relates to less tangible efforts like training or investing in production flow management.

Queen points out that the investment in capacity and efficiencies will ultimately drive profitability “particularly within textiles, where the investments are typically more related to capital equipment that is either more efficient or allows us to expand our product offering”.

Continued government grants, the weaker rand and recent developments on the wage front certainly increase the chances of Seardel spinning a profit out of a low-margin business model.

But the next few years will be tricky, and not even the most optimistic punter will be pencilling in a huge number at bottom line.

Meanwhile, Seardel’s property underpinned value — stated as 177c/share in the annual report — is being heavily discounted by a share price of 80c.

While the textile and clothing division fight for survival, it was always going to be reassuring for HCI (which threw more than R250m at Seardel in a rescue rights offer) to have a solid property underpin. Value aside, the growth in rental income from investment properties (valued at R224m) will surely be worth watching.

The recent closure of the Frame Vertical Pipeline has left the company with plenty real estate for development. The annual report notes that on completion of the developments, Seardel will have around 150000m² for letting. About 30000m² has already been let and tenanted, with a further 37421m² still under development.

Aside from growing net asset value, these not insubstantial property initiatives could provide a new lease on cash flows in the ensuing years.

Source: Financial Mail – Marc Hassenfuss