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.