Letting Rex off the lead

EMPOWERMENT icon Brimstone looks set to cause a flutter among the corporate fashionistas and perennially fashionable value investors.

This week Brimstone signalled an intention to cast off its investment in fashion retailer Rex Trueform (RexTru).

Brimstone acquired an effective 34.6% stake in RexTru in late 2007.

At last count, the empowerment company’s interest in Rextru was spread as follows: 242 654 Rextru ordinary shares and 2.6 million Rextru N-shares as well as 254 126 ordinary shares and 3.7 million N-shares in Rextru’s pyramid holding African & Overseas Enterprises.

That’s a holding roughly worth R50m, but – more importantly – a holding representing a big chunk of a company which cannot, by any stretch of the imagination, be regarded as one of the JSE’s most liquid counters.

Despite the canine connotation of Rex – having been schooled in the classics at Muir College in Uitenhage, I do know Rex is actually latin for “king” – the company is no dog. Rextru, which owns the Queenspark fashion chain, has proved a remarkably resilient (and rewarding) business over the years.

Originally, Rextru was to form part and parcel of Brimstone’s longer-term plans to build a fashion brand house around its clothing manufacturing subsidiary, House of Monatic (HoM).

I suspect that plan is no longer on the table. And Brimstone directors admit as much in commentary that accompanies the company’s recently released year to end-December results.

In reference to the Rextru investment, they noted: “Events and developments within the clothing industry and specifically within Brimstone’s clothing cluster have given cause for Brimstone to review its strategy.”

Brimstone unlikely to be panicked

In this regard Rextru is no longer considered strategic, which means Brimstone is “actively pursuing opportunities to extract maximum value” from the Rextru investment.

For those that need reminding, Brimstone’s clothing cluster was dealt a heavy body blow when subsidiary Fifth Element was liquidated after some unsavoury business practices were uncovered in an internal investigation.

In any event HoM – which thankfully does hold some valuable industrial properties – posted a loss of R30m after factoring in write-offs and expenses.

Still, Brimstone probably won’t be panicked into selling Rextru. Indeed the empowerment company, which has a strong portfolio ranging from healthcare to fishing and assurance to insurance, can afford to sit back and collect the dividends from Rextru.

I reckon, though, Brimstone has done a clever thing in “putting out” its intentions for Rextru. It certainly would not surprise me to hear that Brimstone was inundated with polite calls of enquiry from interested parties – probably ranging from larger fashion retailers to private equity specialists.

I even wonder whether former asset manager Hugh Roberts, who already holds a sizeable position in Rextru, might be tempted to harness a bigger stake?

While there should be no shortage of buyers for Brimstone’s Rextru stake, there is a question around price. When Brimstone struck the deal to buy out Old Mutual’s stake in Rextru and Af&Over, the shares were trading at around 800c and 600c respectively on the JSE.

The shares have crept up, but are still – according to my calculations – trading below tangible net asset value. NAV aside, the earnings multiple on Rextru is well below its larger peers like Foschini, Mr Price and Truworths.

In other words, I don’t think Brimstone will be looking at a 1 000c/share offer for its Rextru shares or 800c/share for its Af&Over shares.

The thing is that there is so much potential tucked away in Rextru, more specifically Queenspark, that it seems quite possible that a larger fashion conglomerate or private equity firm could well be willing to fork out a premium.

One has to consider that Rextru, run for generations as a family-controlled business, has always erred on the side of caution.

Quite striking is the fact that at last count Rextru had over R100m in the bank and a chain of around 50 Queenspark stores.

Perhaps the real potential of the business could come to the fore with a chain of 100 Queenspark stores and only R50m in the bank?

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