Looking for a gem under the rubble

he value destruction for shareholders in Luxe Holdings, including USbased Riskowitz Value Fund and JSE-listed insurance company

TConduit Capital, over the past few years has been epic. The market capitalisation is less than a third of the dividends the group — in its former guise as Taste Holdings — paid in financial 2014 and 2015.

Taste Holdings made a costly call to bring Domino’s Pizza and Starbucks to SA. Both markets are competitive … even overtraded. Domino’s push for critical mass always looked unconvincing, and Starbucks seemed to battle for traction in terms of finding suitable sites.

After serious losses, both brands were effectively jettisoned, leaving Luxe with its jewellery operations Arthur Kaplan, NWJ and The World’s Finest Watches.

One shouldn’t lose sight of how much capital was burnt. The group initiated a series of rights offers — and raised R132m as recently as early 2019. This followed a R392m capital raising the year before.

Fresh capital will be difficult to garner, unless the main shareholders have deep pockets. So the question is whether Luxe will have more luck eking out a sustainable return with its remaining jewellery operations — these brands were slated for sale during the fast food thrust.

Trading has been tough. But if the depreciation and amortisation costs (R20m) are stripped out, it might be argued Luxe actually made pretax profit of R6m. The cash flow statement shows cash generated from operations at R12.5m and that net cash flow was R5m — or roughly 23c a share.

What might attract deep value investors’ attention is that Taste states its equity at R144m — more than 600c a share. IM calculates a more tangible equity number — stripping out rights of use assets, intangibles and goodwill — of R75m. This is equal to about 340c a share, and should offer some solace if trading conditions for jewellery remain dull.

Luxe said that in September and October same store sales exceeded expectations. This needs to be viewed in light of the economic impasse. Jewellery is not essential; it might be a while before it revives.

Luxe is erring on the side of caution with cost containment, modest capital expenditure, cash preservation and margin reinforcement. A balance sheet that can endure fickle trading is essential.

Second-half trading will,

nonetheless, be fascinating to gauge. The group noted: “Due to the seasonality of the business, we expect sales and profits to be more heavily weighted in the second half of the financial year with Black Friday, Christmas and post-Christmas.”

Adventurous small cap punters need to decide whether the well-established jewellery brands are worth markedly more than Luxe’s market value.

Or, perhaps more importantly, whether dour trading conditions will continue to erode these brands’ value.

It could be a while before anyone gets excited about Luxe — and investors can take a pointer from the prevailing sentiment reserved for fashion retailers such as TFG or Truworths International.

But the market, which can be overly cynical in its pandemic ponderings, might mark Luxe down to levels far from fiscal reality. While IM was writing this article the share traded as low as 71c, for a market value of just R16m.

It’s worth remembering Taste paid R85m for Arthur Kaplan alone, more than five times the market value of the group at the time of writing. IM suspects Arthur Kaplan would fetch more than R16m if offered up for sale (again).

IM would not be putting its life savings into Luxe. But a speculative flutter might be worthwhile if the SA economy ever recovers.