Financial Mail - Investors Monthly - - Contents - Stafford Thomas

Tre­ma­ton Cap­i­tal In­vest­ments, Grindrod, KAP Industrial, Huge Group, Cog­ni­tion Hold­ings

When it comes to ag­gres­sive growth, few com­pa­nies come close to Stein­hoff. It has set a stan­dard Gary Chap­lin, CE of the group’s industrial arm, Kap, in­tends to em­u­late.

“We have spent three years clean­ing up as­sets and it is now time to change the fo­cus to grow­ing the busi­ness,” says Chap­lin. “Kap is highly cash gen­er­a­tive and has a lot of head­room to take on debt to make ac­qui­si­tions.”

Kap’s as­set clean-up re­sulted in it dis­pos­ing of Bren­ner Mills, Bull Brand and Jor­dan Footwear. They were non­core units in­her­ited when Stein­hoff R8,9bn re­verse-listed its Uni­trans lo­gis­tics, PG Bi­son and mat­tress com­po­nent units into Kap in April 2012. “You can’t be sell­ing and ac­quir­ing busi­nesses at the same time,” says Kap ex­ec­u­tive deputy chair­man Jo Grové (65), who handed over the CE reins to Chap­lin (44) last Novem­ber.

It is a lead­er­ship role Grové says Chap­lin had been pre­par­ing for since 2011, as CE of PG Bi­son, Kap’s tim­ber prod­ucts unit. It was a tough testing ground.

“PG Bi­son had lost its way,” says Grové. “He [Chap­lin] changed the busi­ness model in un­der a year. It is one of the most suc­cess­ful turn­arounds I have ever seen. PG Bi­son is now the low­est-cost [tim­ber prod­ucts] pro­ducer in SA.”

Grové him­self re­mains in a hands-on role: “I will stay on for an­other year, or per­haps two, to en­sure a smooth tran­si­tion. I will also as­sist with ac­qui­si­tions. We have a host to con­sider.”

Kap has al­ready struck its first ac­quis­i­tive blow, snap­ping up mat­tress man­u­fac­turer Re­stonic. Closed in Jan­uary, the Re­stonic deal was “the first big ac­qui­si­tion”, says Chap­lin.

Re­stonic pro­vides scale pre­vi­ously lack­ing in Kap’s mat­tress com­po­nent unit. “We had to do some­thing mean­ing­ful or sell [the unit]. We want to be num­ber one or two in the sec­tors we op­er­ate in,” says Chap­lin.

Through Re­stonic’s ac­qui­si­tion Kap has achieved bal­ance be­tween its Uni­trans and industrial di­vi­sions. The lat­ter also houses Hosaf, SA’s sole pro­ducer of Pet plas­tic, Fel­tex, the lead­ing sup­plier of ve­hi­cle seats and car­pets, and PG Bi­son. “We now have two di­vi­sions, each with [an­nual] rev­enue of about R7,5bn and op­er­at­ing profit of about R700m,” says Chap­lin.

He is up­beat on Kap’s prospects, in­clud­ing those of Uni­trans which, he says, is en­joy­ing “a flight to qual­ity” by cus­tomers seek­ing rep­utable sup­pli­ers. Ex­pan­sion in Africa, par­tic­u­larly in pas­sen­ger trans­port, also un­der­pins Uni­trans’s growth prospects.

Fel­tex is a pic­ture of sta­bil­ity. “It is an an­nu­ity-type busi­ness,” says Chap­lin. “A new model con­tract is for five to seven years and there is lit­tle risk of be­ing dis­placed by an­other sup­plier.”

A re­cent Fel­tex win is for the new Mercedes Benz C Class.

SA’s ve­hi­cle man­u­fac­tur­ing in­dus­try is experiencing solid growth driven by ex­ports, which ac­count for 40% of pro­duc­tion. New ve­hi­cle sales in Fe­bru­ary rose 11,4% year-on-year.

Hosaf rep­re­sents a “fan­tas­tic busi­ness”, says Grové. The chal­lenge is Hosaf’s an­nual ca­pac­ity of 120 000 t, which has been fully utilised for many years in a mar­ket where de­mand, ac­cord­ing to re­cy­cling body Petco, is grow­ing at 10%/year. It presents a growth op­por­tu­nity that Kap is con­sid­er­ing, says Grové. He says dou­bling that ca­pac­ity would cost roughly half the orig­i­nal R1,2bn es­ti­mate.

Kap’s po­ten­tial has not gone un­no­ticed by the mar­ket, which has lifted its share price by 50% since mid-2014.

The rise has boosted Kap’s price:earn­ings ra­tio to just over 15, com­pared with its av­er­age 13 PE since the 2012 Stein­hoff deal.

It is a rat­ing at which two an­a­lysts polled by INet-BFA rec­om­mend sell­ing Kap. In their con­sen­sus fore­cast they see Kap’s head­line EPS grow­ing at 16,2% in its year to June 2015 then fall­ing to 13,7% in the sec­ond year and 10,4% in the third.

Their pro­jec­tion ap­pears con­ser­va­tive given the pow­er­ful com­bi­na­tion of Kap’s ro­bust bal­ance sheet, strong cash flow and able man­age­ment. Kap is a share to ac­cu­mu­late, es­pe­cially on any price cor­rec­tion.

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