KAL: The best little retailer on the JSE

A retail powerhouse rooted in the platteland may seem as incongruous as a tractor dealership in Sandton City.

But agribusiness KAL Group — which started in 1912 among the whispering wheat fields of the Swartland as a seller of guano-based fertiliser — is now ploughing profitably beyond its traditional farming hamlets, with annual sales topping R22bn.

In fact, its perennial profitability and superior margin might easily make the case for KAL being the best little retailer in South Africa. Well, not so little ... its flagship Agrimark stores and fast-growing number of fuel forecourts — which have traditionally dotted farming areas with reliable rainfall patterns — now reach into peri-urban nodes within spitting distance of perhaps increasingly wary mainstream retailers.

Certainly, the product range in Agrimark has widened extensively over the years from farming staples such as shovels, hoes, overalls, gumboots, fertilisers, seeds and the like to washing powder, foods, clothing, beverages ... pretty much anything usually shelved in large supermarket chains. A larger Agrimark store — for instance, Paarl — carried 6,000 stock-keeping units 10 years ago, but now carries more than 21,000.

Today KAL has 267 units (Agrimarks plus convenience stores, fuel stations, bottle stores, fast-food outlets, packaging centres, mechanisation dealerships and manufacturing facilities) in 148 places throughout South Africa and Namibia. Big Agrimark stores are based in major, well-heeled farming centres such as Stellenbosch, Durbanville, Paarl, Upington and Hermanus, and the group has a dominant presence in platteland precincts such as Pofadder, Porterville, Hoedspruit, Ladysmith, Kakamas, Kirkwood, Springbok, Kuruman, Addo, Patensie, Montagu, Elgin, Rawsonville and Tulbagh (to name a few).

A recently opened Agrimark outlet in the Sitari development near Somerset West might signal a testing of proper urban expansion — though stepping on the toes of the mainstream retailers is not the intention of KAL executives at the moment.

Making a mark

Of course, KAL is not front-of-mind when investors mull retail options on the JSE. The group’s Agrimark brand does not have the recognition of a Shoprite, Woolworths, Spar, Pick n Pay or Mr Price ... at least to city slickers.

Yet Agrimark has driven solid returns at KAL — which listed on the JSE in mid-2017 — that might make more than a few better-known retailers green with envy. KAL’s plain-talking CEO, Sean Walsh, who has headed the business for almost a decade and a half, is determined to end this financial year with a more than respectable 14-year average compound annual growth rate of 15%.

Chris Logan, chief investment officer of Opportune Investments, believes KAL has some very powerful factors working in its favour.

“First, KAL has not been shy to change and adopt powerful practices which drive higher returns, specifically embracing ROIC [return on invested capital] as a key metric, adopting EVA- [economic value add] aligned incentives and a skin in the game focus via minimum shareholding requirements.”

This isn’t all just talk-talk, there is a track record of strong historic compound growth in earnings, coupled with returns trending higher

—  Chris Logan

Second, Logan points out that KAL has a hands-on, committed and experienced top executive in Walsh and CFO Graeme Sim (ex Massmart). “They both seem to enjoy what they do and strive to do it well.”

Third, he reckons KAL benefits from nonexecutives of the calibre of PSG co-founder Chris Otto and George Steyn (Pepkor), who are highly experienced in building businesses and, very importantly, are big shareholders in KAL.

“This isn’t all just talk-talk, there is a track record of strong historic compound growth in earnings, coupled with returns trending higher. Indeed, in financial 2023 — notwithstanding challenges such as load-shedding — KAL delivered record ROIC of 14.3% and has indicated further future upside in ROIC.”

KAL has already been good to original shareholders — especially those who were involved in the late 1990s, when the group’s predecessor, the old WPK Landbou, was still in existence. One of the early shareholders after the transformation from a “farming co-operative” to a proper commercial entity under Kaap Agri was Stellenbosh-based investment house PSG via its agribusiness investment arm Zeder.

Zeder was initially attracted to the old Kaap Agri by the significant minority holding in a then unlisted Pioneer Foods — formed from a merger between cereals business Bokomo and bread-maker Sasko. Pioneer was separated from Kaap Agri, listed on the JSE and then acquired by PepsiCo in 2020, raking in a heap of profit for Zeder.

While the initial perceptions of Kaap Agri’s retail and agribusiness services operations in irrigation, grain storage and packaging were hardly enthusiastic, the group’s steady growth and geographic expansion gradually caught the eye of other astute investors who were able to scramble for the unlisted shares.

Otto remembers Kaap Agri as being one of Zeder’s standout investments. “They were different from other former agricultural co-operatives. The directors were open-minded and listened to suggestions on corporate governance, balance sheet structure and dividends. I think that’s one of the key reasons for the ongoing success in KAL ... And I look forward to the next 10 years,” he tells the FM.

Those early birds at Kaap Agri have harvested a rich yield. KAL grew from generating turnover of R4bn and profit before tax (PBT) of R175m in financial 2013 to R5.6bn in revenue and PBT of R291m in financial 2016 — just ahead of its listing on the JSE. In financial 2023 revenue — admittedly helped by the acquisition of the PEG fuel business — topped R22bn, with PBT coming in at R692m.

The transformation of the business to be less reliant on the agricultural sector is also clearly evident. Walsh notes: “While our roots are proudly invested in agriculture, the agri-inputs channel trading profit accounts for only 17% of group trading profit. The retail contribution is taking the lead with 43%. Similarly, non-agri trading profit now accounts for over 70% of trading profit.”

Though it will be difficult to completely shake the country-bumpkin perceptions and the effects of cruel swings in agribusiness cycles, KAL does have important geographic advantages. Walsh indicates that most agri sectors in which it’s active have experienced a better year and the production outlook remains positive. “Fortunately, due to low exposure to summer crop regions, we are not subject to the El Niño risks associated with the dry weather conditions in these areas. Dam water levels throughout the regions in which we operate are on average higher than last year,” he says.

The ‘big, hairy, audacious goal’

With KAL highly cash generative — net cash profit from operating activities was R571m in the interim period (and R865m in the year to end-September 2023) — dividends have flowed strongly. What is astounding is that KAL has returned more than R550m in dividends to shareholders since listing — which is more than three times the group’s PBT number in 2013. That’s before the just-declared interim dividend of 54c a share for the six months ended March — which adds another dollop of about R40m.

While KAL’s recently released interims provided reassurance that strategic initiatives are paying off, there was a slight downer when an only slightly sheepish Walsh cautioned last week that the group’s BHAG (“big, hairy, audacious goal”) might be a little out of reach.

Fortunately, due to low exposure to summer crop regions, we are not subject to the El Niño risks associated with the dry weather conditions in these areas. Dam water levels throughout the regions in which we operate are on average higher than last year

—  Sean Walsh

KAL actually set its goal of R1bn in PBT for financial 2025 some years back. Walsh reminded shareholders of the goal at the full-year presentation last year — but several factors have conspired to hold back profits. Disruptions from load-shedding and the cost of setting up alternative energy coupled with the lingering higher interest rates will be the biggest factors in the profit projection shortfall. Under the circumstances, a small miss on a bold profit target is hardly something to get shareholders riled up.

KAL’s shares did not reflect any deep disappointment. At close of business on Friday — a day after the release of the interim results to end-March — the group’s shares held at R43.62 — just a shade under the recent 12-month high of R44.

SmallTalkDaily analyst Anthony Clark argues a modest PBT miss — while disappointing — can be caught up in ensuing years. “Overall, its investor presentation was upbeat and encouraging. Many of the metrics that KAL operates in are performing significantly better than the underlying competitive environment ... and for a retailer that must be a pleasing sign.”

KAL’s shares have risen about 27% in the past six months, but arguably still represent value — against the broader retail segment of the JSE in offering investors a modest trailing p:e of 6.75 and a nifty 4.2% dividend yield.

Despite its solid track record of profit performances and dividend distributions since listing, KAL has not yet earned the rich ratings associated with JSE retailers. Shoprite — the undisputed king of local retailing — is accorded a p:e of 22 and both Woolworths and Mr Price are on 15. Spar, which is dealing with several challenges at this point, trades on a p:e of 17. 

Many a retailer would crawl over broken glass to get the kind of consistent performance KAL has delivered year in and year out for the best part of 15 years

—  Anthony Clark

Clark says the market rating is derisory considering KAL’s evolution under Walsh — particularly the strong convenience store aspect to the group these days. “Many a retailer would crawl over broken glass to get the kind of consistent performance KAL has delivered year in and year out for the best part of 15 years.”

If KAL traded on a trailing p:e of just 10, the share price would be more than R60. But what could trigger such a shift in sentiment?

Probably the key shift is already under way with the logic of KAL’s decision to grow its lower-margin fuel-selling business becoming increasingly obvious to investors. Initially, investors felt KAL should continue to build on its strong Agrimark retail offering — which had already been enhanced with smart variations into convenience stores via Expressmark as well as building supplies and liquor stores.

For the interim period, Agrimark continued to hold its own with revenue of R4.3bn (down slightly on the previous interim period’s R4.4bn) translating into pretax profits of R295m. That represents a pretax margin of almost 7% — which is ahead of Shoprite’s 4% and Woolworths’s 6.5%.

Walsh stresses the Agrimark strategy is focused on market share-driven growth and retail format optimisation. In this regard it is encouraging to see pet goods sales up 4.4%, pool & garden up 8% and building materials up 5.6%. The online offering is gaining traction too, with users up 12% and return visits up 29%. The online basket size increased a whopping 16%.

A retailer to monitor

Still, the lingering “agri” tag on KAL might perpetuate notions of a local-yokel retailer. Nothing could be further from the truth — especially considering the technology harnessed by KAL to manage its broader retail sweep. One of the prime reasons for a superior margin at KAL is an inspired bespoke supply chain technology function, which automates warehouse management, stock replenishment and promotional activities. Walsh says: “We are able to buy better and sort better. This helps us tweak our margins up ... without this system it would be impossible.”

The interim results showed distribution centre value throughput hiked 12.6% and the “cost to serve” figure pushed down 3.2%.

In any event, farmers — generally — provide a good customer base. Drawing them into stores for their work staples provides a lucrative market for a general retail offering — a proverbial one-stop shop when farmers make their incursions into the nearest dorp.

This does flag one of the issues that KAL needs to constantly address — the prickly point of credit sales to farmers. KAL holds 16,290 credit accounts (3,368 seasonal and 12,922 monthly) worth about R2.4bn. The debtors book, however, turns 4.5 times a year and bad debts written off represented just 0.05% of total debt in the interim period. The five-year average sits at 0.4% of total debt and the 10-year average at 0.35%.

In the interim period, KAL increased its bad debt provision to 2.5% — perhaps understandable in a period that Walsh describes as the worst economic conditions of the past five years. But he does note  that credit sales are an “enabler” to KAL’s revenue growth.

Debt at the centre is also one of the key issues at KAL, which geared up markedly in acquiring PEG Retail Holdings in 2022.

The interim report indicated a reduction in interest-bearing debt of R245m — a chunky R170m of that attributed to the PEG acquisition. Walsh says KAL wants to accelerate the repayment ... with optimum gearing of about 40%-50% (which would allow the group to revisit its dividend cover). KAL’s debt-to-equity ratio has decreased to 56.5% (from 73.8% last year) with interim net debt to earnings before interest, tax, depreciation and amortisation improving to 3.3 times (previously 4.7) and interest cover stretching to 5.1 (4).

A sprightlier KAL could be the retailer to monitor in the medium term — whether it be as an aggregator of niche retail brands or as a target for a larger rival intent on grabbing a swathe of lucrative market share.

KAL: Hunter or hunted?

KAL Group has made commendable progress in reducing gearing, with executives again signalling they are open to exploring value-adding acquisition opportunities.

At the end of the interim period to March 31, KAL has slashed interest-bearing debt by a chunky R571.5m, compared with the 2023 figure.

Matters were also helped by this year’s public holiday regime, when the long weekend prompted a large fuel supplier to draw its payment later than normal, providing a positive R211m kick on net interest-bearing debt at half-year.

Overall, the group’s debt-to-equity ratio decreased to 56.5% (2023: 73.8%), with interim net debt to earnings before interest, tax, depreciation and amortisation improving to 3.3 times (4.7) and interest cover to 5.1 (4).

Should gearing ease to under 50%, KAL would be in a position to make a sizeable acquisition. That said, a more cautious strategy of selected site acquisitions for Agrimark, Expressmark convenience stores and The Fuel Company (TFC) has worked well.

KAL CEO Sean Walsh says the group is looking at two potential expansions for TFC, while it is actively expanding its convenience store offering at forecourt sites. “We intend pushing the pedal down in terms of growing the TFC network,” he says.

He adds that two or three Agrimark expansion opportunities are also under consideration. “Our business is a business of growth. We get up and look at these opportunities every day ... and we now have headroom to push the envelope again with our gearing going down.”

The FM has previously asked whether investment company Astoria’s specialist retail interests in safari, outdoor and hunting merchandise as well as its pet store business might not fit into KAL’s operational hubs. But with organic expansion opportunities still plentiful, this seems unlikely.

Perhaps a more pertinent question is whether KAL itself is not a takeover target — its size and scale pale in comparison with the JSE’s mainstream retailers.

What is important to note is that since KAL’s shares were unbundled by PSG-aligned investment company Zeder, there is no single dominant shareholder.

Even after an odd-lot offer last year there are 10,847 shareholders, none of whom owns more than 5% of the company.

But it seems unlikely that any of the large supermarket groups listed on the JSE would pitch for KAL at this stage. Other agribusiness groups probably don’t have the balance sheet capacity to tilt at the group. But private equity — noting the group’s NAV of about R45 a share — might be enticed by the prospect of more aggressive expansion possibilities.