Ploughing money into any of the handful of agribusinesses on the JSE might not reap rich rewards in the short term.
But what about long term? Unfortunately, that’s in doubt too, if recent comments from Afgri CEO (and former Zeder head) Norman Celliers are anything to go by.
“Climatic changes affecting a growing season — that might mean harvesting a crop in March instead of February — can see a meaningful shift in reported numbers. Explaining this to the market can sometimes be impossible,” he said last week.
It’s not just weather that’s a problem. The fallow ground on the local investment market might well result in some companies contemplating pulling up their roots and going private.
It seems certain the JSE is not going to see any new agribusiness listings, even though there are a few sizeable businesses, such as TWK and Senwes, listed on smaller alternative stock exchanges in South Africa that, in better conditions, might seek to migrate to a larger market.
A cursory glance at the JSE’s main agri stocks reflects the pervading pessimism, with all prices well off their 12-month peaks. Trading is also scant, at best.
Quantum Foods — which specialises in poultry production, animal feeds and eggs — is down 20% over a year.
York Timber — which has diversified into citrus, avocados and macadamia nuts — has shed roughly a third of its value over a year that included a rights issue exercise.
Crookes Brothers — which has supplemented its core sugar cane operations with bananas, deciduous fruit, macadamias and an extensive property development segment — is down 13% over 12 months. The share is up 20% over the past few weeks, but that represents a bounce off a multiyear low of R28.02.
More dramatic share movements recently in PSG-aligned investment company Zeder (traditionally a default option for agriculturally inclined investors) need to be viewed in the context of a flurry of corporate actions. These include the sale of The Logistics Co and Agrivision, the unbundling of KAL Group (formerly known as Kaap Agri) and the payment of sizeable special dividends.
Yet Zeder trades at a 33% discount to the NAV of its remaining investments in seed business Zaad (worth about R2.4bn) and fruit venture Capespan (R1bn) as well as almost R600m in cash.
Even KAL Group, which leans to agri services and a slick retail network rather than the traditional agricultural muck and grind, is down 10% over a year and is now not far from its 12-month low. KAL’s earnings multiple of seven is half that of mainstream retailer Pick n Pay.
For punters, Zeder would (on paper) seem a fair bet because there is an ongoing and concerted effort to sell off its two remaining investments and unlock what some believe to be a contentious NAV. Some punters suspect a too-conservative understatement of NAV. Whatever the case, it’s no easy wrap-up for the two remaining assets.
Zeder CEO Johann le Roux says the group remains engaged with third parties around selling off Zaad and Capespan: “We are evaluating various options. We will communicate if any progress is made.”
The problem is partly one of confidence, which has sunk below 50% according to the agribusiness confidence index
But Le Roux concedes the environment to sell assets with valuations of more than R1bn is “quite difficult”, especially because of persistent load-shedding.
This is a pity because global investors might be the more obvious candidates for taking Zeder’s remaining investments. Both Zaad and Capespan have large global components in their business models.
The problem is partly one of confidence, which has sunk below 50% according to the agribusiness confidence index.
Le Roux says agribusinesses are generally more downbeat now that the sector is facing increased input costs stemming from higher fuel and fertiliser prices, as well as supply chain disruptions and weakness in municipal delivery.
Then there is the prospect of drier agricultural conditions with the expected onset of an El Niño cycle. Le Roux notes: “The Western Cape is coming up for the winter season. Hopefully the dams can get to the levels where there are no serious concerns.”
None of the other listed counters is a candidate for buying Zaad or Capespan — either because there is no strategic fit or simply because balance sheets won’t accommodate a deal of such scale. The same applies for companies on the alternative stock exchanges.
That said, TWK is on the lookout for new opportunities that a leaner period might produce. Financial director Eddie Fivaz said recently: “The pipeline of potential acquisitions in South Africa is enough to keep us busy.” TWK — whose current operations include timber, financial services, retail and mechanisation as well as a car dealership division — trades at about R53 a share on the Cape Town Stock Exchange.
But it’s a difficult market for listing a business. It would be a very small business, when you convert it from rand, to list in a foreign jurisdiction
— Johann le Roux
It would be surprising if TWK took a tilt at Zeder’s assets. Perhaps York, with a market value of less than R1bn, would be more enticing? SmallTalkDaily analyst Anthony Clark doubts TWK will be enthusiastic about spending R500m on acquisitions, and would rather look for bolt-on acquisitions. “They won’t bet the farm … they can’t issue shares, and any big deal will need to be debt-funded.”
Still, TWK must be paying attention at developments at Zaad. After all, it owns a majority shareholding in Sunshine Seedling Services, which produces more than 50-million vegetable seedlings annually, 10-million forestry clones, 7-million forestry seedlings and 4-million essential oil seedlings and clones.
Any potential deals for Zeder’s remaining assets are premised on the current valuations of the 97% stake in Zaad and 92% holding in Capespan.
Zaad is headed by former Zeder CEO Antonie Jacobs. It develops and distributes seeds and chemicals to emerging markets in Africa, the Middle East and Eastern Europe. In the six months to end-February it reported an 11% drop in recurring headline earnings to R124m, with strong performances registered at local seeds business Agricol, local agrochemicals business FarmAg, and May Seed in Türkiye. Netherlands-based Bakker, the African maize operations and EA Seeds in East Africa were below expectations.
Le Roux says the specialised agri-inputs market, and particularly the proprietary hybrid seed segment, remain attractive. Annualising results is probably not prudent in the farming sector, but by way of illustration, if Zaad repeated its interim performance in the second half, R248m in recurring headline earnings would provide a fair underpin to Zeder’s valuation.
There would probably be buyers for selected bits of Zaad. But if it can’t sell the entire business, how might it unlock value? There has been talk of listing Zaad on an international bourse and Le Roux says Zeder is looking at all options. “But it’s a difficult market for listing a business. It would be a very small business, when you convert it from rand, to list in a foreign jurisdiction. We would rather consider listing in South Africa than Europe. But this is not something we are seriously considering at this stage.”
Capespan is smaller and perhaps presents a bigger quandary for Zeder, especially with its patchy track record.
Capespan reported a 65% hike in recurring headline earnings of R89m for the year ended December 2022 — which, like Zaad, provides a fair value underpin. It has not been easy, though. The global fruit industry is grappling with higher costs, higher shipping rates, and logistics issues.
More than 10 years ago, before Zeder was a controlling shareholder, Irish fruit and vegetable marketing giant Total Produce Plc (since merged with Dole Foods) built a sizeable stake in Capespan. It is not known if an enlarged Dole, recently sent reeling by a cyberattack, would harbour any interest in Capespan.
Farm-gate talk is that Zeder has entertained suitors, but pricing has been short of expectations. Clark reckons about R800m might be a fairer valuation for Zeder’s stake in Capespan.
Yet there has been some activity in the fruit sector. The FM is aware of talk that ANB Investments, the parent company for Clemengold, which specialises in seedless citrus derivations, is drawing in new investors via a preference share issue.
If Zeder’s value unlock turns into a drawn-out exercise, investors probably can’t expect top shareholder, the now unlisted PSG Group, to sit on its hands.
Zeder might well be encouraged to buy back its own shares rather than toy with further special dividends. This might help pave the way for PSG to pitch a buyout offer — at a premium to the market value but below the last stated NAV — to take Zeder’s remnants private. There, corporate action might be far easier than in the public eye.
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