As the grandson and son of farmers I’ve always had a deep interest in agriculture. These roots have developed to the point where I am probably the only sell-side analyst who covers agriculture companies as well as the better-known JSE food processing counters.
My real passion is the bigger agricultural co-operatives, which have adapted to contend with the economic challenges in SA.
Many are 100-year-old businesses that have annual revenues of billions and deep tentacles in their operating areas. They are asset rich with conservative balance sheets.
This column highlights three stocks that have been in the investment shadows for too long.
Kaap Agri (R34) trades on the JSE, while Senwes (R13) and TWK (R30) trade on ZAR X. Many people have no idea how big these businesses are, or how profitable.
Kaap Agri reported headline EPS (HEPS) of 388c per share in Covid-affected FY2020, a decline of less than 2% year on year. It has a market value of R2.5bn and in 2020 had revenues of R8.5bn and profit after tax of R279m. Trading on a historic p:e of 8.7 times, the stock should have a solid year, with the rating unwinding to under 7.
Over the years Kaap has balanced its agricultural portfolio and expanded from its Western Cape base. It now has 217 outlets in eight provinces and Namibia. Fuel and retail are significant businesses and it is this expansionary move that has powered recent growth, though the market has shown some disquiet at the low returns from the nearly R1bn spent on expanding the fuel business. That should change.
Senwes, based in Klerksdorp in North West, is a grains titan in the heart of the maize belt with a market value of R2.4bn.
FY2020 revenue was hindered by a weaker 2019/2020 maize crop but it reported a R4.8bn revenue base and profit before tax of R446m. HEPS fell 19% to 144c per share.
The new financial year has seen an uplift in prospects. Senwes’s stellar interim results are driven by acquisitive growth and the benefits of a larger year-on-year maize crop passing through its various business units. HEPS in the first half rose 76% to 153c per share, exceeding the FY2020 HEPS. Its p:e is 9 but should fall this year to under 6.
The second half and into 2022 also look good. A bumper maize crop is forecast for the 2021/2022 season which will power earnings, and the benefits from the KLK and Suidwes deals will assist growth.
Last is co-op TWK in Piet Retief, KwaZulu-Natal, a stock that barely registers with investors despite its R1bn market valuation.
Covid had a big impact on TWK, much greater than on Kaap and Senwes, as TWK has a large wood chip export business and a sizeable domestic motor retail business.
Revenues were flat on the year at R7.7bn, with profit before tax falling 44% to R108m, the first fall in many years. TWK, until Covid-19 and its restrictions, had been a consistent performer. HEPS declined 20% to 385c per share. Its historic p:e is 7.8. I can see the counter back to a 6 p:e in FY2021.
With sizeable forestry and timber interests aside from the traditional agri divisions and retail assets, the resumption of wood chip exports and firming prices for wood chips and timber should power a sharp recovery in FY2021 earnings.
I hope this column has opened your eyes to the sizeable businesses that operate in SA agriculture. The agri ratings are undemanding, all pay solid dividends and moves are afoot to continue sector consolidation.
Given the extraordinary run in softs such as maize, soya and wheat, and the long-term fundamentals in supply and demand, these stocks, while cyclical, all have long-term portfolio qualities and are worthy of a buy recommendation.
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