I was pondering my October column and remembered the old British standby is to always talk about the weather.
As the north of this country basks in heat and farmers and the agricultural sector fret about the impact of the impending El Niño oscillation, here in the Western Cape the province is living up to Portuguese explorer Bartolomeu Dias’s narrative when he named the region the “Cape of Storms”.
The domestic agricultural sector has benefited from an unprecedented four-year cycle La Niña weather pattern. This led to wetter summer periods which was beneficial for field crops such as maize, soy and wheat and, thus, good sector results.
With an expectation of a swing back into a warmer and drier El Niño weather period, especially in the north in the 2024 growing season, there are fears that bumper field crops will start to normalise. Much of this market pessimism towards agriculture is driven by a lack of understanding of how the current season fared and insight from direct “from the farm” feedback on regional differences.
From the second-highest maize crop on record of 16.4Mt in 2023, expectations for 2024 are about 15Mt. Hardly a train smash, as South Africa consumes 12Mt a year.
A wet 2023 northern winter led to good soil moisture conditions in much of the maize belt, aiding the planting window. Farmers are taking advantage of these conditions to plant early, hoping that average rainfall in the maize belt ahead of harvest in May 2024 will support the crop.
There will be a slowdown in earnings for the key grain counters in the north on lower crop tonnages but diversification into Eastern European agricultural mechanisation will support grain giant Senwes, which is a coming off record FY2023 results.
Similarly, TWK will lose some grain-related revenue but exports of timber product and the weak rand will soften its agri earnings hit. I downgraded both stocks from a buy to a hold going into the new 2024 agricultural season.
Here in the Cape, the stormy, wet and windy weather has been miserable, especially over the Heritage Day long weekend. However, feedback from on-the-ground sources was that there was limited damage to the agricultural sector with some vineyards flooded, pockets of the wheat belt flattened and some incidences of fruit tree damage. Overall, sector prospects for the season remain favourable.
Even if El Niño hits the Cape with warmer temperatures and average summer rains, the deluge in the province over the winter has filled all the dams and provided good soil moisture conditions. The wheat sector expects a bumper season into 2024.
With the rand weak, global shipping rates lower and some improvement in port handling, the fruit sector, so important to the Cape, should also perform well.
This all flows into a fair period of results for Western Cape-based KAL Group, formerly known as Kaap Agri. Trading at R33.50, a 52-week low as I write, and a market value of R2.49bn, the share is back to early-2021 levels.
This slide, I believe, is due to concerns over the forthcoming Cape agricultural season, misplaced in my view, alongside higher finance costs from the PEG fuel deal and a continued lack of understanding of what KAL Group actually is. Is it a retailer, is it an agricultural company or is it, as I maintain, a consistent 10-year 15% CAGR retail hybrid?
FY2022 HEPS grew 22.3% to 556c a share. For KAL’s H1 2023, it reported growth in HEPS of 11.6% to 381.09c a share. At the February AGM, KAL was upbeat on second-half prospects — but then the government and its SOE incompetence struck, with Eskom’s erratic load-shedding denting business and consumer confidence.
However, in a pre-close review of KAL given its September year-end, I expect that the underlying fuel, convenience store and agriculture sectors will still lead to positive year-on-year growth in earnings — something many retailers would crawl over broken glass for.
I forecast growth in earnings of 8% to 600c a share, placing the stock on a p:e of 5.6 times. The stock now trades at a discount to NAV of 18%, something KAL has not seen in years.
I believe the market is mispricing what is a rather resilient retail counter, with KAL outshining many sector peers — but at a bargain basement p:e valuation. I place a buy on KAL Group with a target of $44 (+31%).
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