INVESTORS' OPPORTUNITY

NZ Truth, Issue 1191, 27 September 1928, Page 19

INVESTORS' OPPORTUNITY

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South British Clothing Company, Limited, Prospectus ; . ' (By "Fiat Lux.") It is not often that investors— other than a favored fen — have . the opportunity to acquire an interest m one of the many important and profitable secondary industries which are carried on so successfully m Auckland, but such an opportunity has now arisen.

WITH the retirement from active business of the old-established firm of warehousemen — Archibald Clark and Sons, Limited — their "Zealandia" clothing factory, the product of which has been so well and favorably known throughout the Dominion for the 'past forty years, has been placed upon the market. A company with a capital of £45,000 is now m process of formation to take over the factory, freehold land, plant and very valuable trade-mark. The new management plans to continue manufacturing • similar lines to those turned put by the old concern, but does not intend to confine Its sales to the retail trade, having already opened negotiations with wholesale houses to manufacture big quantity lines specially for each wholesaler. This is undoubtedly a move m the direction which leads' to continued prosperity. A clothing manufacturing concern must keep its machines fully employed, otherwise its overhead expenses will be out of all proportion to turnover—, and when that happens for any length of 'time financial disaster must inevitably follow. Let us take a few very simple figures to illustrate the paramount importance of this question of i turnover and the relation of overhead expenses thereto.

Firstly, however, we need an explanation of "overhead expenses"; whilst these vary m different concerns, m a manufacturing business they can be classed as those expenses which do not vary with the turnover, such as rent (or Interest on the capital cost of the factory and plant), : • ■depreciation of I

plant, directors' fees, general manager's salary and similar items.

and will be -issued as bearer bonds or can be registered. i. To "Fiat Lux," these mortgage de- v bentures, m parti-

Take a factory where the output is £ 60,000 per annum and the overheads, say, £5000; the ratio of overhead to turnover would be £8.3 per cent. Now, if the turnover is not maintained, but falls away to £ 50,000, none of the expenses detailed above could be curtailed. Depreciation, rent, manager's salary, etc., could not be reduced because the turnover had receded by £10,000, so the position would then be that — owing to the fall m turnover — the "overheads" (£5000) now represent £10 per cent of the turnover (£50,000). And as it is highly improbable that the percentage of profit could have risen, it would re<sult m the net profits being £1.7 per cent, lower, equal to £880. ' Take another £10,000 off the turnover and your percentage of overhead has risen ,to £12% per cent., whilst your net profit has fallen by £1680, although you are still charging your customers exactly the same price as when your turnover was £60,000 per ! annum.

From the foregoing, readers will be able to understand why "Fiat Lux" places so much importance upon the fact that the new concern has taken time by the forelock m searching out new and additional markjets for its output.

It is to be hoped that the provisional directors' efforts m this direction will | ultimately meet with that success which the wise move merits. The name given to the new company is the South British Clothing Company, Limited, and its nominal share capital is £30,000, divided into £1 shares; m addition} there is an 8 per cent, mortgage, debenture issue of £15,000.

These debentures are available m minimum parcels of £50, but can be applied for beyond that amount m multiples of £10— .

cular, appear to be very attractive and will, no doubt, be oversubscribed before the company proceeds to allotment. i The interest rate of 8 per cent, is liberal and can be accepted, as a criterion of the faith of the promoters m the venture, which, after all, has been tried and proven. Furthermore, with the pronounced tendency for Returns on investments to become lightei-, it is highly probable that these debentures, when listed on the stock exchanges, will soon attain a premium of several shillings. The interest m due and payable without any deduction, half -yearly, on March 31 and September 30. Whilst the principal is nominally due for repayment on September 30, i 943, the company retains the right to repay on September 30, 1933, upon giving three months' previous notice m writing of such, intention. A few words regarding the security behind these mortgage debentures; the company is acquiring freehold land, buildings, plant, machinery and fittings of a certified value of £19,687. In addition, there will be stock and other assets purchased out of capital. On the land and buildings, a first mortgage of £5000 will remain, leaving the equity of redemption therein at £8500, to which has to be added the value of plant, machinery and fittings (£6187), making a total of £14,687. Then there are the assets, which will be purchased out of the proceeds of the debenture ordinary share issue; assuming that the former is fully subscribed and the latter subscribed only up to the declared minimum, £10,000, this will provide a further net balance (after meeting payments for property and flotation expenses) of approximately £14,000. Thus these debentures will be booked with a minimum of about 39/- worth of assets m the £1; the company is giving a mortgage over its whole assets and undertaking to the trustee for the debentureholders.

Creating Reserves

Promoters' Faith

With this amount of security, plus 8 per cent, interest and the fact that income-tax thereon is payable by recipients at their ' own individual tax rates, "Fiat Lux" feels confident that this portion of the capital issue will 1 meet with instant favor at the hands] of investors. , i Regarding, the ordinary share capital of £30,000, 7000 of these shares are being held m reserve at present, but may be issued at any time m terms of the prospectus. A further 3000 shares, classed as "deferreds," are being issued as fully] paid up m part payment for the property to be acquired. These ''deferreds" are not entitled to any dividend m any year until the or- I dinaries have received 1 8 per cent, for that year. Then the "deferreds" get 8 per cent., arid, if '■ there ■ are further j divisible profits, both classes share equally therein. - ' Upon all the paid-up capital having received a dividend of- — or exceeding— 8 per cent, per annum for two consecutive years, it is further provided thatj the deferred shares shall become class- j ed as ordinary shares. j A provision, which, whilst quite reasonable In many • ways, is likely to cause a lot of trouble, is that until the deferred shares attain the dignity of ordinary shares, the company may not place any • profits to. reserve. .

It would have been far better from every point of view had these shares been subjected to promotion In status upon the company, • merely EARNING net profits equal to. 8 per, cent, on the whole of its paid-up capital — not necessarily distributing them.

The existing: restrictive condition upon the company creating reserves Is decidedly ' unsound and should be replaced by a better and more equitable

arrangement at an early date. . It is entirefy m the best interests of the company that this should be done. What are the company's prospects In the matter of earnings? The prospectus gives certified figures of the actual results In 1926 anS 1927, the 1928 figures riot being available. ■

The figures for the two years mentioned have been- adjusted to fit m with the new company's financial organization and show the substantial result of £7233 net profit. i This, it has . to be pointed out, was the result on sales made to the retail trade only arid should be Improved upon by the new concern operating— as it will be— for the wholesale trade also. Assuming, however, that the new concern merely maintains these figures, the following distribution could oe made annually: ■••'.■ £ Income tax 1600 .... 8 p.c. interest on debentures 1200 10 p.c. dividend on shares .. 2300 To reserve 2133

Estimated net profit ...... 7233

It is of" interest to note that the accountants' certificate of profits states expressly that the profits shown were arrived at after making proper allowance for depreciation and all other charges, exclusive of selling and office expenses, and these have been 'estimated by the directors at £4000, which they consider should be amp*le.

Of. the assets to be acquired by the new concern, every item carries a valuer's certificate, which is most refreshing to this writer and must carry considerable . weight with intending investors.

No doubt -when the Companies Act is overhauled, certificates of this kind will be compulsory m all prospectuses, as indeed they should be.

Why should the public be asked to buy a "pig m a poke" by way of assets of uncertain values? The obvious retort is that the public should be wise enough to refrain from buying into such uncertified ventures, but unfortunately the public is — always has been and always will be — a most trusting- ' body, .otherwise the world's trade would cease, since it is based upon personal trust. The factory has m the past, produced a wide range of high-class apparel under its registered trade mark, Zealandia, and has the distinction of being the only factory m the Dominion to, produce dress shirts and starched collars. Included m its output, also, are suits, trousers, oilcoats,. soft shirts, soft collars arid miscellanedus soft goods, and the capacity of the plant is approximately 50 per cent, above the latest output, thus providing for a huge expansion m trade without a proportionate additional outlay on new plant. It is of considerable interest to observe that the^ssets are being acquired by the new company at over £2000 less than valuation' and that no stocks are being taken over. No goodwill is being- paid, either for the business or the "Zealandia" trade mark, whilst all the original and exclusive patterns and designs of shirts, collars and suits are being acquired, m addition to the services of the technical experts. The provisional directorate is a strong one and three members have- a thorough knowledge of the trade. "Fiat Lux" considers that the company offers excellent prospects for regular dividends; its capital proposals are eminently sound and should prove ample for all requirements for some years to come. . New Zealand regularly imports some £2 millions worth of apparel each year — and the company can certainly obtain a large enough percentage of this trade to give good returns to investors. ..'.'.•'