The right fit for the adventurous shopper

Retail shares on the JSE — especially those counters specialising in fashion — usually demand premium prices. Threadbare trading conditions have spoiled market ratings in the past 12 months, but at the time of writing, Mr Price still commanded a 23 times earnings multiple, Foschini 17, and Truworths 15. All offer fairly compelling dividend yields.

For the more adventurous (and patient) shopper, however, the biggest retail bargain might be found in small fashion retailer Rex Trueform. Rextru owns the Queenspark chain but also holds valuable property interests and a sizeable cash balance.

After two years of losses, the company stitched together a remarkable comeback in the year to end-June — reporting a 20% hike in operating profits to R290m off a 7% increase in revenue to R536m. Bottom line came in at 115c/share (from a loss of 49c/share previously).

This puts Rextru on a trailing earnings multiple of just 10 times — though it must be pointed out that the share (which comprises ordinary shares and low voting N-shares) is hopelessly illiquid.

Some market watchers believe the turnaround came as a relief to the Shub family, which controls Rextru via the archaic N-share structure and through the African & Overseas pyramid holding company. If the losses had persisted there was a chance Rextru might have resorted to raising fresh capital from shareholders, loosening the tight control structure.

Independent analyst Syd Vianello says: “The only way to get rid of the ownership structure would be if the company runs out of cash. The chances of that happening are now remote.”

In truth, Rextru’s core fashion hub, though profitable again, is still slightly shabby in its operating performance. What jerked up bottom-line profits in the financial year were the company’s unsung real estate interests. Thanks to rental income and the sale of a noncore property, Rextru’s “other income” tripled from R5, 6m to R17m.

It’s not good form to detract from a turnaround, and Rextru CEO Catherine Radowsky must be credited with dragging Queenspark back into the black by containing costs, innovative buying and improving operating structures.

But with only 56 stores in SA (along with three franchise stores operating in Namibia, Botswana and Kenya) there is a worrying lack of scale at Queenspark at a time when competition has intensified with more “international” fashion retailers — like TopShop, Zara and Cotton On — entering the local market.

Only four new stores are planned for the coming year — which seems underwhelming compared to its larger listed rivals (some of which are acquiring new formats and brands).

Major shareholder, economically speaking, Brimstone Investment Corp has registered its frustration that its attempts to contribute to Rextru’s growth strategies have been futile.

Brimstone director TJ Tapela says suggestions have included extending the Queenspark chain to potentially viable shopping centres, acquiring a small shoe retailing outlet and selling off unprofitable buildings.

The Shub family has stubbornly fended off efforts by major shareholders to influence

the business, but the new reality in South African fashion retailing could eventually force a corporate change.

Vianello believes there is a distinct possibility the Shub family could weigh up a buyout as more foreign investors seek to get instant exposure to the vibrant South African fashion retailing hub. “Rextru’s advantage is a nicely positioned footprint of stores in major shopping malls. Foreigners keen to get instant exposure might approach the Shubs with a buyout offer. The offer won’t necessarily be for the Queenspark brand, but rather for its store footprint.”

Radowsky has discounted plans for selling Queenspark or even merging with other retail groups. But a premium priced offer might sway this defensive stance — unless, of course, the Shub family has its own plans to make a buyout offer to the rest of Rextru’s shareholders.

Either way, Rextru looks a company with more long-term upside than downside. Even if no corporate action transpires and operating performance remains uninspired, investors can take comfort in a stout balance sheet. There is a strong property underpin (R72m in investment property alone) and a reassuring cash holding (R80m) that combined is worth more than 800c/share.