Overvalued, and languid in parts
I fear this may be Zeder’s last cycle — because institutional dissatisfaction will surely swell if the status quo remains
Ihave covered agricultural fund Zeder Investments, a business 42%-owned by financial services company PSG Group, for more than a decade. I also cover its unlisted constituent parts, and I was even involved in the listing of its largest asset, Pioneer Foods.
I mention this not as a boast but to put into context the depth of my coverage on the counter and its underlying assets.
I have been a harsh critic of the fee structure that PSG imposed on Zeder which, for the second time, was recently amended. I have argued that most of Zeder’s assets had been in a coma for 2016. I also believe the counter is overvalued.
Zeder is now in its third life cycle as an owner and operator of agribusiness assets.
Unless there is radical change in the structure to unlock value and revitalise the comatose R4.5bn over-the-counter (OTC) and unlisted portfolio, I fear this may be Zeder’s last cycle — because institutional dissatisfaction will surely swell if the status quo remains.
When Zeder was founded more than a decade ago, its main aim was to acquire OTC shares in highly undervalued agricultural stocks such as Kaap Agri, NWK, OTK and BKB. The Zeder would work with management to unlock value by creating profit centres instead of what were long standing farmers’ co-operatives.
Zeder was very successful and there was material uplift in the portfolio’s sum of the parts (SOTP) valuation.
In Zeder’s second life cycle, it sold off assets which it could not materially influence to focus on a core group of stocks where it could gain meaningful value uplift. Thus Capespan, Kaap Agri and Agricol (now Zaad) came to the fore. At the same time, PSG and Zeder realised that the material value that was trapped inside SA’s second-largest food company, formally OTC listed, Pioneer Foods.
Many of the agricultural co-ops they acquired had stakes, for historic reasons, in this highly undervalued food giant. The biggest stake was held by Western Cape Agri co-op Kaap Agri, which owned a staggering legacy, holding of 56m Pioneer Foods shares.
When Kaap Agri unbundled this highly valued stake into a separate OTC listing vehicle called Agri Voedsel in 2013, the stock traded at a 30% discount to its key asset. It was an illiquid, if valuable, holding company.
Zeder swooped in to acquire the minorities in Agri Voedsel in 2014. The R2.3bn deal was seen as contentious as it undervalued the inherent stake in Pioneer Foods. From this point in mid-2014, Zeder’s discount to SOTP widened as the weight and scale of the vast Pioneer Foods stake weighed on the counter. The unlisted stocks, which were little understood by the market, were gradually disregarded as Zeder increasingly was viewed as a Pioneer Foods proxy.
A matter of months ago Zeder, at its worst, was trading at a 50% discount to its SOTP. The entire market value of Zeder was dominated by Pioneer (now 66% of the fund) with the other assets valued at less than zero.
Further, the large management and performance fees that PSG Group levied on Zeder raised the hackles of large institutional shareholders.
I also felt it was utterly unjust that a large 1.5% management charge and an additional performance fee was levied on shareholders for a fund that was predominantly valued by the market as nothing more than a Pioneer proxy.
I was happy to pay a fee for the OTC and unlisted assets — however, why pay a fee on a R10bn asset where Zeder has no real influence?
That fee structure, thankfully, has been amended in exchange for an issue of 207m new Zeder shares (worth R1.3bn) to PSG (which relinquishes its annual management and performances fees). This frees up Zeder to pay higher dividends, gear its balance sheet to the tune of R1bn to R1.5bn and issue new shares to fund any possible expansion.
However, I now ponder if, in this its a third life cycle, Zeder has any reason to exist.
I struggle to see where any significant uplift can come from, and wonder if it’s not better to break the company up.
It was unjust that a 1.5% management charge and an additional performance fee was levied on shareholders