TRADE of the MONTH

A ‘plougherful’ play might be to go short on Crookes and long on Zeder

he marked increase in the Associated British Foods (ABF) offer to buy out minority shareholders at sugar group Illovo might reignite market interest in the handful of agribusiness listings on the JSE.

That the mighty ABF, which is one of the largest consumer businesses in the world, is willing to look beyond this low point in the agricultural cycle speaks volumes about the longer-term potential of specialist farming businesses in SA.

Aside from ABF there are more than a few private equity-type entities making selected acquisitions in the local agribusiness sector.

At this juncture, two standout companies — PSG-controlled Zeder Investments and KwaZulu Natal-based Crookes Brothers — appear poised to plough into what is still a largely fragmented agribusiness market.

Both are geared towards acquisitions. Crookes recently raised R215m to fund new growth opportunities in sub-Saharan Africa. PSG last year raised more than R2bn in an accelerated bookbuild, and there is little doubt that a portion of this fresh capital must wend its way to Zeder — which probably needs to embark on a rights issue before it can start hunting seriously for opportunities that are big enough to move the portfolio performance needle.

While developments at both Zeder and Crookes are worth monitoring closely, a “plougherful play” might be to go short on Crookes and long on Zeder.

Crookes is by no means overvalued, and was trading at the time of writing at less than the nearly R63/share net asset

Tvalue reflected as at the end of September 2015.

The company is conservatively managed, and its interim performance — when earnings came in at 181c/share — was more than respectable.

The challenge, however, is diversifying convincingly away from the reliance on its core competencies in the sugar industry, which still accounts for 63% of revenue and much more of operating profits (where the fledgling macadamia and deciduous fruit ventures traded at a loss in the last interim period).

Gut feel is that Crookes will probably not rush deal making — even if the poor agricultural conditions might have dried out the determination of vendors to hold out for premium prices for agribusiness assets. There is an air of caution in the interims — with the dividend covered more than five times by earnings despite the reassurance of operating cash flow coming in 5% higher at R102m. Directors did note that several major projects were under evaluation, taking into consideration the need to balance longer-term projects with short-term cash-generative investments.

These include a “low risk” greenfield development of a 300 ha banana farm in southern Mozambique, a partnership with Silverlands in 2016 and plans to unlock value via a residential, commercial and industrial property development near Scottburgh.

Things are also looking up for the macadamia and deciduous plantings. But ultimately Crookes is likely to benefit from these endeavours only in the medium term, and the share may continue to drift lower on sugar’s bittersweet prospects. Zeder, on the other hand, could experience a shorter-term uplift after enduring several months of poor performance on the JSE.

Zeder holds a number of agribusiness investments, ranging from fruit marketing giant Capespan and farmers’ retailer Kaap Agri to a specialised seed business and a commercial farming venture in Zambia. But its market value is largely pegged to its biggest investment, consumer brands giant Pioneer Foods. At the time of writing Zeder was trading at roughly a 20% discount to its sum-of-the-parts valuation of R8,64/share.

New deal flow could narrow the discount to closer to 10%. But what will bolster market sentiment more than anything is the admission that PSG is “investigating various alternatives to the current management fee”.

The management fee is highly contentious, since so much of Zeder’s value story is dictated by Pioneer rather than by management tinkering with the portfolio. Should a more equitable fee structure be agreed on, Zeder would certainly be viewed much more positively by the market.

Zeder should perhaps also give serious thought to unbundling its stake in Pioneer, which would result in a smaller, but much more intriguing, agribusiness portfolio that would be more accommodating of smaller acquisitions.