TWK Investments — known by seasoned players in agriculture as the old Transvaal Wattle Company — has been around since the 1940s. Today it is a vast business, and at its August 2021 year end it had annual revenues of R8.9bn and an operating profit of R491m.
IM recommended the counter at R31 in April 2021, when it was emerging from the Covid malaise and IM foresaw the potential recovery outlook of profitability and earnings. TWK has delivered — but there is more to come.
The counter has a primary listing on the Cape Town Stock Exchange (CTSE) and a secondary listing on the A2X. The listings occurred in September 2021 and were a move from the now defunct ZAR X exchange. The listings have been a success; TWK listed at R35 and attained IM’s R50 target by December 2021.
The stock has been weak along with the general market for the past couple of months, which is why IM recommends taking another peek at the stock.
At the time of writing the share price is at R41.50. The wider market is yet to cotton on to what TWK is all about and what its growth prospects are. IM forecast that punters will be pleasantly surprised when the financial results for 2022 emerge in August and an expected blockbuster trading update is issued.
Bumper year-on-year results are forecast, because recent interim results to February were excellent. Revenue rose 30% to R4.9bn as a strong agricultural sector, aided by a recovering export market for wood chips and timber products, powered revenue and earnings.
For the period, the profit before tax soared 178% to R338m and earnings increased 127% to 566c a share. NAV rose 18% to more than R50 a share. TWK pays an annual dividend.
The key driver of the results in the first half and into the second will be TWK’s large timber interests. The company produced 902,000t of timber, with wood chip exports of 360,000t, in 2021 from its 37,400ha of forestry assets.
In the interim period segmental timber revenue rose 81% to R1.15bn, with profit increasing a whopping 177% to R162m. Sales volumes in wood chips rose 47% to 643,000t.
The wider market is yet to cotton on to what TWK is all about
As Covid abated and supply chain channels were reopened, TWK — via its Richards Bay facility — resumed and increased exports of wood chips to the Asian paper and pulp market. Further growth is foreseen in the second half, and with a materially weaker rand, IM expects another stellar performance from timber.
The largest division is allied to TWK’s agricultural interests. Revenue and profit surged, buoyed by higher soft commodity prices attained by farmers, who in turn spent money at TWK’s retail and mechanisation divisions. Profit at the first half rose 107% to R173m. This will slow in the second half, given the seasonal nature of the sector, but will still be ahead year on year.
Other, smaller units, such as motor retail and financial services, both also reported pleasing like-on-like profit growth. But 76% of TWK’s profit is derived from its forestry and agricultural divisions.
For its 2021 financial year, TWK reported headline earning per share (HEPS) of 505c — a rise of 26% year on year — as the Covid after-effects, mostly on the export business, lessened and business started to return to normality.
Following a solid first-half showing, IM forecasts HEPS of 700c for the 2022 financial year — a rise of at least 38% year on year. If this scenario unfolds (given the current R41.50 trading price) the stock is on a forward earnings multiple of 5.9 with an expected dividend of 175c giving a yield of 4.2%.
IM believes this is a compelling valuation for a growing agricultural business with levers aiding its expansion — most notably a weaker rand and ongoing demand for timber products and a further year of fair agricultural-sector production.
The 2022/2023 agricultural season is also shaping up for a fair year — its fourth year of uplift — despite surging input costs for the sector. Soft commodity prices have remained elevated due to international black swan events, and prices are high domestically on the SA Futures Exchange (Safex) for the key field crops of maize, soya and the edible oils complex (groundnut, canola and sunflower).
The truth is that TWK is some years behind JSE-listed Kaap Agri (recently unbundled from PSG-aligned Zaad) in terms of investor awareness. That’s perhaps not a bad thing. It means private investors can steal a march on the “big boys” before they fully discover and understand this business with its R1.7bn market valuation.
The counter has had a stellar run and over the past five years has been the best-performing agricultural counter that IM has tracked.
At R41.50 IM has little hesitation in recommending TWK as the pick of the month, with a target price of R60.
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