FER­TILE YIELDS

Three new agri-busi­nesses have come to mar­ket, of­fer­ing juicy new op­por­tu­ni­ties to in­vestors

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The tim­ing could not have been bet­ter: in a year in which the maize crop is ex­pected to more than dou­ble the pre­vi­ous year’s yield, three agribusi­nesses have listed on pub­lic ex­changes.

Sen­wes, TWK In­vest­ments and Zeder’s Kaap Agri give in­vestors the pre­vi­ously unavail­able op­por­tu­nity to gain ex­po­sure to the pri­mary agri­cul­ture sec­tor.

And agribusi­nesses are likely to en­joy a rel­a­tively bet­ter year, given down­ward pres­sure on crop prices from a bumper har­vest, says Wandile Sihlobo, head of eco­nomic and agribusi­ness re­search at the Agri­cul­tural Busi­ness Cham­ber (Ag­biz).

Grain prices are down by a fac­tor of 60%, with agribusi­nesses con­tin­u­ing to hold an op­ti­mistic view re­gard­ing busi­ness ac­tiv­ity in SA. Sihlobo says. The Ag­biz/In­dus­trial De­vel­op­ment Corp’s Agribusi­ness Con­fi­dence In­dex con­tracted only marginally in the sec­ond quar­ter to 56, stay­ing in ex­pan­sion­ary ter­ri­tory.

Agri­sec­tor con­fi­dence is un­der­pinned by good weather con­di­tions in large parts of SA, which bodes well for crop pro­duc­tion. This will also boost agri­cul­ture’s con­tri­bu­tion to gross do­mes­tic prod­uct in 2017, with the har­vest ex­pected to last un­til at least May next year, says Sihlobo.

He cau­tions, how­ever, that global cli­mate fore­cast­ers are pre­dict­ing the likely re­turn of El Niño, which could lead to an­other drought at the end of 2017. This would in­flu­ence agri­cul­tural ac­tiv­ity in 2018.

While this could hurt agribusi­nesses, for now at least, these com­pa­nies will be ma­jor ben­e­fi­cia­ries of drought al­le­vi­a­tion. For in­vestors, they of­fer the op­por­tu­nity to gain ac­cess to a sec­tor that, up un­til now, has been unavail­able on pub­lic stock ex­changes.

The list­ing of busi­nesses such as Sen­wes and Kaap Agri is hugely pos­i­tive for in­vestors, says An­drew Vint­cent, a port­fo­lio man­ager at Clu­casGray As­set Man­age­ment.

A broad range of in­vestors can now in­vest in a sec­tor, pri­mary agri­cul­ture, where ac­cess was pre­vi­ously re­stricted. It also en­ables in­vestors to “play” an im­por­tant and unique theme in the fu­ture of food se­cu­rity.

Sen­wes, which listed on SA’s new­est stock ex­change, ZAR X, in Fe­bru­ary, re­ported a 16.2% in­crease in profit af­ter tax to R229m for the year to April 2017, on a rise in rev­enue and op­er­at­ing in­come.

The busi­ness is well po­si­tioned to take ad­van­tage of record-high grain har­vests. It is able to store 25% of SA’s grain out­put in 60 si­los, sup­ply­ing a broad range of ser­vices to the agri­cul­tural sec­tor, in­clud­ing equip­ment, seed, stor­age and fi­nan­cial ser­vices.

At close to R2bn, its mar­ket cap­i­tal­i­sa­tion has in­creased mod­er­ately since list­ing. Trad­ing at R11 at the time of writ­ing, the share is lit­tle moved from its list­ing price of R10.50.

Vu­nani Se­cu­ri­ties an­a­lyst An­thony Clark reck­ons the counter of­fers ex­cel­lent value

Fore­cast­ers are pre­dict­ing the likely re­turn of El Niño, which could lead to an­other drought at the end of 2017

at cur­rent lev­els, par­tic­u­larly as an earn­ings re­cov­ery play on the huge maize har­vest. “On a price-to-earn­ings (p:e) of 9.6 times, a div­i­dend yield of 4.3% and a net as­set value dis­count of 10%, Sen­wes is by no means as glam­orous as the re­cently JSE main-board listed Kaap Agri, whose p:e is now at 21,” Clark says in a note. “Sen­wes hides its light un­der a bushel.”

That Kaap Agri’s share price jumped 16% on its first day of trad­ing demon­strates what in­ter­est there is if a com­pany is prop­erly mar­keted and well un­der­stood, he says.

Kaap Agri, a sub­sidiary of Zeder In­vest­ments, listed sep­a­rately on the JSE at the end of June. The share was trad­ing at R61.65 at July 11, about 11% ahead of where it traded on its pre­vi­ous over-the-counter plat­form and 3.5% stronger since list­ing. The busi­ness has a mar­ket cap of R4.6bn, which is mul­ti­ples of Zeder’s own val­u­a­tion of the as­set, as pub­lished in its re­sults for the year to Fe­bru­ary, it­self a 75% in­crease on the pre­vi­ous year.

“Rain in the West­ern Cape will help the wheat and fruit sec­tors, both im­por­tant mar­kets to Kaap Agri,” says Clark.

Kaap Agri has suc­cess­fully di­ver­si­fied, pro­vid­ing a va­ri­ety of re­tail ser­vices to the agri­cul­tural sec­tor and the pub­lic. Clark reck­ons man­age­ment’s plan to at­tain prof­its of R500m by 2020 will be eas­ily achieved, pos­si­bly even ear­lier than ex­pected, as Kaap Agri adopts a “re­tail­ing” op­er­a­tional fo­cus, re­fur­bish­ing its Agri Mart store base and rolling out its fuel sta­tion and con­ve­nience­s­tore of­fer­ing, Ex­press Mart.

With a mar­ket cap­i­tal­i­sa­tion of about R456m, TWK In­vest­ments listed about 35.1m shares on ZAR X on June 12. No new se­cu­ri­ties were is­sued, as the group sim­ply mi­grated its ex­ist­ing over-the-counter plat­form onto a li­censed ex­change.

Though TWK Agri­cul­tural Hold­ings holds nearly 70% of the stock, TWK In­vest­ments has more than 700 share­hold­ers who can now sell their shares to the pub­lic via ZAR X.

The stock jumped more than 5% on list­ing, in­di­cat­ing height­ened in­vestor in­ter­est in the agri sec­tor. For the year to Au­gust 2016, TWK grew rev­enue 23% to R6.5bn. Profit be­fore tax in­creased 39% to R158.7m. The group also pro­vides ser­vices to the agri­cul­tural sec­tor, in­clud­ing fer­tiliser, fi­nan­cial ser­vices and ve­hi­cles.

Agri­cul­tural co-op­er­a­tives have suc­cess­fully di­ver­si­fied and moved with the times, as stock ex­change list­ings in­di­cate, says in­de­pen­dent an­a­lyst Mark Ing­ham.

“As more agri as­sets come to mar­ket, we will see more re­fined pric­ing [of these com­pa­nies]. But this won’t hap­pen overnight,” he says.

Along­side giv­ing agribusi­nesses a lift, record pro­duc­tion lev­els are ex­pected to boost trade in the agri­cul­tural de­riv­a­tives mar­ket, since there is now con­sid­er­ably more crop to hedge, says JSE di­rec­tor of com­modi­ties Chris Sturgess.

As at July 12, about 4Mt of an ex­pected white maize crop of 9.5 Mt — 38% of the un­der­ly­ing mar­ket — had been hedged. Com­bined with yel­low maize, about 42% of the un­der­ly­ing ex­pected crop was held as open in­ter­est.

Prices of white and yel­low maize are down around 40% since the R3,000/t they were trad­ing at this time last year. “I don’t see those prices re­cov­er­ing this year,” Sihlobo says.

To re­duce their risk, banks and other trade fi­nanciers gen­er­ally re­quire farm­ers to hedge against price risk via fu­tures con­tracts be­fore they ex­tend loans. Franklin Wil­liams, deal orig­i­na­tor at Mer­gence Com­mod­ity Fi­nance, be­lieves trade com­mod­ity fi­nance is set to grow within South­ern Africa, es­pe­cially given the con­straints on bank lend­ing in the wake of Basel 3 reg­u­la­tions.

In­vest­ment man­agers and other cor­po­rates are likely to fill this gap, which could of­fer op­por­tu­ni­ties for in­vestors.

In­vestors can gain ex­po­sure to trade com­mod­ity fi­nance con­tracts via the JSE com­mod­ity de­riv­a­tives mar­ket, for­merly the SA Fu­tures Ex­change. Yel­low and white maize fu­tures con­tracts are the most ac­tively traded, fol­lowed by soya beans, wheat, sun­flower seeds and sorghum in the grain cat­e­gory.

Con­firm­ing Sihlobo’s fore­casts, Sturgess says that white maize is be­ing hedged out un­til the end of 2018, in­di­cat­ing that the sig­nif­i­cantly larger crop will be car­ried over into a sec­ond sea­son.

While large trad­ing houses and agri­cul­tural co-op­er­a­tives gen­er­ally dom­i­nate trad­ing in agri­cul­tural com­mod­ity de­riv­a­tives, Sturgess says there has been an in­crease in in­sti­tu­tional in­flows, with hedge funds also start­ing to in­clude agri­cul­tural de­riv­a­tives in their port­fo­lios.

The JSE has in­tro­duced in­ter­est­ing agri­cul­tural de­riv­a­tives prod­ucts over the past year, namely beef and lamb car­cass con­tracts, a merino wool con­tract and a soya bean crush in­dex.

The beef and lamb car­cass con­tracts en­able farm­ers and abat­toirs to pro­tect them­selves against risks aris­ing from move­ments in the prices of beef and mut­ton. The con­tracts are cash-set­tled, based on trans­ac­tional data from the Red Meat Abat­toirs As­so­ci­a­tion.

In June, the bourse in­tro­duced a Merino wool con­tract, set­tled off an in­dex based on trans­ac­tional data col­lected by Cape Wools, which op­er­ates weekly auc­tions, and en­ables hedg­ing against move­ments in the price of wool.

Also launched this year is a soya bean crush in­dex. The crush refers to the two byprod­ucts of soya beans: soya bean meal and soya bean oil.

This par­tic­u­lar fu­tures con­tract en­ables crush­ers to have a view on the crush mar­gin — also known as the crush spread — which is the dif­fer­ence in price be­tween soya beans and the com­bined value of the meal and oil.

“The crush value is traded based on ex­pec­ta­tions of the fu­ture price move­ment of soya beans com­pared to the other com­po­nents of the con­tract,” says Sturgess.

“It al­lows soya bean pro­ces­sors to hedge against price fluc­tu­a­tions in the value of the crush in­dex to im­prove sus­tain­abil­ity.”

He thinks that in fu­ture there could be an op­por­tu­nity to cre­ate an agri­cul­tural in­dex, which would en­able re­tail in­vestors to gain ex­po­sure to all listed agri­cul­tural com­pa­nies through a sin­gle in­dex.

Pic­tures: iS­TOCK

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