Deneb still fighting

The old saying that “there’s life in this old dog yet” might apply perfectly to Epping-based Deneb Invest­ments – which houses the industrial remnants of the original Seardel clothing and textile empire.

Seardel was last year split into media assets (see separate story in this edition) and in­dustrial assets – the latter being housed in Deneb. Considering the operational assets are focused on tough industrial niches, not many observers were giving Deneb – despite shedding its loss mak­ing clothing manufac­turing assets – much of a chance to spin mean­ingful profits. But the company – which now comprises textiles, industrial products and branded product as well as a valuable property portfolio – managed an encour­aging (and surprising) attributable profit of R209m in the year to end March.

The performance is all the more remark­able considering that CEO Stuart Queen reported that a chal­lenging manufacturing environment was exac­erbated by industrial action within Deneb’s own businesses as well as those of its custom­er and supplier bases coupled with inconsis­tent electricity supply. Queen, though, cau­tioned that the R209m profit figure should be seen the context of R72m of tax income re­corded in the financial year (through the rec­ognition of a deferred tax asset) and the re­valuation of investment properties by R70m. He said overall the current year’s results were mixed.

“On the one hand, we are pleased to re­port the strong attrib­utable profit. However, the year was not with­out its challenges. That being said, the fact that the Group is quite strongly profitable in a challenging year is tes­tament to the improv­ing resilience of the various businesses.”

He stressed that much work had gone into improving Den­eb’s balance sheet over the past few years – pointing out that interest-bearing debt stood at 19% of total asset value at year-end (down from 21% a year ago.)

“We believe that the quality of assets reflected on the bal­ance sheet has also improved over the last few years with proper­ties now representing 37% of the R3bn to­tal asset value, while plant and equipment comprises a little over 10%.”

Deneb’s divisional report showed the company’s Branded Product segment as most vibrant with rev­enue growth of 47% to R1.4bn. But operating profit before finance costs declined 52% to R20m – the profit performance affected by a decision to invest heavily in Seartec, the office automation and electronics distribu­tion business. Queen said this investment included strengthen­ing the management structures, expanding the product profile, improving the facilities by moving into higher-profile properties in a number of the major centres, spending on the technology back­bone of the business and increasing its ex­posure by upping the marketing spend.

“These interven­tions increased the cost base quite signifi­cantly, but we are con­fident that the invest­ments made will see enduring benefits over the medium-term.”

He added the perfor­mance of the Branded Product was also af­fected by challenges in the Prima Toy business – even though turnover continued to grow.

“The rapid depre­ciation of the Rand leading up to the busy Christmas season put pressure on mar­gins and this, coupled with an increased level of returns post- Christmas, saw oper­ating profits fall below those achieved in the prior period.”

Deneb’s recent ac­quisition of a vari­ety of sports brands saw Brand ID’s per­formance improve markedly. Queen said this start-up business had now reached breakeven.

“We anticipate that it will be­come a contributor going forward.”

Queen said the textile segment saw challenging trading conditions, and saw operating profit fall 21% to R28m. He said the performance of this segment was influenced by a reduc­tion in the value of public procurement tenders awarded.

Higher energy costs, downtime as a result of loadshedding and a strike at one of the operations as well as industrial action in the customer and supplier base, also hit the per­formance of the textile division. Queen was pleased at the textile division’s performance.

“Given the prob­lems experienced, we are pleased at how well the textile busi­nesses withstood the tough year and this reflects the work that the management teams within these entities have done to improve the quality of revenue and operating efficiencies.”

He admitted, though, that operat­ing margins remain wafer-thin and were weighed down by the last of the loss-mak­ing businesses in the manufacturing space.

“Progress is being made on a number of new initiatives that will look to address the margin concern.”

Deneb’s industrial segment saw revenue up 6%, but recorded a 30% drop in oper­ating profit to R25m. This division was largely beset by the same problems dog­ging the textile sector. Deneb’s initiatives to secure sustainable vi­ability for its operat­ing divisions will be interesting to gauge in the year ahead. Queen noted Deneb had been working diligently to make in­cremental changes to the businesses so that they become more re­silient to adversity.

“These incremental changes take the form of discontinuing un­profitable businesses or product lines while, on the other hand, looking to enter new growth areas and diver­sify and deepen quality revenue streams.”