The past two seasons have been kind to the agricultural sector, with strong demand for produce and soaring exports. This year promises to be another solid one for the fruit and field crops sector.
One of the sector’s largest players is Western Cape-based Kaap Agri.
The stock is not really followed by mainstream analysts because, while most of its revenue and profit is derived from retailing, Kaap’s operations are not within the ambit of many classic retail analysts. So the stock gets sidelined.
That has been a sector and market mistake.
Given the impact of Covid, Kaap was more resilient than many other sector retail companies. Its agricultural base, aided by a booming fruit and grains sector, mitigated some of the effects of lower fuel sales and softer general consumer retail trading due to the lockdowns that affected trading.
From its JSE listing in June 2017, Kaap’s share price rocketed to a high of R64 as the former over-the-counter agri stock had a spotlight shone on its business.
That share price euphoria was short-lived.
A series of underwhelming earnings in the 2018 and 2019 financial years saw the stock dive to a low of R19.
Those trading periods were a disappointment for Kaap as the lingering after-effect of the Western Cape drought hit the agricultural sector. And heavy investment in the fuel retailing division The Fuel Co (TFC) had not delivered the return investors expected after such hefty capex.
Just when a recovery looked imminent, Covid hit SA in March 2020. The Kaap share price stagnated despite some credible Covid trading.
Management came through the pandemic showing a 4.6% increase in year-on-year recurring headline earnings to 392.5c a share to September 2020. This provided a solid base for recovery.
During Covid, operational costs and capex were trimmed and a decision was made to improve returns within TFC via the agreed sale of the property assets (PropCo) for R460m — which will materially improve returns.
The agricultural sector performed superbly and a near-record wheat harvest also helped the business.
Recovery in key subsidiaries such as fuel, building materials and general retail saw a kicker in interim and year-end 2021 results.
In results to September 2021, revenue rose 23% to a record R10.6bn, while profit before tax rose 21% to R460m.
The dominant trade division was 59% of revenue but 73% of profits. The fuel and convenience stores made up 29% of revenue but only 13% of profits. Understandably, management is focusing efforts on improving this, and a recent deal to expand this space should stimulate future returns.
Recurring headline earnings rose 22% to 478c a share, with a total dividend paid of 151c a share. At the current share price of R48, Kaap’s historic earnings multiple is 10 times with a dividend yield of 3.1%.
Looking into the first half of 2022 and beyond, IM recently attended the Kaap Agri AGM, where management detailed a robust guidance plan and expressed confidence in a better year ahead.
The management team said the benefits of ongoing sector conditions in agriculture and the recent R1bn acquisition of 41 new fuel outlets via the acquisition of privately owned PEG will materially bolster the profitability and margins at the fuel business.
Kaap funded the PEG deal with the PropCo disposal at TFC and a ring-fenced loan. PEG is profitable and will double the volume of fuel litres sold to 600-million. Its major highway locations also generate a materially larger proportion of margin and profit from its retail and food outlets.
IM sees the deal as transformational, and one that will generate material profits and cash flow. IM sees the debt being paid off in four or five years, leaving a highly cash-generative business that will augment fatter dividends from Kaap.
Despite Kaap attaining a recent intraday high of R58.50, the stock is trading 18% lower at R48 at the time of writing.
IM contends that the market has simply not grasped the operational changes that Kaap’s management has undertaken to improve returns within the business, nor the potential of PEG, which will contribute five months of profit to Kaap’s year-end to September 2022.
IM maintains its target value of R64 on Kaap Agri.
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