For the brave, African expansion is the X-factor

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.