King spots the gap to take SA textiles into new territory
'You'll find more customs inspectors at Heathrow than in the whole of SA. Illegal imports mar the balance of payments'
SPOT the opportunity for South African textile producers: Mervyn King of Frame has. The country is not subject to quota restrictions in the export of goods to America, Europe and elsewhere, but many Eastern countries are.
Imagine the benefits if an Eastern company were to tie in with Frame, and send it the yarn for finishing and exporting to international customers.
"It does not take a rocket scientist to see that this is our marketing advantage," says King, who is not the man to suggest such a possibility lightly.
King says that following Frame's purchase of 51% of Romatex, the consolidated net asset value of Frame is 2 508c, compared with the market price of 900c. The cash content of R130-million alone accounts for almost R5 a Frame share. Gross sales will reach R1,2-billion this year.
King notes that Romatex will have a negative impact on the Frame earnings for the first year. However, "New brooms will sweep clean", he assures investors. Romatex has two broad businesses: Floor Coverings and Hextex account for 60% of turnover, and Berg River Textiles and Romatex Home Textiles the balance. Berg River and Home Textiles are cotton-based businesses which fit snugly into Frame's business.
"There will be some rationalisation. Discussion is under way with management but nothing will be done in the short term. We'll do things carefully."
The acquisition of Romatex suggests confidence in the future of textiles. King says that north of South Africa, near-economic collapse has led to the closure of manufacturing businesses. This has opened new markets which did not exist a few years ago.
"The world is forming itself into trade blocs. Our Government says it may take up to eight years, but I can assure you that one will form between South and east Africa and the Indian Ocean islands.
"Frame will be the textile leader. It already has world-class human resources and state of the art plant. Textiles manufacture is technology-driven, not labour-driven."
When King took over at Frame in 1988, the sprawling group employed 23 000. Now, its manufacturing capacity is still 87% of 1998's, with only 5 000 staff.
The amount of space used is dramatically lower. Frame is currently replacing 400 looms with 142 new ones which will occupy an eighth of the space and require 70% fewer staff. Property is therefore freed for development. King says the capital investment was made before the rand's collapse.
King's talk was part of a presentation by the Seardel group to members of the Investment Analysts Society. Seardel is one of the few shares to have a dividend yield (4,9%) greater than its price-earnings ratio of 4,2. Having hit 325c early in the year, Seardel lost 60% of its value in only five months, but has since picked up a touch to 190c. Seardel's net asset value is conservatively stated at 400c. Regrettably, I tipped Seardel (N) as a potential winner for 1996 - perhaps there's still time for it to surpass the starting price of 220c. Chairman Aaron Searll, who founded the group with the R500 purchase of two thirds of Elatta Manufacturing with annual turnover of R31 156 in 1957, rightly says Seardel is a substantial group.
Turnover will approach R3-billion in the current financial year. It has large market shares in men's, women's and children's apparel and textiles, augmented by Seartec's Sharp electronic goods and Prima Toys.
Searll welcomes the improved vigilance of South Africa's Customs and Excise teams in intercepting the flood of illegal imports, especially clothing, arriving duty-free throughout the country.
"The Minister of Finance acknowledges the problem, but there are more customs inspectors at Heathrow airport alone than in the whole of South Africa. These imports are creating our balance of payments problem whereby foreign reserves are only sufficient to cover one month's imports.
"Proper control over imports could alleviate the problem. What's happening is nothing short of economic sabotage," says Searll.
An eight-day strike will have an effect on the first quarter's results, but Seardel is projecting pre-tax profit of R137-million in the year to June 1997, about 46c a share. While this is almost unchanged on last year, the company's net cash position after years of gearing will result in a reduction in dividend cover from 5 times to 3,5, about 12c. On a share price of only 190c, a forward yield of more than 6% looks attractive.
Seardel's cumbersome capital structure has been dismantled, the pyramid unbundled and now only ordinary and N shares are quoted.
After the presentation, Frame's price added 75c to 925c and Seardel N 6c to 186c.
I prefer Frame: King's optimism has me convinced on its prospects.