Ploughing into Kaap Agri

The valuation of the Boere Massmart is being limited because the company is ‘trapped’ in the OTC market

With a 100-year history, a 2015 revenue of R5.3bn and profit of R257m, Kaap Agri is one of the best-kept retail secrets, and possibly also the cheapest, operating in SA. If the stock were a main board JSE-listed business in the retail sector its share price would be 50% higher than now.

But Kaap is “trapped” trading on the over-the-counter (OTC) market, and I see real opportunity as it heads towards its 2020 goals of a main board listing of value creation if enough coercion is applied, especially to its majority shareholder, Zeder Investments. With about 120 stores in several provinces, Kaap Agri’s fastest-growing area of business is servicing its nonagricultural clients.

More than 85% of its business is derived from retail, which is why several years ago I nicknamed the company a “Boere Massmart”.

Apart from wooden poles, tractors and fertilisers for farmers, Kaap’s biggest-selling items through its approximately 120 stores are pet food, building materials, work and safety wear and, increasingly, fuel from its chain of ExpressMart fuel and convenience stores. It is the biggest reseller of cement in the Western Cape and, outside of the big oil majors, one of the largest fuel retailers.

Listed on the OTC market at R29, the counter is trading on a historic price:earnings ratio of 11 and should fall below 10 when its September results are released.

I recently met management to discuss prospects. Kaap had a good interim financial reporting period to March, with its diverse and wide-ranging agricultural and retail interests spread from its Western Cape heartland to four other provinces and Namibia.

Margin mix improvements, as the wider retail offering expanded, generated good profit; for the interim period profit increased 17% to R179m. HEPS growth rose by 18% to 185.24c/share despite the drought in certain parts of the country.

Management comments that the second half of its financial period (March to September 2016) has started “better than [expected]”. An uptick in the core agricultural trading business and solid growth in the inputs business have been seen. Second-half growth will be slower than the first half, due to the drought affecting the wheat division, but the underlying retail businesses remain strong.

The real growth and profit driver within Kaap Agri the past years has been from converting its agricultural fuel depots to more of a forecourt convenience store offering. Kaap sells nearly 200ml of fuel a year and thus gains great trading and rebate terms from the major fuel suppliers due to its scale.

The fuel offering and rapidly expanding ExpressMart forecourt convenience store format will continue to deliver outstanding results. Fuel now consists of 30% of Kaap’s entire business — and it is growing. Kaap has just over 20 such outlets offering convenience store formats, with plans for a further eight by the end of 2016 and five others thereafter.

The stock, even given its prospects, is not the easiest to trade or deal in. Since the imposition of the Financial Services Authority rules on the OTC market, there has been a dramatic decline in daily trade and volumes though, if patient, your stockbroker should be able pick up stock.

For a business of this inherent quality and management’s strategy of ongoing 15% growth in compound annual growth rate which — on management’s forecasts, will lead to Kaap attaining an operating profit of R500m by 2020 — this OTC trading mechanism is hampering Kaap’s valuation. I have questioned why this business is being hamstrung by an OTC listing rather than the company making preparation for a main board JSE listing. This is anathema to me and many other Kaap shareholders.

The main hindrance could be majority shareholder Zeder Investments, with its 40% stake, which has tried twice before to buy out minorities.

I say that Kaap should list on the JSE as soon as possible and let the wider market decide what its “proper” valuation is.

I guarantee you that it will not be a PE of 9.

An uptick in the core agricultural trading business and solid growth in the inputs business have been seen