| Thu 26 Mar 2009, 16:35 | | SER/SRN - Seardel - Unaudited group interim report to shareholders for the six |
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SER SRN
SER
SER/SRN - Seardel - Unaudited group interim report to shareholders for the six
months ended 31 December 2008
SEARDEL INVESTMENT CORPORATION LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1968/011249/06)
Share code: SER ISIN Code: ZAE000029815
Share code: SRN ISIN Code: ZAE000030144
("Seardel" or "the company")
UNAUDITED GROUP INTERIM REPORT TO SHAREHOLDERS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008.
INCOME STATEMENT YEAR ENDED
SIX MONTHS ENDED 31 DECEMBER 30 JUNE
2008 2007 % Change 2008
Rand thousands (unaudited) (unaudited (audited)
& restated)
Revenue R2 052 097 R2 030 159 1,1% R3 867 565
Gross profit 297 026 414 309 - 28,3% 721 722
Operating (loss)/profit
before impairments and
restructuring and
retrenchment costs (90 261) 42 171 (14 876)
and restructuring and
retrenchment costs
Impairment of assets (20 364) - (108 693)
Restructuring and
retrenchment costs (18 229) - (41 886)
Operating (loss)/profit
before finance costs (128 854) 42 171 - 405,6% (165 455)
Finance income 6 743 12 971 - 48,0% 31 134
Finance expenses (60 202) (51 788) 16,2% (112 779)
Share of losses from joint
venture (2 503) (2 143) 16,8% (9 181)
(Loss)/profit before
taxation (184 816) 1 211 (256 281)
Taxation (3 747) 1 441 72 212
(Loss)/profit for the
period (188 563) 2 652 (184 069)
Attributable to:
Equity holders of the
parent (183 450) 3 785 (178 842)
Minority interest (5 113) (1 133) (5 227)
(Loss)/profit for the year (R188 563) R2 652 (R184 069)
STATISTICS PER SHARE
In cents, where applicable
YEAR ENDED
SIX MONTHS ENDED 31 DECEMBER 30 JUNE
Weighted average number of
shares in issue (000) 316 229 90 228 90 048
Weighted average number of
diluted shares in issue
(000) 316 229 90 427 90 232
Net number of shares in
issue 702 946 90 098 89 620
(Loss)/earnings (58,0) 4,2 (198,6)
Diluted (loss)/earnings (58,0) 4,2 (198,2)
Headline (loss)/earnings (53,3) 4,0 (111,0)
Diluted headline (53,3) 4,0 (110,8)
(loss)/earnings
Distribution - annual - - -
RECONCILIATION BETWEEN
(LOSS)/EARNINGS AND
HEADLINE (LOSS)/EARNINGS
Income attributable to
shareholders (183 450) 3 785 (178 842)
Impairment of assets 20 364 - 108 693
Surplus on disposal of
property, plant and
equipment (5 052) (351) (988)
Profit on acquisition of
minority interest (926) - -
Loss on disposal of
property, plant and
equipment 429 133 1 844
Tax effect of adjustments - 63 (30 673)
Headline (loss)/earnings (R168 635) R3 630 (R99 966)
BALANCE SHEET
YEAR ENDED
AS AT 31 DECEMBER 30 JUNE
2008 2007 2008
(unaudited &
Rand thousands (unaudited) restated) (audited)
ASSETS
Non-current assets 1 109 763 1 153 320 1 131 726
Property, plant and
equipment 1 038 461 1 072 983 1 036 413
Intangible assets 21 910 3 453 33 283
Interest in joint ventures 8 000 14 330 18 000
Investments 1 615 2 413 2 405
Long-term receivables 33 920 38 452 35 189
Deferred taxation 5 857 21 689 6 436
Current assets 1 687 437 1 787 72 1 781 887
Inventories 729 769 784 964 848 142
Trade and other
receivables 915 663 909 518 879 069
Non-current assets held
for sale 11 087 26 743 10 146
Taxation receivable 3 387 53 1 664
Cash and cash equivalents 27 531 66 443 42 866
TOTAL ASSETS R2 797 200 R2 941 041 R2 913 613
EQUITY AND LIABILITIES
TOTAL EQUITY 1 506 039 1 543 600 1 396 839
Share capital and share
premium 303 970 6 130 6 130
Treasury shares (14 611) (14 200) (16 250)
Reserves 1 216 113 1 540 970 1 400 353
Total equity attributable
to equity holders 1 505 472 1 532 900 1 390 233
Minority interest 567 10 700 6 606
Non-current liabilities 352 315 516 022 261 941
Interest-bearing 193 520 289 864 106 409
liabilities
Post retirement medical
aid benefits 89 182 70 400 89 182
Deferred royalty payment 25 319 - 21 998
Deferred taxation 43 847 152 373 43 912
Operating lease accruals 447 3 385 440
Current liabilities 938 846 881 419 1 254 833
Interest-bearing
liabilities 29 697 207 625 331 471
Trade and other payables 559 695 495 050 727 749
Provisions 42 566 50 436 38 404
Bank overdrafts 306 888 109 634 147 143
Taxation payable - 18 674 10 066
TOTAL LIABILITIES R1 291 161 R1 397 441 R1 516 774
TOTAL EQUITY AND
LIABILITIES R2 797 200 R2 941 041 R2 913 613
Net asset value (excluding
intangible assets) R1 483 562 R1 529 447 R1 356 950
Net asset value per share
after treasury shares -
cents 211 1 698 1 514
CONDENSED CASH FLOW YEAR ENDED
STATEMENT SIX MONTHS ENDED 31 DECEMBER 30 JUNE
2008 2007 2008
Rand thousands (unaudited) (unaudited) (audited)
Net cash flow from
operating activities (232 355) (52 641) 6 023
Net cash flow from
investing activities (28 331) (20 517) (78 608)
Net cash flow from
financing activities 85 606 (81 154) (142 813)
Net decrease in cash and
cash equivalents (175 080) (154 312) (215 398)
Cash and cash equivalents
at beginning of period (104 277) 111 121 111 121
Cash and cash equivalents
at end of period (R279 357) (R43 191) (R104 277)
STATEMENT OF RECOGNISED
INCOME AND EXPENSE
SIX MONTHS ENDED 31 DECEMBER YEAR ENDED
30 JUNE
2008 2007 2008
(restated &
Rand thousands (unaudited) unaudited) (audited)
Income and expense
recognised directly in
equity (9 590) - 42 011
(Loss)/profit for the
period (188 563) 2 652 (184 069)
Total recognised income
and expense for the period (R198 153) R2 652 (R142 058)
Attributable to:
Equity holders of the
parent (198 040) 3 785 (136 831)
Minority interest (5 113) (1 133) (5 227)
Total recognised income
and expense for the year (R198 153) R2 652 (R142 058)
CAPITAL AND RESERVES
Rand thousands
Share Share Treasury Other
Capital Premium Shares Reserves
Balance 30 June 2007 5 943 187 (13 042) 187 795
As previously stated
Reclassification
Share repurchases (1 158)
Total recognised income
and expense
Dividend
Balance 31 December 2007 R5 943 R187 (R14 200) R187 795
Balance 30 June 2008 5 943 187 (16 250) 241 386
Acquisition of minority
interest
Shares issued net of share
issue expenses 153 265 144 575
Share disposals 1 639
Total recognised income
and expense (790)
Balance
31 December 2008 R159 208 R144 762 (R14 611) R240 596
CAPITAL AND RESERVES
(CONTINUED)
Rand thousands
Retained Total Minority Total
Income Interest
Balance 30 June 2007 1 360 210 1 541 093 11 833 1 552 926
As previously stated 6 806
Reclassification 5 027
Share repurchases (1 158) (1 158)
Total recognised income
and expense 3 785 3 785 (1 133) 2 652
Dividend (10 820) (10 820) (10 820)
Balance 31 December 2007 R1 353 175 R1 532 900 R10 700 R1 543 600
Balance 30 June 2008 1 158 967 1 390 233 6 606 R1 396 839
Acquisition of minority
interest - (926) (926)
Shares issued net of share
issue expenses 297 840 297 840
Share disposals 1 639 1 639
Total recognised income
and expense (183 450) (184 240) (5 113) (189 353)
Balance
31 December 2008 R975 517 R1 505 472 R567 R1 506 039
2008 2007
Composition of other reserves
Revaluation of investments 615 1 352
Capital redemption reserve fund 440 440
Surplus on disposal of subsidiary and associated
companies 7 923 7 923
Surplus on revaluation of land and buildings 231 618 178 080
R240 596 R187 795
CONDENSED SEGMENTAL REPORT
Six months ended Textiles Apparel and Consumer
31 December 2008 household electronics
Rand thousands textiles
Segment revenue
External sales 907 632 887 270 107 482
Inter-segment sales (these
transactions are at arm`s
length) (25 572)
882 060 887 270 107 482
Segment results
Operating (loss)/profit (49 017) (70 258) 5 974
Six months ended 31 December
2007
Segment revenue
External sales 871 345 931 017 109 985
Inter-segment sales (these
transactions are at arm`s
length) (45 330)
826 015 931 017 109 985
Segment results
Operating (loss)/profit 17 360 (11 053) 8 103
CONDENSED SEGMENTAL
REPORT(CONTINUED)
Six months ended
31 December 2008
Rand thousands Toys Other Total
Segment revenue
External sales 175 285 - 2 077 669
Inter-segment sales (these
transactions are at arm`s
length) (25 572)
175 285 - 2 052 097
Segment results
Operating (loss)/profit 18 464 (34 017) (128 854)
Six months ended
31 December 2007
Segment revenue
External sales 163 142 - 2 075 489
Inter-segment sales (these
transactions are at arm`s
length) (45 330)
163 142 - 2 030 159
Segment results
Operating (loss)/profit 16 842 10 919 42 171
Notes
1. Basis of preparation
The condensed financial statements have been prepared in accordance with
International Accounting Standard IAS34: Interim Financial Reporting. They are
also compliant with International Financial Reporting Standards IFRS). These
results have not been audited or reviewed by the company`s auditors, KPMG Inc.
2. Significant accounting policies
The condensed financial statements have been prepared under the historical cost
convention, except for the revaluation of certain properties and financial
instruments. The accounting policies adopted are consistent with those followed
in the preparation of the Group`s annual financial statements for the year ended
30 June 2008.
3. Granting of security over assets
Lenders to the group (namely, ABSA Bank, Standard Bank, Nedbank, Investec Bank
and State Bank of India) have undertaken to maintain the existing facilities
until at least 30 June 2010 on the basis that most of the group`s assets
(including, without limitation, immovable property, intellectual property,
insurances, trade debtors, inventory and material plant and machinery as well as
pledges and cessions of shares in and claims against group companies) are
secured in their favour in various ways.
The security has been provided to a special purpose company (Seardel Security
(Pty) Ltd), which has guaranteed the obligations of the group companies in
favour of the lenders and which in turn is indemnified by Group companies.
4. Rights offer
The company issued 613,057,249 rights offer shares at R0.50 per share raising
R306,528,624 which reduced group borrowings. Hosken Consolidated Investments
Limited ("HCI") being one of the underwriters of the offer took up 497,603,811
rights offer shares resulting in HCI holding some 70.6% of the total issued
share capital of the company.
5. Acquisition of shares
The company acquired the 25.1% interest in Seartec Trading (Pty) Ltd held by
Thesele Industrial (Pty) Ltd with the result that Seartec Trading (Pty) Ltd
became a wholly owned subsidiary of Seardel Investment Corporation Limited.
6. Disposal of shares
The Seardel Investment Corporation Limited Share Incentive Scheme 2001 disposed
of its remaining holding of 268,400 N ordinary shares through the market for a
total consideration of R108.5 thousand.
7. Restatement of prior year comparatives
A subordinated shareholder loan to a subsidiary has been reclassified as being
part of the minority interest in the group.
Balance of non-current interest bearing liabilities before 294 891
reclassification
Reclassification (5 027)
Balance of non-current interest bearing liabilities after 289 864
reclassification
Minority interest prior to reclassification 5 673
Reclassification 5 027
Minority interest after reclassification 10 700
Deferred tax asset and liability balances in the prior year
have been restated to show the aggregate positions reflected
in the underlying legal entities.
Previously the allocation was based on the nature of the
temporary difference.
Deferred tax asset prior to reclassification 122 788
Reclassification (101 099)
Deferred tax asset after reclassification 21 689
Deferred tax liability prior to reclassification 253 472
Reclassification (101 099)
Deferred tax liability after reclassification 152 373
Trade and other payables have been restated to include the
items shown in the reconciliation below:
Trade and other payables before restatement 495 035
Reallocation of shareholders for dividend 15
Trade and other payables after restatement 495 050
8. Capital expenditure and commitments
Net capital expenditure during the period under review amounted to R45,7 million
(2007: R42,8 million). There are further commitments in respect of contracted
capital expenditure as at 31 December 2008 of approximately R5,9 million (2007:
R27,1 million).
COMMENT ON RESULTS AND CORPORATE ACTIONS
Results
The 6 months to December 2008 saw Seardel record an attributable loss of some
R183 million compared to a R4 million profit in the corresponding period.
Included in the loss to December 2008 are the following non-recurring items:
- The Group`s excess inventory has historically been disposed of through its
factory stores and to bulk purchasers. The current market conditions have
depressed the prices that can be achieved in these markets. In addition,
the Group`s focus on cash generation has meant that inventory sales have
been more aggressive. This has resulted in the Group selling inventory at
below carrying value. In order to bring inventory values to better
approximate current net realisable values, inventory provisions have been
raised by some R36 million;
- A R20 million impairment of asset expense was realised of which R10m
relates to the write down of the intangible asset recognised with respect
to the Fifa contract. The latest forecasts for this contract reflect sales
well below those anticipated when the contract was signed. A further R8
million of the impairment relates to a write down of the Group`s interest
in Sustainable Fibre Solutions (Pty) Ltd ("SFS") a company which produces
fibre from Kenaf plant. During the 6 months under review SFS required a
further R15 million of funding. Seardel did not follow its rights and its
interest in SFS has been diluted from 33% to just below 30%;
- R18 million worth of restructuring and retrenchment costs were recognised
during the period;
- The severe and rapid depreciation of the Rand resulted in foreign exchange
losses of R18 million being recorded.
After adjusting for the non-recurring items, Seardel recorded a core loss of
approximately R91 million despite a marginal increase in turnover. This loss is
almost entirely due to the deterioration of gross margins and increased finance
costs. Excluding the R36 million of increased inventory obsolescence provision
mentioned above, gross margins have decreased from 20.4% for the 6 months to
December 2007 to 16.2% in the current period. This 4.2% deterioration translates
into an R86 million reduction in gross profit. The decreasing margins are
reflective of the Group`s inability to pass on input cost increases particularly
within the textile and clothing divisions.
Textiles and clothing
The textile division`s gross margins have been particularly affected as the
majority of its input costs are US dollar denominated and the weakening Rand
severely affected this division`s profitability. Energy costs make up a
substantial portion of the textile divisions cost base and the above inflation
increases experienced in this area also negatively affected the achieved
margins.
On the clothing side, the Group`s customers continue to increase the levels of
imports and are placing increasing pressure on Seardel to match import prices.
Whilst input costs continue to rise, retailers are demanding price decreases
which obviously places great strain on margins despite the Group`s efforts to
reduce costs through efficiency gains.
Toys
Prima has continued on its positive growth trend with both turnover (up 7%) and
operating profit (up 9%) improving contrary to the economic trend over the
period. Prima has increased its market share and is now by far the most dominant
toy, game and branded stationery distributor in the South African market. It
will be concentrating on securing its growing market penetration and product
range into 2009. New and exciting brands and characters, as well as some lower
price-point product, will be on offer to help mitigate the impact of the current
economic conditions.
Consumer Electronics
Seartec experienced strong growth in calculator sales for the period, but copier
and microwave sales volumes declined resulting in turnover being 2% below that
of the corresponding period. The Scripto factory was closed in December and
certain impairments for the closure of the factory and unrealised foreign
exchange losses negatively affected the division`s operating profit which was
26% below that of the corresponding period.
Recapitalisation
The period under review was significant in the life of Seardel. As reported on
in the 2008 Annual Financial Statements, the pressures brought to bear on the
Group during the previous financial year resulted in it breaching its funding
covenants. To save itself from almost inevitable liquidation, the Group required
a recapitalisation. A rights issue was concluded on 27 October 2008 which saw
Hosken Consolidated Investments Limited ("HCI") become the controlling
shareholder with a 71% shareholding. As a result of the successful conclusion of
the rights issue and the provision of security, the Group`s commercial funders,
who have combined facilities with the Group in excess of R750 million, have
agreed to maintain their facilities until 30 June 2010 provided that the Group
does not breach any of its facility terms.
In addition to the facilities from the commercial funders, the Group has a R100
million loan from Grawood Investments (Pty) Ltd ("Grawood") a company controlled
by Dr Aaron Searll, the Group`s founder. Despite ongoing discussions with the
representatives of Grawood the Group has not yet succeeded in reaching any
agreement as to the basis on which Grawood may be afforded security for its loan
account, nor has any of the terms of such security been finalised. The Group
will continue with its efforts to bring these discussions to a close as soon as
is reasonably possible.
Changes to the Board
Post the rights issue, Dr Searll, resigned as Chairman and then from the Board.
Mr John Copelyn was appointed Chairman and the Board was reconstituted. Messrs
Arthur Jacobson and Russell Upton resigned from the board and the following new
appointments were made:
- Mr Stuart Queen was appointed Chief Financial Officer;
- Mr Anthony Dixon-Seager was appointed CEO-Clothing Division;
- Mr Amon Ntuli was appointed an Executive Director; and
- Messrs Kevin Govender, Yunis Shaik and Mohammed Ahmed were appointed Non-
executive Directors.
It has recently been announced that Mr Walter Simeoni, the Group`s Chief
Executive Officer is due to retire in November 2009 and as part of its
succession planning, Mr Stuart Queen has been appointed CEO designate. Mr
Anthony Dixon-Seager has been appointed Chief Operating Officer with his role
expanding to include responsibility for the Group`s textile operations in
addition to his current responsibilities.
Turnaround and restructuring
Since HCI has taken control, Seardel has commenced with an extensive
restructuring program. It is recognised that there are no quick fixes to a Group
of this size and that losses are anticipated until the benefits of turnaround
come to fruition. The main thrusts of the turnaround include:
- Moving from a decentralised strategy to a more centralised approach;
- Unlocking economies of scale through factory consolidations. To this end
the textile division has realigned itself around product clusters and work
is being done to consolidate the Group`s lingerie and swimwear divisions
into one facility. Further consolidations are expected;
- Improving efficiencies through the adoption of world class manufacturing
practices. To assist with this objective the Group has enhanced its
engineering capabilities through the appointment of staff from industries
where these practices are standard;
- Increasing production flexibility to enable quicker turnaround times and
shorter runs the benefits of which will include the ability to unlock new
markets;
- Ensuring that the existing assets of the Group generate satisfactory long
term returns and that future capital is only allocated to projects where
there is a high degree of confidence in the expected returns;
- Allocating finance costs to each division based on the levels of capital
employed in order to better reflect the actual contribution of these
divisions;
- Reducing working capital levels throughout the value chain;
- Eliminating low margin turnover by setting margin hurdle rates and if
necessary, right sizing the Group; and
- Looking to increase market share in higher margin areas.
Industry dynamics
Whilst fixing the issues internal to Seardel is the key focus, there are a
number of issues that are affecting the industry in general that require urgent
attention. Local producers of textiles and garments are uncompetitive when
compared to imports. It is often assumed that this is solely as a result of
inefficiencies on the part of local producers. This is a simplistic view as,
although there is certainly room for efficiency improvements, the non-
competitiveness is a multi faceted problem. Some of the main issues facing the
local industry include:
- Subsidisation programs, including state owned firms, in other parts of the
world. The garment industry has the ability to create employment for
relatively little investment with the cost per job created being one of the
lowest of all manufacturing sectors. Governments in developing countries
often use the industry as an employment generator, particularly in areas of
low economic activity;
- Although we recognise that some of the local employment conditions need to
be reviewed to bring them in line with other industries in our own
territory, the necessity to pay a living wage means the local industry is
required to pay significantly higher wages than those paid in competing
countries;
- The above factors result in international firms achieving lower costs per
unit manufactured and thus these manufacturers attract the volumes
generated by the large international retailers which result in longer runs
and greater efficiency;
The import tariffs provide some protection but the level of illegal and illicit
imports is such that these protections do not have the full effect. We are
encouraged by the work currently being undertaken by SARS to ensure compliance
and this initiative has our full support.
Of further concern are the structural deficiencies implicit in the current
policies. It is our view that the DCC scheme has been ineffective as a support
mechanism for the local manufacturing industry and has simply served to
subsidise fellow SACU members` export programs at the expense of local
manufacturers. The current SACU and SADC arrangements are also problematic as
these countries have discrepant wage structures with very limited tariff
protection offered to local producers.
The issue of illegality is not confined to imports. Within the local market
there is significant non-compliance to bargaining council agreements which
undermines the competitiveness of compliant manufacturers. To this end Seardel
is encouraged by the improved focus of the local bargaining council compliance
teams but non-compliance is widespread and will require a concerted effort to
remedy.
It is our view that each member of the value chain, including agents and
retailers, need to take responsibility for ensuring that only legally imported
or manufactured goods enter the local market and that there should be a sanction
for those who choose to ignore this responsibility.
Outlook
Significant challenges need to be overcome to return the Group to profitability
and we remain pragmatic in our assessment and approach to the issues. However,
we are optimistic that a turnaround can be achieved.
Appreciation
The change processes being undertaken places significant pressure on staff at
all levels requiring sacrifices to be made particularly with regard to personal
and family time. The directors and management of Seardel would like to thank all
those who are working tirelessly to effect the turnaround.
Signed for and on behalf of the board in Durban on 23 March 2009.
W Simeoni
Chief Executive Officer
S A Queen
Chief Financial Officer
The 2009 Annual report, for the nine months ending 31 March 2009, will be issued
by no later than 30 June 2009. (The company`s financial year end has been
changed to coincide with that of its majority shareholder).
The company`s shares are listed under the Consumer Goods - Personal and
Household Goods Sector of the JSE Limited.
DIRECTORS: J A Copelyn# BA(Hons) BProc (Chairman), Adv N N Lazarus# SC (Deputy
Chairman), W Simeoni* (Chief Executive Officer) (Austrian), M H Ahmed# BSc
(Accounting), A E Dixon-Seager DipBus M(Hons) (Chief Operating Officer), T G
(Kevin) Govender#, A M Ntuli, S A Queen CA(SA) (Chief Financial Officer & Chief
Executive Officer - Designate), Y Shaik# BProc. (# indicates Non-Executive)
Transfer Secretaries:
Computershare Investor Services (Pty) Ltd, 70 Marshall Street, Johannesburg
2001. P O Box 61051, Marshalltown 2107.
Administration
Secretary and registered office:
HCI Managerial Services (Pty) Ltd
1 Moorsom Avenue, corner Bofors Circle and
Moorsom Avenue, Epping Industria II, Cape Town 7460
Registration number: 1968/011249/06
Postal address: P O Box 524 Eppindust 7475
Telephone: +27-21-5055261
Telefax: +27-21-5350045
Internet: http://www.seardel.co.za
Auditors: KPMG Inc.
26 March 2009
Sponsors: Java Capital (Pty) Ltd
Date: 26/03/2009 16:35:02 Produced by the JSE SENS Department.
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