FERTILE YIELDS

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

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