Plough­ing into Kaap Agri

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

Financial Mail - Investors Monthly - - Front Page - ANTHONY CLARK

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

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