For the brave, African ex­pan­sion is the X-fac­tor

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

Re­cently listed Quantum Foods — un­cer­e­mo­ni­ously spun out from Pi­o­neer Foods Group — might be re­garded as one big mys­tery pack­age. The con­stituents of the business don’t gel com­pellingly, and over­all the com­mod­ity-heavy agri-op­er­a­tions look over­whelm­ingly vul­ner­a­ble. Yet pun­ters have been ac­tively try­ing to gauge a bot­tom for the share price since list­ing last month.

Quantum’s com­mod­ity-aligned op­er­a­tions, span­ning chick­ens, eggs and an­i­mal feeds, clearly had no place in the brand-in­ten­sive en­vi­ron­ment of Pi­o­neer Foods Group. Be­cause Quantum has been a se­rial un­der­per­former for the past few years, in­vestors can’t help feel­ing that Pi­o­neer was prob­a­bly much re­lieved to get shot of the loss-mak­ing business.

But in­vestors may re­gret writ­ing off Quantum as an agri-business con­tender, even though the num­bers for the fi­nan­cial year to end Septem­ber might not of­fer much cause for op­ti­mism in terms of trac­tion for short-term growth.

While Pi­o­neer was happy to dis­tance it­self from Quantum, it is im­por­tant to note that PSG-aligned agri-business in­vestor Zeder has re­tained its in­flu­en­tial un­bun­dled stake. Of course, there might be a valid ar­gu­ment that Zeder, as a ma­jor share­holder in Pi­o­neer, had no choice but to hang onto the un­bun­dled Quantum scrip. At this del­i­cate point only the most op­por­tunis­tic buyer would be sniff­ing around Quantum.

With scant de­mand the share, which listed with an “in­ferred value” of around 500c/share, has drib­bled down to 312c. This is close to the 300c lev­els a num­ber of pes­simistic mar­ket com­men­ta­tors were bandy­ing about in the days fol­low­ing Quantum’s mar­ket de­but.

It may be worth ac­cu­mu­lat­ing Quantum at th­ese lev­els, traders per­haps hop­ing for a short-term bounce on the back of gen­er­ally bet­ter sen­ti­ment for poul­try play­ers. But no mat­ter which way in­vestors look at Quantum, there re­main con­sid­er­able risks.

First, the company plies its trade in three very cycli­cal agri­cul­tural sec­tors with lit­tle or no room for pric­ing lever­age via brand-build­ing ef­forts. Aside from the egg seg­ment, where Quantum is a se­ri­ous player, the company might be seen as a “bit player” in poul­try and feeds in SA. Grow­ing the egg business ag­gres­sively might prove a scram­bled strat­egy con­sid­er­ing the low bar­ri­ers to en­try in this mar­ket.

But con­sid­er­able com­fort can be taken from Quantum’s de-risk­ing of its Western Cape broiler business by fo­cus­ing this op­er­a­tion on the sale of live­stock to abat­toirs. It is also im­por­tant to note that pro­duc­tion fa­cil­i­ties are rel­a­tively new, and the company fore­sees no ma­jor plant up­grade be­ing un­der­taken in the next five years as all strate­gic cap­i­tal ex­pen­di­ture projects were com­pleted by Septem­ber 2013.

The X-fac­tor for brave buy­ers of this stock is un­doubt­edly the pos­si­bil­ity of Quantum prof­itably ex­pand­ing its African pres­ence, which is cur­rently limited to Zam­bia and Uganda.

Quantum direc­tors have flagged both th­ese coun­tries as hav­ing ex­cel­lent growth prospects. Ex­pan­sion in Zam­bia is al­ready un­der way, but more in­trigu­ing will be whether Quantum can open more mar­kets in neigh­bour­ing coun­tries like Tan­za­nia, Malawi and An­gola.

This ex­pan­sion per­haps should be viewed in light of Zeder’s own ef­forts to boost its ex­po­sure to Africa. It al­ready owns a sprawl­ing com­mer­cial farm­ing en­ter­prise in Zam­bia (Chay­ton Africa) and its seed business, Zaad, is ac­tively mar­ket­ing its prod­ucts across the bor­der. Quite pos­si­bly Zeder will en­thu­si­as­ti­cally drive the African en­deav­ours at Quantum — which, it’s worth not­ing, is ungeared. Per­haps deal flow could even reach a point when it makes sense for Quantum to be­come the pre­ferred ve­hi­cle or ded­i­cated home for all Zeder’s African am­bi­tions and as­sets.

Ad­mit­tedly many ifs and buts ap­ply to Quantum, but down­side po­ten­tial is surely limited on the core lo­cal op­er­a­tions and in­vestors are cer­tainly not over­pay­ing for a fledg­ling African pres­ence that holds con­sid­er­able prom­ise. We con­sider Quantum a spec buy at cur­rent lev­els.

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