BUY: SENWES
Share price: R10 ZAR-X
Senwes is based in Klerksdorp in North West and was founded in 1909. It has a market valuation of R1.8bn. It has interests in grain handling and storage, has a large financial services division and is a leading dealer in John Deere agricultural equipment.
In 2019, a low harvest year, revenues of R2.7bn and profit before tax of R398m were reported. On 2019 headline earnings of 177.5c a share Senwes is trading on a historic earnings multiple of 5.6 and a dividend yield of 6%. The share also offers a 31% discount to its NAV.
Senwes has been the most acquisitive of the super-regional titan agricultural businesses. In 2019 it snapped up Upington-based co-op KLK, which added about R2bn in revenues. Senwes is also in discussions to buy smaller neighbouring co-op Suidwes.
Senwes is conservatively run and has a sound balance sheet. Its sheer scale means it will become one of the country’s agri super-titans as consolidation of the smaller co-ops occurs over time.
The 2020 results are due shortly and, owing to the 2019 harvest, earnings will decline on the previous year. However, with a bumper mealie harvest due in 2020, the next financial year’s earnings will rebound sharply. Because of this and with benefits to come from past deals, IM rates Senwes a solid buy.
HOLD: KAAP AGRI
Share price: 2185c
Kaap Agri — which listed on the JSE in 2017 — has been in existence for 108 years in various guises.
Over the years, under the guidance of 41% anchor shareholder Zeder, Kaap Agri has expanded its footprint from its core Western Cape base. It now trades in all provinces and has a reasonable foothold in Namibia as well. The financial 2019 revenues were R8.5bn, with a profit before tax of R281m. Headline earnings were 397c a share — which puts the counter on a historic earnings multiple of 5.5 and a dividend yield of 5.7%. The share trades at a 24% discount to NAV.
Recent interim earnings included a respectable 8% rise in headline earnings, but owing to caution about the Covid-19 outbreak the interim dividend was passed.
In the interim period about 88% of revenue and 82% of pre-tax profit came from retail. Within that breakdown, a hefty 30% of the total business now comes from lower-margin fuel retailing.
The company’s second half will be challenging as the Covid-19 lockdown will trim some retail divisions and fuel volumes. Debt of R1.7bn (a 77% gearing) is high, but manageable. But the low returns on capital expenditure of about R900m over the past five years are worrying.
Kaap Agri looks cheap (against the JSE’s retail sector), but IM prefers to rate the stock a hold.
SELL: NWK LIMITED
Share price: 485c 4AX
NWK is another "centenary stock", with 100 years of trading in North West. Its larger neighbour is Senwes. In fact, Senwes has made repeated unsuccessful overtures to acquire the smaller R686m market-value business.
As a mid-sized co-op in the mealie belt, NWK’s fortunes are more closely aligned to the soft commodity. The group’s 2019 revenues were R2bn, and profit before tax came in at R121m. The stock trades at a 56% discount to NAV. A series of diversifications has brought mixed results; the chicken and animal feeds business was sold after hefty losses of R296m in 2018.
NWK’s total borrowings are nearly double its market valuation, and in September 2019 the holding company paid an eye-watering premium to the ruling NWK share price to buy back a 20.3% stake from Grindrod for R204m.
In a further effort to stay independent, the co-op is making a share-swap offer via its NWH Holdings business to acquire the minority shares in NWK Ltd and delist.
IM feels the good harvest of 2020 will be a saving grace. But trying to remain an independent unlisted mid-sized regional co-op will be difficult — especially in a consolidating agricultural landscape when NWK kust does not have the financial muscle to truly compete. We believe NWK is too risky now, and rate the sock a sell.
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