In­dus­trial Grind

KAP vs Bar­loworld

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

KAP is a clear win­ner in the per­for­mance stakes, out­do­ing Bar­loworld. But in the rat­ing stakes KAP, which has been trad­ing un­der the shadow of its dis­graced ma­jor share­holder, Stein­hoff, is lag­ging well be­hind Bar­loworld.

Stein­hoff, locked in a fight for sur­vival, made its first move in March, re­duc­ing its hold­ing in KAP from 43% to 26% in a pri­vate plac­ing worth R3.67bn.

Nadim Mo­hammed of First Av­enue In­vest­ment Man­age­ment says: “I be­lieve Stein­hoff will sell its KAP stake com­pletely through fur­ther place­ment tranches. That’s what it did with its PSG stake.”

KAP has al­ready dis­tanced it­self from Stein­hoff with moves that in­clude the ter­mi­na­tion of mu­tual cor­po­rate ser­vices and the va­ca­tion of rental space in Stein­hoff’s head of­fice.

With Stein­hoff’s woes as they af­fect KAP now be­ing re­solved, it ap­pears to have cre­ated an op­por­tu­nity to go long on KAP and short on Bar­loworld. Per­for­mance fig­ures speak for them­selves. In its five years to Septem­ber Bar­loworld pro­duced av­er­age an­nual head­line EPS (HEPS) growth of only 7.5%. In its best show­ing, HEPS lifted 15.9% in its past year, with a big boost from R231m (29%) lower tax­a­tion.

In a far stronger show­ing over five years, KAP, mea­sured to its De­cem­ber in­ter­ims, gen­er­ated av­er­age an­nual HEPS growth of 15% with a high de­gree of con­sis­tency.

For its ef­forts Bar­loworld is be­ing re­warded by the mar­ket with an 18.7 p:e, while KAP is trad­ing on a 15.8 p:e.

Bar­loworld, with an an­nual rev­enue of R62bn, has caught in­vestor at­ten­tion over the past two years due to in­creas­ing hard com­mod­ity prices, which ben­e­fit Baroworld’s R18.3bn­rev­enue South­ern African and R5bn-rev­enue Rus­sian Cater­pil­lar earth­mov­ing equip­ment op­er­a­tions.

In Bar­loworld’s past year new min­ing equip­ment con­trib­uted 46% of its South­ern African and 51% of its Rus­sian rev­enue. How­ever, Bar­loworld’s earth­mov­ing equip­ment op­er­a­tions’ re­sults were un­spec­tac­u­lar. South­ern Africa op­er­at­ing profit lifted 13% to R1.78bn. In Rus­sia it rose 7% in US dol­lars but, hit by a strong rand, was down 3% on con­ver­sion to R582m. Since Septem­ber the rand has strength­ened a fur­ther 11% against the dol­lar.

The other big de­ter­mi­nant of Bar­loworld’s for­tunes is its R32bn-rev­enue au­to­mo­tive di­vi­sion, which op­er­ates in the highly com­pet­i­tive rental, fleet man­age­ment and deal­er­ship seg­ments. The di­vi­sion did not shoot the lights out in Bar­loworld’s past year, lift­ing op­er­at­ing profit 5.6% to R1.75bn.

KAP is also ac­tive in the au­to­mo­tive in­dus­try, through its seats and floor-fit­tings man­u­fac­tur­ing op­er­a­tion Fel­tex and ac­ces­sories fran­chise busi­ness Au­toVest. Re­gret­tably KAP re­veals sales and op­er­at­ing prof­its only at the di­vi­sional level. At the sub­di­vi­sion level only per­cent­age changes in op­er­at­ing prof­its are re­vealed. Here KAP’s au­to­mo­tive sub­di­vi­sion did well to up op­er­at­ing profit 18% in the past half year.

KAP CEO Gary Chap­lin is up­beat on prospects fol­low­ing Fel­tex’s win­ning of a con­tract to sup­ply Volk­swa­gen with Polo com­po­nents.

Bar­loworld and KAP share a com­mon in­volve­ment in lo­gis­tics, but per­for­mance dif­fers.

Bar­loworld’s lo­gis­tics di­vi­sion has for years been locked in a state of re­struc­tur­ing, but with no sign of suc­cess. In the past year the R6.1bn-rev­enue di­vi­sion’s op­er­at­ing profit slumped 55% to R122m.

The di­vi­sion also rep­re­sents poor cap­i­tal al­lo­ca­tion. At fi­nan­cial year-end it was ty­ing up net op­er­at­ing as­sets of R8.7bn, R2bn more than the au­to­mo­tive di­vi­sion.

By con­trast, KAP’s lo­gis­tics di­vi­sion, with Uni­trans at its core, lifted rev­enue 3% to R4.6bn and op­er­at­ing profit 4% to R600m in the past half year. Di­vi­sional as­sets were R7.66bn.

From an ac­qui­si­tion per­spec­tive KAP has shown it­self to be far more dy­namic than Bar­loworld when it comes to deals that move rev­enue and profit nee­dles. KAP’s ac­qui­si­tion of Au­toVest in April 2016 for R560m is a re­flec­tion of this. It lifted the au­to­mo­tive sub­di­vi­sion’s rev­enue by 48%.

Big­ger still was the Jan­uary 2017 ac­qui­si­tion of Safripol, SA’s largest high-den­sity poly­eth­yl­ene and polypropy­lene plas­tics pro­ducer. The R4.1bn ac­qui­si­tion added R721m in profit at the level of earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­sa­tion in the six months to De­cem­ber.

Safripol is housed in the R8bn-rev­enue chem­i­cals di­vi­sion, to­gether with Hosaf, SA’s largest pro­ducer of PET plas­tic, used ex­ten­sively in the bev­er­age sec­tor, and Wood­chem, SA’s largest wood panel resins pro­ducer. KAP has also shown will­ing­ness to in­vest in ex­ist­ing as­sets for fu­ture growth. Re­cent moves in­clude a R600m up­grade of PG Bi­son’s Piet Retief par­ti­cle board fa­cil­ity and a R700m project to lift Hosaf’s an­nual ca­pac­ity from 128,000 t to 240,000 t.

Due for com­ple­tion last Au­gust, the Hosaf project hit start-up prob­lems, in­clud­ing its pri­mary equip­ment sup­plier’s in­sol­vency. It lim­ited the chem­i­cals di­vi­sion’s op­er­at­ing profit rise to 4%, but it was a short­term set­back, be­lieves Chap­lin.

De­spite Hosaf’s prob­lems and muted lo­gis­tics growth, KAP still pro­duced an 11% HEPS rise in its past re­port­ing pe­riod. Once Hosaf’s prob­lems have been re­solved KAP ap­pears well set to re­sume its 15%/year HEPS growth trend.

KAP has shown it­self to be more dy­namic than Bar­loworld when it comes to deals that move rev­enue and profit nee­dles

Source: IRESS

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