SEARDEL’S INTERIM RESULTS to end- September do little to dispel the notion that majority shareholder Hosken Consolidated Investment-. (HCI) will kittle long and hard to make a return from an operational turnaround at the struggling clothing and textile conglomerate. Vestact’s Paul Theron – a well-known market commentator – recently described Seardel as “road kill” in discussing its turnaround prospects.

With Seardel notching up a R50m loss from continuing operations it’s difficult lo argue with Theron’ brutal assessment especially in light of the prevailing macroeeonomic environment (a strong rand and doleful consumer spending).

However, Seardel CEO Stuart Queen reckons the group has made some “tremendous steps forward operationally” – pointing out its results didn’t reflect the full benefits of the turnaround effort.

Finweek does note a couple of positive developments. First, the gross margin – presumably thanks to the closure of large sections of its textile division – has increased from less than 19% to more than 20%. Indeed, the textile division’s continuing operations managed lo show R1Om at operating profit level. The reorganised clothing division still operated at a hefty loss of R4bn.

Second, Seardel’s reduced debt levels (and lower interest rates) saw the net interest paid plunge from R54m at year-end 2008 to a less imposing R30m.

Queen admits liquidity is usually the factor that determines whether a turnaround will be successful or not. He says Seardel has already implemented strict working capital controls, which – coupled with the closure of certain textile divisions – meant working capital levels reduced by almost R250m over the interim period.

Restoring profits at the textile division hinges on efforts to form clusters for the group’s knitting, home textile and non-woven products. It seems Seardel is being realistic in hoping for meaningful improvements in the second half of its financial vear.

Its clothing division, which has been hampered bv strike action and sizeable foreign exchange losses, looks another story entirely. The plan here appears to revolve on consolidating various clothing divisions, though there may be some significance in the appointment of a number of new senior managers from the vehicle industry to take charge of production, quality control, procurement and supply chain management.

While Seardel is also hopeful of reporting profits for those divisions over the next six months, Finweek believes the strong rand will see retailers continuing to source from the East and neighbouring states. Whether HCI will cut into the clothing division’s operations may depend on signs Government might look at ways of offering SA’s clothing manufacturers some protection.

At this juncture we wonder whether HCI, which holds just more than 70% of Seardel. had given thought to delisting the company from the JSE”. There’s no doubt taking the group out of the public eye would make the tough decisions needed to effect a turnaround so much easier to enforce. While HCI could easily afford to pitch a fairly generous offer to Seardel’s shareholders (would 5Oc/share suffice?) thenmay be a number of larger shareholders including former CEO and founder Aaron Scarll who know the underlying value of the company is closer to 200c/share.

However, the truth is that 200c/share net asset value is unlikely to be realised over the short term especially with HCI determined to make an operational turnaround at Seardel, even if it does take several years.

To be frank, there does seem little enthusiasm (at least judging bv Seardel’s share price) outside MCI for a prolonged turnaround effort at operational level. With that in mind MCI wouldn’t be amiss to lonsider dangling some “takeout” bait lo long suffering Seardel minorities.

Source: Finweek – Marc Hasenfuss