Following the delisting of Afgri, the old OTK co-op, in 2014 the only pure exposure investors could gain to the agricultural sector was various listings on the now defunct over-the-counter (OTC) market. All this changed in 2017 when one of the largest diversified agricultural co-ops, Kaap Agri, moved its OTC listing to the JSE. Backed by PSG-aligned Zeder Investments with a 41% stake, Kaap Agri has diversified out of its traditional Western Cape markets into six provinces and Namibia. Today it has a strong presence in retailing to the agricultural sector and the public.
Operationally Kaap Agri spans retail, building materials, speciality agricultural packaging (predominantly fruit), wheat storage, irrigation and agricultural machinery, and a fast-growing fuel division.
About 63% of its revenue is derived from "trade" sources, which generates 64% of profit before tax. If you include the fuel division as a retail element, 90% of revenue and 88% of profit before tax stems from the trade segment.
From a share price of R30 in December 2016, the stock ran to a high of R64 in June 2017 (when the group had a market valuation of R4.5bn).
After posting financial 2017 headline earnings of 351c a share, retail sector hype saw the share price push ahead and Kaap Agri’s normally staid earnings multiple stretched to a more demanding 18 times.
The hype was short-lived. In 2017/2018 the Western Cape had its worst drought in a century. Agricultural output and sector revenue were hit, and Kaap Agri felt the full brunt of this slump.
After years of a consistent compound annual growth rate of 15% a year, earnings growth in financial 2018 skidded, with year-on-year earnings growing only 1% to 354c a share. The share price fell to R39.
The hangover from the drought permeated into financial 2019, and tough trading conditions in the retail division and challenges in the fuel and wheat divisions resulted in interim earnings for 2019 rising a modest 1.4% to 224c a share. Kaap’s share price hit a low of R25.50 earlier this year.
At the half-year results presentation in March, management was confident that recovery would come in the second half, as many divisions were performing well.
But reduced economic activity in April and May hit Kaap Agri. Retail and building materials suffered from slower spending and there was a general sector malaise in the third quarter. Despite a better fourth quarter, Kaap simply cannot recover from this miss in earnings.
IM expects another disappointing growth period for 2019 and have trimmed its 9% positive growth forecasts back to low single digits (on the 354c a share delivered in 2018).
The dividend should remain solid as Kaap has a policy of continual improvements in its dividend cover.
With the share price at R29.05 at time of writing, Kaap Agri is on a trailing multiple of 8.2 times. This is at the lower end of the band IM has tracked for a decade — but is reflective of a little followed, misunderstood agricultural counter now operating in the mainstream.
Looking into financial 2020, IM reckons recovery to normal earnings growth is a reasonable expectation. The key agricultural provinces have good water positions, and activity in important segments — fruit and wine — are reverting to normal patterns. Retail, building materials and fuel are also starting to tick back up. Kaap Agri continues to invest in expansion and new initiatives, which should yield new profit streams and market share.
It is a conservative, solid, well-run business, and investors should see a return of green shoots and growth in the next two years. We rate the stock a recovery buy.
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