The right fit for the ad­ven­tur­ous shop­per

Financial Mail - Investors Monthly - - Analysis - Reitumetse Pitso

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.