Fashion retailer or investment company?

Rex Trueform (Rextru) is one of the JSE’s great transformation stories. Back in the 1980s the group, started and then controlled by the Shub family, took an inspired decision to supplement its core clothing manufacturing operations with a factory store to sell garments to the public.

This proved lucrative, and soon the Queenspark fashion retailing brand was being expanded to new locales. So, unlike the many other JSElisted clothing manufacturers that unravelled when the flow of imported cheaper clothing could not be stanched, Rextru had a new lease of corporate life.

Fast-forward to the present, and Rextru — now under the control of BEE pioneer Marcel Golding — is undergoing another transformation. The reliable cash flows from the Queenspark chain are being harnessed to build out a broader investment vehicle, which now also takes in specialist media operations, property development and water services.

It’s early days with regard to the morphing of these with the fashion retailing interests that are still generating the bulk of Rextru’s keep.

But it is interesting to try to slap a value on Rextru, which has highly illiquid ordinary shares and slightly more liquid (but low-voting) N shares.

Do investors still compare Rextru to other fashion retailers, or is it now more appropriate to look at the group as an investment holding company?

IM suggests both measures are appropriate for those who are willing to test their patience by trying to pick up meaningful lines of Rextru stock and take a longer-term view of the company’s new diversification strategy.

If there is a tendency to view Rextru as an investment company, the stated NAV of R20.50 which is a tangible measure stripping out a smidgen of goodwill is a key figure. That means the most recently traded N share price is discounting intrinsic NAV by 25%.

A few years ago that might have been par for the course for an investment holding company, but these days discounts applied to intrinsic NAV on the JSE are a lot wider. A lot.

Remgro, the doyen of investment holding companies, is now trading at close to a 50% discount to intrinsic NAV. Other smaller investment counters, which probably provide a better comparison with Rextru, are at similarly wide discounts, most notably Brimstone, Trematon and Brait.

If investors still consider an “operational value” for Rextru as more appropriate, it becomes much more interesting.

Revenue generated from Queenspark, which has now stretched to 102 stores, crept down 1% to R383m. This is not entirely unexpected, considering slack consumer demand in the higher interest rate environment and the dour overall economy. The gross margin sank to 46.1% from 48.5%, the drop in gross profit being limited to 5% at R177m. But net profit slumped from R52m to just R8m.

Directors’ commentary accompanying the interim results does not explain the collapse in net profit at Queenspark, but the income statement suggests a marked increase in operating costs, which might, at least partly, stem from the opening of nine new stores. Hopefully, these new stores will chip in with profits for the second half.

The property segment presents a happier picture, with revenue up 33.9% to more than R41m (2022: R30.8m). However, this was driven by the fairly recent acquisition of a 51% interest in Belper Investments (which owns five industrial properties in Epping, Cape Town) and the acquisition of an industrial property in Epping. This segment realised a net profit after tax of R8m (2022: R7.6m).

The media and broadcasting revenue increased by 3.6% to R58.3m but yielded markedly lower net profit after tax of R2.2m (2022: R5.3m). Rextru’s water infrastructure investment yielded an equity-accounted profit of R4.3m and a net profit after tax of R7.6m.

IM suspects that under current conditions, Rextru would be hard-pressed to achieve much more than another 100c a share in headline earnings in the second half. This would put Rextru on a forward earnings multiple of 7.5 which, though modest, is richer than the traditional low single-digit multiple placed on the share in recent years.

That said, history will show that Rextru’s fashion retailing segment has had its ups and downs, and probably more ups than downs. And when it repairs margins, the effect on profitability is quite pronounced.

The important factor is that the group remains cash generative, with operating cash flow of nearly R90m, equivalent to more than 400c a share. Cash on hand sits at R65m, or about 300c a share.

In other words, there is no real stress on the balance sheet if the recently acquired media assets, like Telemedia, take a little longer to deliver on promise.

While Rextru remains an interesting work in progress, there is no real incentive for rushing into the share. In fact, considering the jaundiced sentiment reserved for small caps, Rextru might offer better value down the line.